The infrastructure on the NE main line is proving time and again that it is unfit for purpose. Even a relatively untrained eye can see frequent and significant mud holes, dips and distortions in the track and rotted wooden sleepers (largely on the BG south of Seymour). Regular derailments and complaints of rough riding from staff and passengers alike add to the argument that the whole thing is in a poor state despite significant sums of money having been spent on its "improvement".
Passenger rolling stock should allow for a majority of journeys (excluding those of a regional commuter nature on the Seymour services) to be above 90 minutes in duration and many taking longer than several hours. It is reasonable over that duration to have available at least light refreshments. The XPT service seems to do a good trade in full cooked meals and not all are for passengers making the entire Sydney - Melbourne journey by any means.
I would see a minimum specification for a Melbourne - Albury service as seating of a superior quality to that offered suburban and regional commuter passengers i.e. not 3+2 and with more comfort than a Sprinter or Harris car. The N-sets and VL units are just about acceptable though could certainly be improved upon. Ample luggage space must be provided and some form of food and drinks service which should be open for at least the majority and ideally all of the journey. The VLP snack bars are opened when staffing permits which can vary if the staff member concerned is also busy assisting with other duties such as ticket checks on a busy train. It is widely regarded as not acceptable hygienic practice to be both serving food and performing other tasks. On-train catering can be franchised out (as is generally done in the UK) with minimum service contracts in place to ensure standards are met. Whether service is from a fixed counter or a trolley can depend on the actual journey being worked; there are arguments for and against both though hot meals cannot be served from a trolley.
VLP operates on a very low cost recovery basis and while fares are cheap to the user they are subsidised to the hilt. That is a political decision. Fares were already cheap and were then cut substantially a few years back. Some might argue that was done to buy votes in the next election. It is true that in the US, Europe and particularly the UK that walk-up fares can be very much more expensive. In general those nations also offer the quality of service to match the fare from the ground up. Track is usually first class, trains often among the best there are, seating and customer service are of high standards and while those trains can also be very crowded there is also the opportunity in many cases to reserve a defined and labelled seat rather than the random VLP system which does nothing to prevent unreserved passengers sitting in your "reserved" seat. In the UK they would be firmly ordered out to sit elsewhere.
If the product is right the passengers will choose to use it. Fares are not the only consideration as the British example shows. Some of the highest fares in the world have done nothing to slow the huge growth in passenger rail which continues because the service is reliable, frequent, safe, fast (even some London and south-east commuter trains run at 225kph) and efficient. And in most cases beyond purely metropolitan commuting distance at least a trolley snack service is offered with a more substantial light meal service, and sometimes a full plated meal, available from a buffet counter or served at your seat on most long distance trains.