Consolidation in Australia’s vibrant coffee industry is “necessary”, says Coffee Supreme CEO Andrew Low, as neighbourhood cafes and independent roasters contend with rising costs and market saturation.
New Zealand-based Coffee Supreme on Wednesday announced its investment in Gabriel Coffee, acquiring what Low called a “substantial stake” in the Sydney business.
As part of the move, Coffee Supreme will shutter its Prestons roastery and move to Gabriel Coffee’s Chatswood factory.
But both brands will live side-by-side, sharing financial and factory functions while keeping sales, marketing, and fulfilment operations separate.
Gabriel Coffee founder Sam Gabrielian will remain onboard as a shareholder and Head of Coffee in the new business structure.
Speaking to SmartCompany, Low said the deal will help Coffee Supreme expand in New South Wales, which remains its smallest Australian market.
“This recent transaction is very much a utilisation of assets, and a scale play,” Low said, remarking that Coffee Supreme and Gabriel Coffee share expertise and operational know-how.
It is not Coffee Supreme’s first Australian investment: the roaster, itself wholly acquired by Kiwi private equity firm Pioneer Capital in 2022, bought Sydney roastery Saint Dreux one year later.
The new deal is backdropped by economic hardship at every level of the coffee industry, spanning plantations in Brazil to cafes in Brunswick.
The cost of commodity coffee has practically doubled over the past 12 months, owing to poor growing seasons in key regions worldwide.
And local importers using the US dollar to access the global coffee market are losing out, as the falling Australian dollar makes it even harder for independent roasters to access high-quality beans.
Then there are the rising energy and labour costs for domestic roasters and cafes alike.
Low said Australian coffee businesses are particularly susceptible to those headwinds because of market saturation.
Remarking on his entry into the coffee industry in 2009, the former GM of Toby’s Estate Coffee said there were around 6,000 independent cafes at the time.
There are 29,000 today, Low said, far outpacing population growth.
“So we have seen the explosion of independent cafes in Australia, and we have the largest independent cafe market in the world… in terms of population per venue, it’s got harder,” he said.
“Most of those businesses, because they’re competing with someone next door now, their sales have gone down.
So we are seeing in the data a small contraction in venues. There’s more venues closing than opening for the first time in recorded history at the cafe level.
Industry data suggests the cafe sector is particularly hard-hit.
In December, credit monitoring bureau CreditorWatch said the food and beverage service businesses segment ranked highest for business failure rate, late payments, and large ATO tax debt defaults.
One step away from cafes are the approximately 900 independent coffee roasters spread across Australia.
There are “too many to service the market, and I think consolidation is necessary,” said Low.
It is an “appropriate” time for that to happen, “not because I wish that on any of my colleagues in the industry, but because I think resetting to a more sustainable number of brands and cafes is best for everyone,” he added.
Some of that consolidation will look similar to the latest Coffee Supreme and Gabriel Coffee deal, but with 200 wholesale customers and significant factory capital, Gabriel Coffee is no micro-roastery.
Low is aware of other larger roasters considering their own acquisitions or investments.
However, many smaller targets “aren’t really worth it” for businesses looking for meaningful scale.
“I think a chunk of those [smaller roasters] will go insolvent… even if you combined brands, I don’t think you would achieve enough efficiency to overcome the current economic headwinds we’re facing,” he said.
The price of coffee is only going up, but Low disputed fears that a flat white could cost $12 by the end of 2025.
“There is no foundational basis to that,” he said, saying the major cost drivers will be factors like labour, rent, and energy.
“Even in the worst market I’ve ever seen, I would expect the [commodity] coffee impact to push the cup price up about $1 for a cafe to maintain margin.”
And while Australian consumers are immensely protective of independent coffee culture, Low said some consolidation will help protect the local industry from megachain dominance.
“For us to be viable for our customers moving forward, we can’t be enemies,” he said.
“We have to be friends, and there’s room for all of us to play.”
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Senior Business Journalist
Focused on the small business sector, David’s work covers the political, regulatory, and economic issues facing Australian entrepreneurs. Prior to joining SmartCompany, he was a reporter for Business Insider Australia. You can follow him on LinkedIn.
