The closure of 61 Starbucks stores is the beginning of a period of pain for Australia’s café sector, with research house IBISWorld predicting another 500 cafes will close this year.
According to IBISWorld estimates, Australians buy 562 million cups of coffee from cafes each year, generating around $1.8 billion in revenue. The industry is growing at around 3% a year – slow growth, but reasonably steady.
Logically, the closure of Starbucks stores should create some opportunities for café owners. IBISWorld estimates each Starbucks branch sold around 270 cups per day. With 61 stores closing, there will be an additional 16,470 coffee hits per day up for grabs among other competitors – around 1.37 additional cups per café. “Small players will probably beat the large chains to the bulk of this additional business,” said IBISWorld general manager Robert Bryant.
But the perilous state of the industry mean that this extra business won’t be enough to stop many small cafes going out of business.
“The coffee retailing market is already so highly saturated, and most small players already run at a loss of 1% of sales. It will be small independent cafes with less than five employees who’ll close down next.
“By the end of this financial year we believe another 500 cafes will close down – mostly in suburban areas. Proximity to customers is a key measure of success in this industry, and the sheer number of cafes which have opened up in Australia in recent years have ensured competition has become increasingly fierce. Therefore, while overall demand for eat-in or takeaway coffee has risen, the number of outlets has grown at a faster rate, exerting serious pressure on the little guys.”
Without the economies of scale or extensive product range of their larger competitors such as Gloria Jean's and McCafe, small players will have to rely on developing strong customer loyalty in their local area if they are to survive.
“To make matters worse, poor consumer sentiment will add insult to injury for independents, despite our strong café culture,” Bryant says.
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