Australia’s coffee culture and the prevalence of small specialty cafes and coffee shops have resulted in a high level of competition, low barriers to entry and low industry concentration, according to IbisWorld.

Industry revenue is expected to grow by an annualised 5.3 per cent over the five years through 2013-14. This includes a forecast increase of 3.7 per cent to $4.2 billion in 2013-14.

IbisWorld expects the industry to post sustained growth over the next five years, with coffee again driving demand. Consumer demand for high quality, convenient food and beverage offerings should support strong sales of other cafe products.

As a result, operators are expected to focus on premium ingredients and gourmet cafe style meals in an effort to boost sales of higher margin products.

Strengthening economic conditions and ongoing interest in health and ethical consumer issues will also provide support for profit margins. The fragmented nature of the industry means that small specialty operators are expected to continue their dominance over the next five years. This fragmentation will fuel intense competition, placing pressure on profit while driving quality up.

The cafes and coffee shops industry owes much of its success to Australia’s love for quality coffee. With the influx of European immigrants after World War II and the emergence of popular European-style cafes, a strong and vibrant coffee culture has developed across the nation.

This love for coffee supported industry demand through the global economic downturn and has fuelled growth over the past five years. This upward trend is expected to continue over the next five years.

IbisWorld industry analyst, Stephen Gargano says an establishment’s success can often be determined by the level of customer service, price and quality of produce, and the overall cafe experience.

The quality of coffee is central, with coffee brand, texture, temperature, milk and even the level of crema in espressos becoming increasingly important to customers.

“The ability to understand and cater to the specific characteristics of consumer demand has driven the success of some players, and proved to be an obstacle for those that fail to incorporate them into business operations,” says Gargano.

The industry has a low level of market share concentration, in line with other industries in the hospitality sector. The industry is highly fragmented and traditionally encompasses a large number of single establishment, owner-operated cafes.

This fragmentation is not expected to change over the next five years. Consumers are expected to drive the trend towards smaller operators and niche providers, continuing to choose independent cafes and coffee shops over chain stores.

For more information, visit IbisWorld’s Cafes and Coffee Shops report.