Cafe profit margins hit by oversupply and rising costs
Australia's cafe scene is at a critical juncture as consumers increasingly weigh the cost of barista-made coffee against the backdrop of a rising cost of living. A combination of escalating operational expenses and shrinking disposable incomes is also challenging the financial viability of numerous cafes.
Adding to the issue is the rising number of cafes and coffee shops across the country, which has created intense competition. Data from IBIS World indicates a significant expansion of Australia's cafe sector over the last two decades, growing from approximately 5,000 specialty and independent cafes 15 years ago to over 27,000 today.
However, this surge in supply hasn't been matched by a proportional rise in consumer demand.
Andrew Low, CEO of major roasted bean supplier Coffee Supreme, said that while appreciation for coffee has grown, it's "not five times bigger." He points out that the average "daily coffee sales" per cafe have fallen from around 500 cups to 300, even as operational costs have roughly doubled.
These increased costs encompass rent, wages, energy, ingredients, insurance, and the price of coffee beans, which have more than doubled in Australian dollar terms in the past year. This "cost pressure" has compelled cafes to increase prices on items like avocado toast and breakfasts, while coffee prices have often remained relatively stable due to established consumer expectations.
Low elaborates that while the cost of meals has seen substantial increases, coffee prices have largely remained anchored "around $4.50, squeezing profit margins further."
Shifting consumer habits
The broader economic climate is significantly influencing how consumers are behaving. Australian "households" have experienced a sharp decline in real disposable incomes—approximately "8%" since mid-2022—leading many to reduce discretionary spending, including regular cafe visits.
The Commonwealth Bank of Australia’s Household Spending Insights survey corroborates this trend, showing a decrease in hospitality spending.
The shift towards increased "remote working" post-pandemic has also diminished the once-reliable daily foot traffic for many cafes. Competition from cheaper alternatives, such as machine-made coffee from convenience stores and petrol stations, or coffee brewed at home, is also growing.
Industry experts acknowledge that the oversupply of cafes, coupled with declining demand, is pushing many businesses towards an unsustainable position.
According to Low, the market imbalance means that "supply is outstripping demand, and that’s making everyone lose a bit of money." He cautions that without sustainable price adjustments and a greater willingness among consumers to pay more, many independent cafes and smaller roasters could disappear, potentially leaving the sector dominated by large chains.
Jonathan Jackson, 19th May 2025
