What is the beverage of choice in Korea? Even though BTS tells us they "get up in the morn, cup of milk, let's rock and roll...", they actually reach for coffee instead.
Korea loves its coffee. The city of Seoul has a whopping 17,000 cafes, representing the highest density of coffee shops in the world: 1 shop per just 580 people. But Korea didn’t always have a coffee shop on every corner. In fact, they were few and far between. How did Korea’s coffee culture explode from 2000 to today?
Before the introduction of Western style coffee shops in the 2000s, Dabangs (다방), Korean style tea shops, were the place to grab a beverage and meet up with friends. This style of tea shop dates back to the late 1800s, when scholars and artists began to convene at the dabangs to socialize. But even at its peak, the estimated number of dabangs in the whole country did not exceed 1,500. During that time, Koreans did drink coffee, but rarely in public places or with other people. The consumption of coffee was limited to instant coffee that Koreans drank in their homes or offices.
The Rise of the Western Coffee Shop
Enter Starbucks. Starbucks opened its first store in Korea in 1999. This event coincided, not coincidentally, with the first wave of K-pop. This era was characterized by Korea’s newfound and sometimes taboo enthusiasm for Western styles of music. Despite some opposition, this interest in music prevailed and by extension, interest in other components of Western culture flourished. It is worth noting that America’s influence in Korea does date back further to the Korean War in the 1950s, remnants of which include fried chicken, army stew, and numerous English loanwords in Korean. However, the rise of K-pop in the 1990s was an even bigger catalyst that transformed the nation into a new, globalized Korea.
So, in comes Starbucks. In 1999, the company began to execute its proven playbook in South Korea as a 50-50 joint venture with Korean retailer Shinsegae. Starbucks defined a new norm for a coffee shop in the country: a store with handcrafted espresso-based drinks, large seating area, and a relaxing atmosphere to meet with friends. Starbucks Korea pursued modest growth at first, opening a few dozen stores per year to reach 300 stores by 2010. After 2010, store growth really began to skyrocket. In the subsequent 4 years, the number of stores more than doubled to 700 stores by 2014 and has doubled again since then to 1,611 stores (Q3 2021).
However, Starbucks’ success did not go unnoticed to local businesspeople. Only 2 years after Starbucks entered the Korean market in 1999, Korean company Ediya Coffee opened, looking to capitalize on this new trend. This set off a wave of entry into the market by other Korean chains including A Twosome Place, Angel-in-us, and Caffe Bene. Unlike Starbucks, which owns and operates its stores, virtually all Korean companies employ a franchise model instead. These chains charge franchise owners either a flat royalty fee per month (approximately $220 USD per month for Ediya), or approximately 5% of revenue as royalties.
Top Coffee Chains in Korea
Amidst the competition, Starbucks has been able to maintain its aura of luxury via its significantly higher prices. A tall americano at Starbucks costs about 4,100 KRW ($3.66 USD), compared to only 2,800 KRW ($2.37 USD) at the mid-priced chain Ediya.
Too Rich For My Blood
Today, competition is fiercer than ever. Korea has an estimated 70,000 coffee shops, and while the number of net new stores in the country is growing, store turnover is tremendously high. In 2018, 14,000 new stores opened while 9,000 stores closed. Increased competition has created battles for real estate and reduced margins for business owners. Operating an independent shop has become very difficult in this environment as the large chains are in an increasingly better position than independent shops to scout prime real estate, open new stores, and finance the heavy upfront capex.
Coffee shop business is one of the most saturated markets in Korea today. In fact, it’s so saturated that Starbucks called it quits, at least from owning and operating its Korean stores itself. In July 2021, Starbucks Corporation sold its 50% share in the Starbucks Korea JV to existing partner Shinsegae and new owner GIC, the Singapore sovereign wealth fund. Starbucks Corporation maintains a licensing agreement with Starbucks Korea. The transaction valued the combined business at $2.4 billion USD, about 2x revenue and 17x operating profit. The transaction gave Starbucks Corp more capital to focus on its largest international frontier, China.
Food (or Drink) for Thought
The next time I travel to Korea, I look forward to sitting down in a quaint coffee shop and enjoying an iced americano. As I drink, I’ll contemplate how none of this now dominant coffee culture existed until fairly recently. Korea is constantly evolving. The country has proven that it is excited rather than threatened by other cultures. This is an admirable mindset to have to promote global cultural sharing. With its constant evolution, I look forward to seeing what the next 20 years of global influences will bring to Korea.
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