Where competition’s brewing in the coffee segment, according to Zarraffa’s, Soul Origin and Merlo

Competition will likely drive rental costs upwards and therefore increase the cost of doing business, IbisWorld said.

With Australia’s coffee segment being one of the country’s most saturated industries, growing market share for chains seems to be a matter of ensuring they respond to evolving habits such as finding better locations and maintaining quality - regardless of channel.

“COVID has influenced a large spike in drive-thru visitation habits. With the move to work from home changing the daily habits of many commuters, combined with the restrictions across Australia that have affected people’s ability to dine in at times, drive thru has never been more popular,” Zarraffa’s Coffee, a chain heavily investing in drive-thru locations, told QSR Media.

Merlo Coffee general manager David Holt confirmed they are in the final stages of investigating retail acquisition opportunities with drive-thru options.

“We are also actively seeking opportunities to purchase in Sydney to expand our Eastern seaboard outlets. Our business is set up and prepared for growth and we are looking at all opportunities for expansion,” he said.

Soul Origin, which has a majority of stores being placed in shopping centres, ensured they onboarded delivery aggregators, along with building an eCommerce platform to provide coffee products as an in-home option.

“Both channels have seen growth month on month and we will continue to optimize these channels moving forward,” Adam Neill, the chain’s chief operating officer, said.

A steady appreciation for premium coffee
Delivering a premium experience in a cup with single origin coffee whilst keeping prices low is becoming a more normal sight for chains.

Zarraffa’s Coffee, for example, released their new Black Label Single Origin range, including the Kenyan Ntongoro and Kenyan Peaberry.

“Zarraffa’s Coffee founder, Kenton Campbell, has long nurtured a ‘trade, not aid’ relationship with the Meru Coffee Co-op in Mt Kenya, Africa by funding seedling nurseries to produce robust coffee crops which allows the local Kenyan coffee community to thrive, so it is fitting that our first release of Single Origin beans are handpicked in Meru County,” the chain said.

Merlo, meanwhile, introduced a 250ml cold brew can made with their Zambia single origin coffee as a grab and go option that has a 12-week shelf life. On the manufacturing side, they recently installed a Brambati 360 roasting plant which will quadruple their roasting capacity from its current 20 tonnes per week to over 100 tonnes per week in capacity.

“Wholesale is very competitive and customers are expecting lower coffee prices and higher end equipment even with small volumes. Commodity prices are under increasing pressure so there is a real squeeze on pricing from both sides,” Holt noted.

Aside from seeing a definite trend towards online purchasing and consumers making more coffee at home, a subscription model is also something Merlo has seen growing.

“Subscription coffee has also grown in popularity as customers want to ensure they have coffee on hand and the convenience of knowing it will be delivered without them having to even think about it,” Hold added. “Providing the full offering of goods is becoming paramount for our B2B base – so we supply everything from alternative milks, syrups, cups, packaging – it’s almost becoming the one stop shop.”

Soul Origin also saw significant growth in its iced coffee counterpart, and more recently locally grown and sourced coffee beans. 

“Our loyalty [programme] customers are our biggest consumers of coffee regarding basket share (when compared to all customer transactions),” Neill added.
 
IbisWorld’s most recent report on the coffee shops industry projects revenue to increase at an annualised 2.1% over the five years through 2025-26, to $4.7 billion. 

Forecasted rising discretionary incomes and coffee's continuing popularity, including expectations of having plant-based milk alternatives, are projected to support industry revenue growth over the next five years.

“Despite a forecast rise in the world price of coffee, industry profit margins are anticipated to rise over the period, driven by ongoing focus on premium products, such as organic and fair trade coffees,” IbisWorld senior industry analyst Suzy Oo said.

With industry players likely to compete on factors other than quality, such as convenient locations and price, competition will likely drive rental costs upwards and therefore increase the cost of doing business.

Towards newer innovative locations
“To support profitability, operators are projected to seek out new and innovative coffee shop locations over the period. Coffee carts and booths in busy business districts are anticipated to become commonplace over the next five years, due to their lower rental costs,” Oo explained.

Oo also expects the market will be increasingly supplied with other caffeinated beverages but are not forecasted to post a threat “in the near future.”

“Energy drinks and teas are prime examples, with the latter anticipated to become increasingly competitive over the next five years, due to the perceived health benefits of herbal teas,” she noted.

“Although rising discretionary income presents an opportunity for industry expansion, consumers can shift towards cafes and restaurants that serve coffee instead. In particular, the ongoing popularity of brunch culture among Australians is anticipated to constrain demand from coffee shops, as consumers opt for cafes where they can enjoy their coffee with a made-to-order meal,” she added.