Emergency services were called to the Magnolia Boulevard shop, near Melaleuca Drive in Meadow Heights, about 1am.
Police believe two men rammed the car into the shop before setting it alight.
They were seen attempting to douse the car inside the store with liquid before the fire started.
Police said the pair left the scene in a dark-coloured car shortly after.
Neighbour Volkan Sahinkaya said he and other neighbours helped police break down the door to an attached home to help an unassuming couple sleeping inside escape.
“We knew there were people living there, so we just tried to get them out, knocking on the door,” Sahinkaya told 9News.
“Then eventually the police came around and we kicked the door and they kind of ran out in shock.
“They were shocked, they didn’t know what was happening. I don’t know how they didn’t hear it…Because they live right behind it.”
The two occupants of the home were not injured.
Residents say the milk bar had recently changed owners and had also undergone renovations.
“They renovated the whole shop …they are real nice people …it’s just sad to see what’s happened,” Sahinkaya said.
“They seemed [like] nice people, I feel sorry for them because they were new,” resident Chris Curmi said.
“This doesn’t happen here … That milk bar there, it’s been quiet all its life.”
Neighbour Eric reported hearing “cries of distress” and said the “whole street was covered in smoke”.
“I’ve only been in there a couple of times, they seem like nice people so I don’t know who would want to do this sort of thing,” Eric said.
Locals said the suspected firebombing had shaken the quiet suburban street.
“We’ve got kids, we’ve got families around here we’re worried about the families around here. It’s a bit scary,” Sahinkaya said.
“Everyone’s kind of one edge … it’s one of those things, you just try to watch out for your neighbour.”
Investigators cordoned off the area and have set up a crime scene.
An arson specialist and detectives will attend the scene today.
Police will investigate whether the damage and fire are linked to any other recent incidents.