South Korea’s Shrinking Coffee Market a Windfall to Consumers

By Josh Doyle

Even the largest of waves breaks when it hits shore.

The surge of cafés in South Korea has finally reached its peak as local media reports that thousands of Seoul’s 17,000-plus coffee houses have shut their doors due to a saturated market and the inevitable erosion that occurs when frequent coffee drinkers start brewing at home.

But as coffee producers from ready-to-drink (RTD) to roasters are forced to improve quality to stay in business, the shrinking market is a win for consumers.

“More and more people are drinking from coffee machines or roasting directly,” Baek-jin Kim of CozyVilla Coffee Roasters in Seoul told STiR. His café is one of many that has been forced to diversify their offerings into desserts and other foods in order to combat a wave of premium RTD and instant coffee products, along with innovative home brewing equipment.

Local media reported that 8.5% of café franchises closed in 2017, with possibly a larger number of closures for independent cafés. Large domestic chain Café Droptop cut 20% of its workforce last year, while rival franchising giant Coffine Gurunaru incurred losses of more than $2 million from operations of its 100 plus cafés. Caffébene, the Korean coffee chain that made waves in the US market in 2012 with their Times Square location, saw store numbers at home fall from a high of 912 shops in 2014 to 850 by 2016. The franchise’s expansion was further halted in 2018 when they filed for bankruptcy in South Korea. The collapse has been pinned on an over-reliance on franchise numbers, while the café chain failed to make offerings that stood out in Korea’s competitive cafe market.

Coffee imports in South Korea also slowed in 2018, a reversal from 2017 when value swelled to $11 billion, according to the South Korea Customs Service. In 2018 coffee imports contracted for the first time in six years, dragged down by a slowing domestic economy and an over-saturated market.

Familiar tale, happy ending?

Hope may be gleaned from the story of Japan’s coffee market, which has settled into a more premium focused market after rocketing growth gave way to a steep drop. Japan’s roast coffee market grew by an impressive 6.5% in 2014 and the instant market rose 2.8%. In 2019 both of those segments, while still growing, are hovering around the 1.8% mark and slowing.

South Korea’s coffee market may mature in a similar pattern, but there are upsides to the shift. As Japan’s coffee market cooled and deflated, it also improved in terms of roast quality and innovation with Japan continuing to dominate coffee auctions across South and Central America.

A pivot towards quality may be underway in Korea as well.

“Korea’s coffee industry will improve with better quality and better-tasting coffee, similar to the case in Japan,” Sujin Park of ED&F MAN Korea told STiR.

“Of course, people are starting to brew at home, and there are more office espresso machines, but in my opinion, people stop visiting cafés when the taste isn’t there and there’s nothing special about the coffee,” she said.

As a result, a focus on quality has become ubiquitous across South Korea’s coffee industry. Companies are moving away from 3-in-1 and other low-cost instant coffees at a rate of about 2% per year, according to Park.

“And we’re seeing movement from premium instant and premium RTD coffees. Cafés are doing more direct roasting as well, and large franchises are moving to single origin,” in order to improve quality and keep customers coming, noted Park.

Other cafés devote more shelf space to food to appeal to customers with a sweet tooth, hoping to draw crowds back with signature desserts.

“Cafés that focused on specialty coffee are now becoming more popular with desserts,” Kim of CozyVilla said, adding that “bakery-focused cafes” are one way South Korean cafés are responding to the maturing industry, where a simple Americano no longer impresses Korean coffee drinkers.

“I think that there will be many cafés changing in the future,” he told STiR.

Overregulation or a sign of growth?

The coffee market also faces hurdles as the government grapples with regulation, protecting children from caffeine and controlling the country’s swelling garbage problem. 

Vending machines are widespread across schools in South Korea, but coffee was removed from vending machines in all elementary, middle, and high schools in September 2018 as the Ministry of Food and Drug Safety sought to cut students’ caffeine intake. The move has reportedly frustrated some teachers, for whom the coffee products were originally intended.

A ban on plastic cups also made life difficult for cafés beginning in 2018, when the government introduced a new measure preventing cafés from serving drinks in plastic, except for take-out customers. Before the measure, cafés would often provide plastic cups to every customer, even if they planned to stay inside the café.

The move has aggravated some customers and employees, but small café owners may be faring better. Kim of CozyVilla said that smaller cafes “seem to be well guarded.” Their customers are more understanding of the policy move, which was meant to help relieve South Korea’s severe plastic problem.

South Korea remains one of the biggest consumers of disposable products worldwide. According to a 2016 government report, Korean people used some 420 plastic bags every year, while Germans used 70 and the average person in Finland used 4.

Skilled hands

A new wave of home brewing equipment is also stealing the market from South Korea’s 49,000 plus cafés. A history of skilled artisanship has left Korea well prepared for the transition to home brewing, with small and medium-sized companies crafting trendy new equipment for the Korean kitchen.

CM Tech, a ceramics company specializing in ceramic heaters, developed a roasting segment for their business after sales for home roasters began to creep upwards. The company’s coffee arm, Ceroffee, put 20 plus years of manufacturing experience to work in making a ceramic coffee roaster, according to Yongsoo Jeon, the company’s marketing representative. They showed off upgrades to the roaster at Seoul’s 2018 Café Show in November, alongside other South Korean manufacturers that are proving quality coffee on the peninsula is no longer the domain of cafés alone.

Coffee shops have played their part in gentrifying many of Seoul’s forgotten neighborhoods, drawing in younger crowds eager to post trendy spaces and artful lattes to their Instagram. Without them, Seoul’s young professionals and thriving hipster crowd would want for lunchtime hangout spots — but the growing swell of South Korea’s café mammoth has begun to eat itself.

With stiff competition in South Korea’s saturated café market, and improving quality from RTD and home brewing products, cafés face a hard road ahead. Demand will remain high for coffee products across the board, but as companies improve quality in their battle to keep customers, South Korea’s coffee drinkers may emerge the winners.