‘A lot of pressure’: How rising costs are pushing cafe owners to the brink

In 2024, engineer Benjamin Cheong opened The Little Cup and Saucer, a cafe in the Sydney residential suburb of Canterbury, viewing it as an opportunity to support his local community and bring people together.

Initially, he said, there were numerous moving parts, including understanding the neighbourhood and working out the cafe’s strengths and weaknesses. “Our profits depend on passing traffic. When people work from home and don’t head out to the office, business drops,” he says.

Over the past year, his main challenge is rising food costs and wages. “It’s really difficult to price food and remain profitable, and balance what customers can afford.”

What has made the cafe ownership more palatable for Cheong is that it’s his secondary business. “My main gig is in risk engineering, so maybe I am ‘relaxed’ when it comes to profitability, but still, running a cafe has been a lot of pressure.”

Establish an identity

Siblings Adam and Elisa Mariani own catering businesses in Melbourne, including bistro Elio’s Place, Maverick and bar Greta. They say rapid changes can happen from initial concept development to fit-out, opening and operating.

With margins this tight, even modest increases in wages, rent or interest can push a business from marginally profitable into loss quickly.

“It’s usually external factors, those out of your control, which contribute to the need to adapt. We’ve found establishing a strong identity and clear goals have helped with the challenges of opening venues,” Adam says.

Their advice is to remain true to your vision. Listen and learn from guest feedback and don’t take your eyes off the day-to-day variable costs, especially labour and supply costs. Also, empower your staff to do their best: “Having the right team in place helps to drive everything.”

In the pressure cooker

Working as a chef before moving into the insolvency industry, Hanzel Hizola, principal at insolvency firm Jirsch Sutherland, understands the challenges these businesses face.

“The pressure in the kitchen and on the floor is real. When rising costs collide with staff shortages and unpredictable trade, it doesn’t take much for that heat to become unbearable,” he says.

Taxation compliance and underestimating how quickly cash flow can unravel are common mistakes.

“Add to this rising wages, staff shortages, rent increases, cost of supply and operating costs, all of which can hit at the same time, while weaker patronage means less money coming through the door,” he says.

Hizola refers to recent ASIC data on accommodation and food services as among the most affected industries for insolvencies.

“That’s reflected not just by ASIC but in our experience too, which consistently shows hospitality, cafes, restaurants and takeaways as one of the most insolvency-exposed sectors.”

Tight profit margins

Importantly, he adds that many cafes and restaurants operate on net profit margins of around 3 or 4 per cent.

“With margins this tight, even modest increases in wages, rent or interest can push a business from marginally profitable into loss quickly.”

The number one reason these businesses go under always comes back to cash flow, followed by tax and the rising cost of doing business.

“We often refer to date-night economics, whereby consumers are having fewer nights out or spending less, which means less cash flowing through these businesses,” Hizola says.

His advice to anyone starting a business is to go in with your eyes open. Have a business plan and follow it, review and update when necessary.

Consider your location, take caution with your start-up and build costs. Build genuine cash buffers, understand your break-even analysis, stress-test your rent and staffing assumptions and stay on top of wages, superannuation and tax obligations from day one.

Similarly, NSW business lawyer Melissa Bush works closely with cafe and restaurant owners and says while most businesses are operationally prepared with menus, suppliers and fit-outs, they’re often legally under-prepared.

From a legal perspective, Bush highlights some of the greatest challenges as lease and fit-out pressure, employment law traps and underpayment risk, business structure mistakes and partnership disputes.

“They often assume legal documents are ‘just paperwork’. In reality, the lease, structure and contracts set up the risk profile for years,” she says.

Get workplace news, advice and perspectives to help make your job work for you. Sign up for our weekly Thank God it’s Monday newsletter.