The landscape of South Korea’s coffee franchise industry is witnessing a notable shift as low-cost brands capitalize on the challenges posed by high inflation, contrasting sharply with the struggles faced by higher-priced competitors.
Amidst a backdrop of soaring inflation rates, low-cost coffee franchises have emerged as key players in the market, leveraging their affordability to attract a growing consumer base. These businesses, initially bolstered by the rise of takeaway culture during the COVID-19 pandemic, are now expanding their market influence with aggressive pricing strategies.
In contrast, high-priced coffee chains such as Starbucks are grappling with declining usage rates, prompting concerted efforts to bolster profitability. Mid-priced to low-cost chains like Ediya have also encountered challenges, experiencing their first-ever revenue decline last year, underscoring a clear polarization in coffee consumption trends.
According to data from market research firm Embrain released on June 19, the utilization rate of coffee franchises in the first quarter of this year dropped by 5.4 percent compared to the same period in 2022. This downturn is attributed to escalating raw material costs due to high inflation, necessitating successive price hikes across the coffee franchise sector. Over the past four years, international coffee bean prices have surged nearly threefold.
While high-priced franchises struggle to maintain their market dominance, low-cost brands such as Mega MGC Coffee and Compose Coffee have experienced a surge in consumer patronage. Utilization rates for these affordable options skyrocketed by 21.3 percent year-on-year, driven by their ability to offer beverages like Americanos for 2,000 won or less (approximately $1.48).
Mega Coffee, a prominent example, recently surpassed the milestone of 3,000 stores. Financial data from the operating company, Ann House Co., reveals a robust financial performance, with sales reaching 368.4 billion won (approximately $266.67 million) last year—a remarkable 110.7 percent increase from the previous year. Operating profit for Mega Coffee also soared by 124.1 percent, climbing from 31 billion won to 69.4 billion won during the same period.
Similarly, Compose Coffee reported a revenue of 88.9 billion won last year, marking a 20.5 percent growth compared to the previous year. The company’s operating profit surged by 46.8 percent to 36.7 billion won, resulting in an impressive operating profit margin of 41.3 percent. Celebrating a decade since its inception, Compose Coffee expanded its footprint to over 2,500 stores by March this year.
In contrast, higher-priced franchise brands like Starbucks Korea faced subdued growth dynamics. The company reported sales of 2.93 trillion won last year, accompanied by an operating profit of 139.8 billion won—an increase of 12.9 percent in sales and 14.2 percent in operating profit compared to the previous year. Despite these gains, the performance fell short of surpassing the 3 trillion won mark, with an operating profit margin of 4.8 percent—marginally higher than the previous year but significantly lower than pre-pandemic levels.
The evolving dynamics within South Korea’s coffee franchise sector underscore a broader consumer shift towards affordability in response to economic pressures, reshaping the competitive landscape among industry players.