Korea's value-focused coffee chains' enjoy high profits, contrary to low profits of licensed store owners

(Yonhap)

Value-focused coffee chain operators, such as Mega MGC Coffee and Compose Coffee, have grown rapidly in South Korea, thanks to increasing demand for affordable coffee products.

While the number of such stores has been increasing across the country, concerns are mounting as the owners of licensed stores suffer amid low margins from selling cheap beverages, while chain operators enjoy higher operating profit margins.

According to earnings reports for 2023, the operating profit margin of Mega MGC Coffee stood at 18 percent, while the same figure for Compose Coffee came to 41 percent. Those were significantly higher than Starbucks, which posted a 6.5 percent operating profit margin in the same period.

The operating margins of local value-focused coffee chain companies spiked last year mainly due to franchise fees, or the initial fees that owners of licensed stores pay when opening new stores.

“Initial franchise fees that value-focused coffee chain operators take from newly opened licensed stores directly become their sales and profits. Their high earnings in recent years have to do with their rapid expansion,” an official from the local coffee industry said.

According to Fair Trade Commission data, there were 1,184 Mega MGC Coffee locations across the country in 2020. That figure increased to 2,156 in 2022, before surpassing 3,000 just last month. Compose Coffee had 725 licensed stores in 2020, but that figure now stands at 2,571.

Those companies are minimizing the number of stores that they directly operate and maximizing their profits through increasing the number of new franchisee stores. Mega MGC Coffee directly operates only 17 stores, and Compose Coffee has no store that it directly operates -- unlike other major coffee franchise brands here, such as Starbucks and Ediya Coffee.

Although value-focused coffee chain companies have enjoyed high operating profit margins amid growing demand for affordable coffee products, the owners of licensed stores are facing difficulties, according to local reports.

For instance, Mega Coffee and Compose Coffee sell their hot Americano at 1,500 won ($1.10). But, production costs of their coffee products are around 38 percent, a local report pointed out. Licensed store owners said they make only 2 million-3 million won of profit even if they sell dozens of coffee per day.

Contrary to the difficulties that owners of licensed stores have, stakeholders in the value-focused coffee chain firms have enjoyed high dividends in recent years.

Mega MGC Coffee, for instance, paid 40.2 billion won in dividends to stakeholders in 2022, when it recorded total annual net profit of 41 billion won. In 2023, the company also provided 50.2 billion won of dividends, out of 56.4 billion won of annual net profit.

By Shim Woo-hyun(ws@heraldcorp.com)