Changing social trends drive revenue growth and consumer demand for restaurants and café dining. Less leisure time and busier lifestyles have led to the solid growth of the café industry, affording customers to dine with leisure and avoid spending time on home cooked meal preparation. However, while industry revenue is expected to rise, hungry competition, increasing discretionary incomes and falling consumer sentiment slow down growth.
Most families now have two income earners and with this kind of lifestyle, it has become easier and more affordable to socialise over a meal at a restaurant or a coffee at a café. The average annual revenue growth of a coffee shop is at 5.1% over the last five years while restaurants are at 3.5%. However, their combined growth was only at less than 1% in the last 12 months. The industry may have even reached a full saturation point in terms of the number of establishments – the mature stage of its life cycle – and this has led to lower profit margins. Also worth mentioning is the additional competition restaurants and cafes face from takeaway food options and pubs, which are now offering high quality food.
Consumers are going back to the basics and prefer to eat healthier. Even fast food chains are starting to offer healthier options and perceived healthier cuisines like Japanese are becoming more popular. We can now see more gluten-free, paleo, vegan and low-carb offerings in restaurants and cafes. Customers are also demanding premium coffee resulting in operators now ensuring that their ingredients and barista training are of high quality. These days’ consumers are considering coffee as an affordable luxury and are unwilling to forgo their daily fix, this alone will support its growth.
Because of tighter economic constraints, diners are starting to choose mid-tier and BYO options and avoid high margin items like entrees, desserts and beverages. Premium restaurants are forced to lower their spend and restructure their costs because of tightening profit margins. They do this by reducing portion sizes, expanding their takeaway menu, and rationalising staff working hours and wages. Fortunately, the 2017 Fair Work Commission has come onboard and is providing help in this area.
The industry is expected to keep finding new ways to create sustainable ways to conduct their business. With websites such as Zomato and Broadstreet, it is also very important for operators to understand and connect with their market to maintain a favourable social media presence. Consumers are seeking wholesome, local and fresh dishes and supporting small, independent businesses. In recent years several high profile franchises have failed but coffee shop chains continue to experience growth in high traffic areas.
The restaurant and café industries are anticipated to see a less than 1% revenue growth over the next five years and profits will likely decline even as operators improve their cost efficiencies. To succeed, they would need to have access to multiskilled staff and niche markets with less competition. Attracting good chefs and cooks and the ability to bring in and send home staff, dependent on immediate demand, would be key success factors. That said, not only would it be advantageous to ensure an efficient staffing and cost control system, it would also be helpful to have the ability to change menus at whim which would maintain interest and offer a unique selling point. A good quality location is also a must.
Coffee shop owners with profits in the order of $100,000 have an ROI range of 55-75%; those with profits of $200,000 have an ROI range of 45-60%. Note that those who operate seven days a week tend to have lower prices than those who operate only five to six days. For restaurant owners with profits in the $200,000, the ROI range is in the order of 55-65%.
Typical cost structure
|Coffee shop / Cafes||Restaurants|
|Purchases||37 – 39%||33 – 35%|
|Wages||23 – 25%||33 – 35%|
|Rent||14 – 16%||8 – 10%|
|Other||19 – 21%||22 – 24%|
|Profit||3 – 5%||3 – 5%|
Source: Business Values Newsletter Oct 2018 edition. No. 145 (Author: Chris Mile)
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