Coffee wars: South Korea's cafe boom nears saturation point (updated)

E-Mart

05/04/2016 03:29

* Coffee shops in South Korea more than tripled in 2011-2015 
    * "Even fried chicken restaurants are trying to be a cafe" 
    * Starbucks has seen double-digit growth in No.3 Asian 
market 
    * Smaller players suffer as 7-Eleven, McDonalds cut prices 
    * Some local chains look to China, SE Asia for new growth 
 
 (Adds number of coffee shops per population in Seoul versus 
other cities) 
    By Joyce Lee and Hooyeon Kim 
    SEOUL, April 5 (Reuters) - South Korea's coffee shop craze 
is frothing over. 
    In fashionable retail and commercial districts of southern 
Seoul, nearly one in every two buildings boasts a coffee shop - 
evidence of a boom that has delivered dizzying growth for the 
likes of Starbucks  SBUX.O  and local chains. 
    But now the market is getting even more crowded, as 
convenience stores such as 7-Eleven offer 1,000 won (87 cents) 
cups, and smaller players are feeling the heat. 
    "We declared an emergency situation, gathered all employees 
eight times to debate strategies," Moon Chang-ki, CEO of 
mid-priced coffee chain Ediya, the country's largest operator by 
location with about 1,800 stores, told reporters recently. "If 
we sell at that price, our store owners won't earn any margins." 
    To compete, Ediya says it has instead focused on improving 
the quality of its coffee, and actually raised prices last year. 
Other chains have responded to growing competition by cutting 
back on store numbers and staff, or expanding overseas. 
    The number of chain and stand-alone coffee shops in South 
Korea more than tripled to about 49,600 in 2015 from 12,400 in 
2011, according to Korea Contents Media - far faster than 
overall consumption of coffee, which Koreans have been drinking 
for decades. 
     With more than 17,000 coffee shops in a city of over 10 
million, or about 17 per 10,000 people, Seoul has more coffee 
shops per capita than Starbucks' hometown Seattle, at 15 per 
10,000, or San Francisco, at 14.7, according to city of Seoul 
data and research providers FindTheHome and FindTheCompany. 
     
    PEAK COFFEE 
    South Korea's per capita coffee consumption has nearly 
doubled since 1990 to 2.3 kg (5 lb) per person, according to the 
International Coffee Organization - still roughly half the 4.5 
kg that Americans consume. 
    Revenue growth at coffee chains in the country slowed to 
about 8 percent in 2014, however, from more than 20 percent 
annually between 2008 and 2012, analysts say. While the number 
of new coffee shops in Seoul increased, so did closures, 
according to city data. 
    Brewed coffee sales at 7-Eleven, run by Lotte Shopping's 
 023530.KS  Korea Seven Co Ltd, jumped 88 percent in 2015 after 
it introduced drip coffee early last year costing about a 
dollar, almost one-fifth the cost of an average Starbucks cup. 
    McDonald's Corp  MCD.N  stores cut coffee prices to 1,500 
won from 2,100 won early last year, and have seen sales of the 
beverage almost triple, the company told Reuters. 
    By contrast, local chain Cafe Droptop, with about 225 shops, 
cut about 20 percent of its workforce at the end of 2015. 
Another chain, Coffine Gurunaru, with about 100 shops, incurred 
combined operating losses of 2.5 billion won ($2.2 million) in 
2013 and 2014 after being profitable in the previous two years, 
filings show. 
    "Even fried chicken restaurants and pubs are adding coffee, 
trying to be a cafe, while espresso machines are spreading in 
offices," said Lee Kyung-hee, who heads the Korea Business 
Strategy Institute, a consultancy. "The coffee industry is 
fighting a war without borders." 
        
    GOING ABROAD 
    Starbucks entered the market in 1999, and is widely credited 
with starting the country's habit for splurging on 
higher-quality coffee and creating a cafe industry SK Securities 
said was worth about 2.5 trillion won ($2.2 billion) in 2014.  
    Starbucks Coffee Korea, a 50-50 joint venture between the 
world's biggest coffee chain and South Korean hypermarket 
operator E-Mart  139480.KS , now has 860 stores, putting the 
country behind only China and Japan as the company's biggest 
markets in Asia, with sales more than doubling between 2011 and 
2014. 
    It posted a 20 percent increase in net profit to 30.77 
billion won in 2014, the most recent year for which results are 
available, on revenue of 617 billion won, up 28 percent. 
    But with industry growth slowing, some chains have been 
pushing abroad. 
    Caffe Bene, which reached 932 domestic stores in 2014 before 
trimming back to 850 at the end of March, posted a 3.3 billion 
won net loss in the first three quarters of 2015, according to 
the latest public data.  
    Last month, a joint venture between Singapore's Food Empire 
 FEMP.SI  and Indonesia's Salim Group acquired a 38 percent 
stake in Caffe Bene, becoming the second biggest shareholder 
after South Korean private equity fund K3 Equity Partners. 
    The chain said it was looking to expand in Southeast Asia to 
drive growth. 
    Zoo Coffee, with 65 domestic shops, has opened about 200 
franchise stores in China since entering the country in 2013 and 
in December announced a tie-up with China's giant Dalian Wanda 
Group to open 50 stores per year there.  
    Cafe Droptop in November opened its first overseas outlet in 
Shanghai. 
($1 = 1,147.8900 won) 
 
 (Editing by Tony Munroe and Alex Richardson) 
 ((jungyoon.lee@thomsonreuters.com; +82 2 3704 5609; Reuters 
Messaging: jungyoon.lee.thomsonreuters.com@reuters.net)) 
 
Keywords: SOUTHKOREA COFFEE/