Market Reports

Korean coffee, Gangnam style

“At first I drank Starbucks coffee because it was a symbol of being rich and luxurious,” says 22-year-old student Jeong-eun Chang. As with many other Korean women her age, Chang spends many hours each week chatting with friends in coffee shops in South Korea’s capital, Seoul. Chang’s peers call the student “Korea’s biggest Starbucks fan”. Stereotypically for young Korean women, Chang is into almost everything that makes her look good. In South Korea, even a paper cup from the right coffee chain is a part of that mix. In a society where status symbols are everything, the branded paper cup is the coffee equivalent of a Gucci or Prada bag for many. The district of Gangnam best expresses this mindset. Forty years ago, Gangnam was little more than rice fields and farmers. Today Gangnam is home to the country’s leading entertainment companies, to movie and pop stars and to those who just want to be like  them. Korean rapper Psy famously portrayed the district, including its coffee shop culture, in his record-breaking hit Gangnam Style. Starbucks was the first coffee shop franchise to target the Korean market successfully. Starting with a few coffee shops in Seoul in 2001, the American chain expanded to almost 500 shops in 2008 when domestic player Caffe Bene entered the scene. Caffe Bene, which is currently the largest Korean coffee shop chain with almost 900 stores all over the country, links its success closely to the culture industry coming out of Gangnam. Contracting starlets and actors as ambassadors for Caffe Bene products, the company has built a brand image that appeals to many Koreans. Watching TV dramas at home, potential customers have been bombarded by images of Caffe Bene on their screens. “We used PPL [Product placement] strategies in famous sitcoms, dramas, etcetera in order to target our main customers – young people – and to naturally create brand awareness,” says Caffe Bene spokesperson Ju-hye Hong. Taking an existing product, copying it and developing it further to better fit customer needs is the formula that has driven the Korean economy for decades. Caffe Bene took that concept to coffee shops and overtook Starbucks within two years. Caffe Bene’s CEO, Sun-kwon Kim, saw the potential of the market and localised the Starbucks success story to fit a broader customer taste in South Korea. Korean consumers are as partial as their Western counterparts to the now-familiar coffee shop formula of a cozy atmosphere, easily accessed internet connections and power outlets close to every table. Most domestic brands do not only serve coffee. Their menus often include ice cream, pretzels and even alcoholic beverages. This fact turns coffee shops like Caffe Bene into a competitor to not just Starbucks, but to food chains and bars as well. “Koreans are fast followers,” says Daniel Schwekendiek, an economics professor at Sungkyunkwan University in Seoul. He says the strategy of coffee shops like Caffe Bene, Holly’s Coffee or Tom n Toms, all Korean domestic brands, are an example for the bandwagon effect. The expansion of coffee shops is driven by the socioeconomic change that has taken place in South Korea in the past decade. The recent enormous expansion is closely linked to the baby boomer generation approaching retirement age. “This generation has accumulated a significant amount of wealth,” Schwekendiek says. “They have the money to invest in a franchise.” Considering that most people usually head to coffee shops close to their workplace or around their homes, the high degree of urbanisation in South Korea, standing at around 85 per cent, has also contributed the fast expansion. Almost 50 per cent of Korea’s citizens – approximately 25 million people – live in the greater Seoul area. Coffee in South Korea has quickly advanced from cheap instant coffee with added sugar and milk replacement, to coffee shop chains on every corner. This change has also heralded a growing sophistication about the types of coffee being served. The biggest buzz nowadays is around specialty coffee shops like Choi Espresso Coffee Shop in southern Seoul, which is owned by certified Q-grader and World Coffee Events judge, Seong-il Choi. In easy reach of the Gangnam district, Choi serves brews imported directly from coffee farms around the world. That coffee consumption is often less about the taste and more about seeing and being seen is something that Choi finds regrettable. However, he and a few others like him have found their own niche. Instead of assembly-line like production of coffee and milk-based beverages, cafés like the Choi Espresso Coffee Shop are putting the emphasis on taste. They are the slow food equivalent to the franchised coffee shop system and passion for the product is their unofficial motto. “You have to drink an espresso within one minute otherwise the crema disappears,” Choi says, illustrating his point by pouring a shot down his throat. “I’ll make another one,” he says.
This commitment to coffee and the knowledge Choi has acquired over years of brewing, roasting, tasting and selling coffee is what Choi believes separates his shop from what he says is “commercial coffee”. Choi also has found an additional source of income by opening a barista school, which was established in 2006. So far 1200 students have graduated from the school, Choi says. The majority of them start out with plans of opening their own coffee shop one day. “Just 10 per cent reach that goal,” he says. Choi’s daily commute to his business now takes him past a Starbucks and a Coffee Bean & Tea Leaf store. “I never thought that within a decade we’d see as many coffee shops as we actually do these days,” Choi says. According to the Seoul Coffee Expo, the number of coffee shops in Korea has risen almost 900 per cent between 2006 and 2011, totalling almost 13,000. Sales in the same period skyrocketed almost 1600 per cent. And Choi believes there is more room for growth, at least for highly specialised shops like his. He adds that this growth might also be the reason why the players in Korea’s coffee industry have left the specialty coffee shops alone at this stage. Choi expects a saturated specialty coffee market within 10 years. Market research provider Euromonitor International is more conservative about the potential in this segment, however. The firm predicts the trend will reach its peak in 2017. While coffee shops in all variations are almost ubiquitous, coffee consumption still has space to grow. The younger generations are more drawn towards brewed coffee based on ground beans and are drinking less instant coffee compared to their parents and grandparents. Estimates by instant coffee maker and Kraft contractor, Dong Suh Foods Corporation in Seoul, show an average annual growth rate of 5.6 per cent for coffee mix products between 2008 and 2013. Soluble coffee, targeting more or less the same customers, has seen a 9.9 per cent decline in the same period, while ready-to-drink coffees available in cans at convenient stores in Korea grew 11.2 per cent on average and sales of roasted and ground coffee increased by 17.5 per cent. Dong Suh Foods’ signature product, Maxim coffee, in all kinds of variations, has been around for decades. Cheap and easy to make, instant drinks became the product of choice in the industrialisation period of South Korea. But as competition from coffee shops and home appliance importers specialising in ground coffee heats up, Dong Suh Foods as well as their direct competitors are coming up with new products. “We have developed more high-end instant coffees,” says company spokesperson Kyoung-tae Choi. Choi says that what the company wants to “incorporate the lifestyle of brewed coffee into an easy-to-use instant product”. Yet the target markets for the different coffee products available are just loosely overlapping. On the one hand, Koreans older than 35 have been socialised with instant coffee. The availability of hot water dispensers in almost every part of Korean life, from homes to offices, made it easy to have an instant shot of sweet creamy caffeine while taking a break. People under 35 are the ones frequenting coffee shops. They have largely been exposed to Western culture while studying and traveling abroad and they have actively participated in the growth of coffee shop franchises in South Korea. Sociology professor at Chung-Ang University, Kwang-yeong Shin, calls the rapid growth “a globalisation of taste” that is happening in Korea. “Drinking coffee is middle-class culture,” Shin tells Global Coffee Review. With the increase of money available for spending in Korean households, so-called ‘coffee-mania’ has started to spread. The most recent development is foreign coffee brewing machinery making it into the apartments of South Koreans in Gangnam and other upscale districts. Euromonitor analyst Minji Kim says that at this point the only opportunity for a new player to enter the Korean market would be to “carve a niche, if it is able to differentiate itself from the competition”. Kim says the key would be “to spend a lot on marketing brands to consumers”. Economist Schwekendiek sees another opportunity. “I say the best way to penetrate the market is over price,” he says. So far there is little price difference between competing players. Many market experts believe that prices should drop as the supply side has reached its peak already. Schwekendiek compares the coffee market to the replacement of luxurious clothing brands like Prada, Gucci and Louis Vuitton by big manufacturers such as H&M, Zara and Uniqlo. These clothing giants have managed to successfully open shops alongside the premium brands in Gangnam, despite its gold-plated demographic. For student Jeong-eun Chang, that would count as an argument to draw her attention away from Starbucks. “Coffee shops in South Korea have a negative image with many people because they are so expensive,” she says. Though she does not like the taste of Caffe Bene and others she also admits that a cheaper coffee shop, if around, would be her choice. “Taste comes second, after price,” she says. Price could be key to driving the spread of coffee and making it available even to those who have been excluded from a lifestyle that many view as Gangnam style.

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