Coffee palaces were developed with the backing of the temperance movement as an alternative to pubs. The Sydney Coffee Palace Hotel Company was formed in 1878 to operate several of these grand temperance hotels. During the 1880s, the number of temperance hotels boomed and they were promoted as family-friendly places to stay, away from the evil influences of alcohol.

As Diana Noyce wrote in M/C Journal:

…coffee, since its introduction into Europe, was regarded as the antidote to alcohol… In the early 1870s in Britain, the temperance movement had revived the coffee house to provide an alternative to the gin taverns that were so attractive to the working classes of the Industrial Age (Clarke 5). Unlike the earlier coffee house, this revived incarnation provided accommodation and was open to men, women and children. “Cheap and wholesome food,” was available as well as reading rooms supplied with newspapers and periodicals, and games and smoking rooms (Clarke 20). In Australia, coffee palaces did not seek the working classes, as clientele:  at least in the cities they were largely for the nouveau riche.

The earliest examples in Melbourne included the Victoria Coffee Palace (1880), the Grand Coffee Palace (1883) and the Collingwood Coffee Palace (1889). The Grand later gained a liquor licence and became the Hotel Windsor. It is one of the few left standing. As this era coincided with a period of post-goldrush prosperity, many of these buildings were lavishly ornamented in the high Victorian style.

Perhaps the most ornate was the Federal Coffee Palace, erected in 1888 on the corner of Collins and King Streets in Melbourne. Like many of its ilk, it later became a licensed hotel and was eventually demolished in 1972.

Coffee palaces were not restricted to the major cities. Many were built in country towns and seaside resorts. A financial crash in 1891 brought the boom to an end, and many temperance hotels were forced to become licensed premises to survive. However, many continued to trade well into the 1920s.