The Australian restaurant industry has faced difficult trading conditions during the past five years due to flow-on effects of the global financial crisis.
The discretionary nature of the industry exposes it to adverse changes in household income and other broader macro-economic factors such as tax, interest rates and employment, which influence consumer sentiment and expenditure.
Declining household income during the recent global economic downturn together with rising unemployment and low consumer sentiment saw demand plummet.
Consumers became vigilant in their spending by choosing to cook at home rather than eat out and they sought value for money in food purchases.
Reduced frequency of restaurant visits and lowered spending on high margin menu items prompted a consistent fall in industry revenue during 2008-09 and 2009-10. Those factors restricted growth during the past five years, when revenue grew at an annual rate of 1.1%.
The industry was expected to recover in 2010-11 thanks to robust growth in economic activity, falling unemployment, improving business profit and consumer sentiment.
Other factors that will lift performance this year include positive flow-on effects from the success of reality TV cooking shows such as MasterChef that reconnect people with the joys associated with the total meal experience, incorporating the lure of well presented, quality meals with positive ambience associated with dining out.
There will be opportunities rising from social trends such as busier lifestyles which fuel demand for convenience.
Added to that will be opportunities associated with rising health consciousness driving consumers to factor health and nutrition into spending habits and food purchases. Those factors are expected to produce a 3.7% rise in industry revenue to total $8.5 billion in 2010-11.
Looking further ahead industry growth will be tied to overall improvement in economic conditions, especially factors such as disposable income levels, employment and consumer confidence.
That is expected to fuel demand for the industry, with people more able and willing to spend on discretionary products such as restaurant meals for social outings, celebrations, convenience and leisure.
Rising health consciousness and ethical consumerism will present industry operators with opportunities to reach niche markets with premium products to increase profitability and revenue.
That means restaurateurs will face tough competition from other hospitality operators such as takeaway food retailers trying to capitalise on those trends. Industry revenue is expected to increase at an annual rate of 3.0% during the five years to 2015-16 to total $9.9 billion.
Industry Outlook
A positive outlook for the Australian economy during the next five years bodes well for restaurant operators, who will benefit from rising income levels and increased consumer spending.
Operators can look forward to a range of business opportunities related to the ongoing increase in health consciousness and the rise of ethical consumer spending, which is expected to enable industry players to provide niche markets with premium products.
But significant competition from takeaway food outlets and other food service and hospitality operators – particularly clubs and pubs – will challenge industry growth as well as increasing the need for operators to remain efficient and responsive to changes in customer demand.
Industry revenue is expected to increase at an annual rate of 3.0% during the five years to 2015-16 to total $9.9 billion.
Growing revenue but stagnant profit
During the next five-years restaurateurs can expect to benefit strongly from projected growth in the Australian economy along with the positive outlook for key drivers of demand such as disposable income levels, household consumption and expenditure on eating out.
Accelerated growth for the Australian economy, especially during the next three years, is expected to trigger a substantial rise in employment and consumer confidence.
That will prompt a rise in disposable income, encouraging households to spend more on discretionary products and services such as dining out. As consumer confidence rises consumers are expected to be less cautious in spending and more willing to purchase expensive, higher value items, which bodes well for industry players.
Other macro-economic factors sustaining demand for the restaurant industry will be overall wage growth as baby boomers retire and the working population shrinks. That will sustain long-term growth in disposable income, which means consumers will be more likely to spend more on higher value food items or choose to attend premium service restaurants, which will boost industry revenue.
That will be reinforced by busier lifestyles, greater workloads and greater reliance on convenience products and services. Added to that will be the ongoing rise in health consciousness and a greater preference for high quality, healthy meals.
Industry players can capitalise on those trends by offering quick, reliable supply of nutritious meals and beverages, enabling consumers to spend less time cooking in order to maximise spare time and maintain healthier lifestyles.
During the five years to 2015-16 there will be only marginal improvement in profit margins as industry competition remains fierce, particularly on a price basis.
New restaurants will continue to enter the market as barriers to entry remain low but overall profit margins will always be small and will continue to range between 1.0% and 7.0% compared with negative rates during the recent economic slowdown.
Profit margins will depend on establishment size and will fluctuate in line with the economic cycle and changes in household disposable income. Profit will remain a function of efficiency and the ability to successfully sell higher value food items alongside additional meal options such as desserts and coffees.
From 2011 on, as unemployment declines further, the industry will experience the re-emergence of issues related to attracting and retaining staff, particularly in the high casual employment component and continued high demand for chefs and cooks.
Training will become critical to ensure that appropriate standards are maintained in all areas and that revenue/profits grow at satisfactory levels. Continued monitoring of changing customer tastes and preferences will be vital for that process.
Business opportunities and competition
There are growth opportunities for the industry to develop niche markets for operators observing popular social trends and investing in technology to reach new markets by responding quickly to changes in consumer demand/behaviour.
Rising public concern over carbon emissions, climate change and health implications of consuming products full of harmful pesticides indicate investment opportunities in niche markets such as organics and eco-consumerism.
That could include restaurateurs differentiating products and services by promoting the use of organic ingredients or by highlighting the effort to reduce their carbon footprint by using local suppliers for transport and utilising energy-saving practices during service.
Industry players can enhance their competitive advantage and increase brand recognition via the internet through online advertising, an informative and interactive company website or via social media streams.
The growing trend of ethical consumerism presents another lucrative growth opportunity where industry players can reach niche markets and promote ethical business practices by using fair trade coffee and other food products.
The use of fair trade products has grown due to increased awareness and demand for transparency in food sourcing practices in order to ensure that coffee growers/food producers in the developing world are not exploited by multinationals.
Fair trade certified products ensure that growers and farmers receive better prices and decent working conditions while educating them about sustainable agricultural practices.
As consumers become more discerning about food and beverage consumption the ethical sourcing of food becomes a major determinant of food expenditure because customers are more willing to pay a premium for coffee or food that has been ethically sourced.
As new restaurant concepts emerge as a result of time constraints on households and general lifestyle changes clients will have an increasing number of alternatives to meet their needs, including hotels and clubs.
The industry will feel the effects of greater competition from pre-prepared foods sold by supermarkets, especially during periods of low economic growth.
Industry players will be forced to compete with the growing health movement in the traditional fast food industry given the success of takeaway chains such as Subway and Sumo Salad marketing themselves as fresh and healthy alternatives to traditional deep-fried, fattening fast food.
Added to that will be higher competition from established fast food operators such as McDonald's via expansion of menus to include healthy options such as wraps and salads.
Key Success Factors
IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are:
Access to niche markets: Being a recognised quality restaurant operating in a niche cuisine sector helps reduce competitive pressure.
Quality control processes: Ensuring a hospitable environment with quality food and service ensures a good reputation and repeat custom.
Effective cost controls: For an industry characterised by low profit margins it is important that players minimise costs and wastage, especially with regard to food inputs.
Access to a multi-skilled and flexible workforce: Operators need a high number of skilled, casual and permanent wait staff, cooks, chefs and kitchen hands to maintain a high level of customer service, especially during peak periods.
Word-of-mouth recommendations: High-quality food and excellent customer service are the keys to gaining favourable recommendations from customers. That encourages new and returning business.
Must comply with government regulations: Complying with planning, health, wage, occupational health and safety, food handling/storage and liquor/other regulations is essential.
Market research and understanding: A thorough understanding of the market and ongoing market research to remain informed about the latest consumer trends helps operators capitalise on new business and new product opportunities
Business expertise of operators: Business expertise, such as experience in hospitality or retail, is a crucial factor to succeeding in an industry characterised by high revenue, low profit and a great propensity for losses.
Robert Bryant is the general manager of business information firm IBISWorld. For more on this sector click here.
