This blog post examines how low-cost coffee brands are surviving within Korea’s highly competitive cafe market, often referred to as a red ocean.

Korean Cafe Startups: Survival Strategies in a Red Ocean

In Korea, renowned for its high number of self-employed individuals, the three major self-employed industries are convenience stores, chicken restaurants, and cafes. According to the National Statistical Portal, there were 100,729 specialty coffee shops in Korea by the end of 2022. Comparing the number of cafes per capita between Korea and Japan reveals that Japan has one cafe per 1,800 people, while Korea has one per 500 people. This makes the cafe business a red ocean for startups in Korea. Looking specifically at the trend of store numbers in major commercial districts, Starbucks had an overwhelming lead as recently as 2018. However, in the last three years, the number of Mega Coffee and Compoze Coffee stores has already surpassed that of Starbucks.
Coffee consumers can be broadly categorized into three groups: those seeking a space, those seeking caffeine, and those seeking taste. Among these, Starbucks, which targets the group seeking space, has no substitutes, so it is expected to continue gaining popularity among them.
In contrast, low-cost coffee brands have successfully targeted the group seeking caffeine by adopting a low-price strategy opposite to Starbucks. At the beginning of low-cost coffee brands, there was Ediya, which successfully increased its number of stores in a short period.
Later, Mega Coffee emerged, placing kiosks at every entrance to allow customers to buy coffee without entering the store, maintaining its popularity even during the COVID-19 pandemic. Consequently, many people opened small, takeout-only cafes, leading to a proliferation of franchise stores. As proof, Mega Coffee headquarters’ operating profit margin in 2021 approached approximately 50%. While the rapid expansion of stores likely contributed significantly to initial franchise fee revenue, the actual high store turnover rate reportedly generates an operating profit margin of around 20-25%. Although Mega Coffee headquarters’ accounting policy later changed, lowering the operating profit margin, it still maintains tremendous performance as of 2023: approximately 368.4 billion won in sales and 69.4 billion won in operating profit.
Seeing such high operating profit margins might make some wonder if the coffee bean quality is low. Actually, affordable coffee doesn’t necessarily mean bad taste. Because, as mentioned earlier, low-cost coffee brands consume large volumes of beans through rapid turnover, they can source good-quality beans at lower prices. However, the taste of the coffee can vary slightly depending on how it’s brewed.

Korean Society: Should I Try Opening a Cafe Too?

You might know someone who says, “I plan to open my own cafe someday,” or perhaps you have a friend who already runs their own cafe. Around the early 2010s, there was a period when demand for independent cafes surged while supply remained relatively low. Back then, even people without deep coffee knowledge could succeed to some extent just by opening a shop. Seeing that inspired many others to dream of starting their own business. But the market itself has changed dramatically since then.
First, supply is now severely oversaturated. This means consumers can choose from a wide array of options, selecting the most competitive cafes with the highest comparative advantage. Securing that competitiveness requires relentless effort. It’s no longer a market where simply opening your doors guarantees success, as it was during that specific period. Instead, it’s a market where you must earn results by establishing yourself as a distinctive cafe in consumers’ minds through hard work, study, and dedication.
Cafes are often seen as an accessible venture due to relatively low startup costs. Many aspiring entrepreneurs are drawn to franchise brands (startup costs: 200-600 million won) and independent businesses (startup costs: minimum 30-100 million won), especially those that aren’t as stringent as Starbucks. However, there are challenges. First, franchises or independent cafes selling low-priced coffee often rely on high-volume, low-margin sales. This can actually increase labor intensity and business complexity. Moreover, the cost of purchasing roasted beans, the core raw material, is no small expense.
So, what must you prepare to not just start an independent cafe but ensure its survival? The most fundamental element is undoubtedly the taste of the coffee. Next, clear targeting is crucial. You need your own unique branding and must invest time effectively to build your image. Especially nowadays, cafes with a distinct color scheme and clear identity are more likely to attract the attention of the MZ generation. The design, interior, and branding that reflect the message the founder wants to convey to the market need to be consistently and effectively communicated to consumers.
Additionally, while raw material costs typically account for about 30% of expenses in a typical independent cafe, methods like in-house roasting or purchasing green beans directly can reduce this ratio to around 15%, thereby boosting operating profit margins.
Ultimately, what matters is having the power to draw people in—whether through the taste of the coffee, the charm of the space, the founder’s message, or something else entirely. Only spaces that provide sufficient reasons to visit and turn those visitors into loyal fans will survive, right? Just like now.

Specialty Coffee: Moving from Niche to Mainstream?

In the saturated cafe market, the specialty coffee market is emerging as businesses begin focusing on taste differentiation. The existence of specialty coffee began to be recognized around 2008, when Korea first started adopting American-style coffee education. A turning point for the growth of Korea’s specialty coffee market arrived in 2019 when barista Jeon Ju-yeon became the first Korean barista to win the World Barista Championship.
To define specialty coffee, the Specialty Coffee Association (SCA) explains it as ‘coffee or a coffee experience recognized for its unique attributes, which confer significant added value in the marketplace.’ Simply put, it refers to coffee whose uniqueness and distinctiveness are recognized, commanding a high added value. There are several criteria for this, including scoring the green beans (the seeds before roasting) – typically requiring a score of 80 points or higher – and the transparency with which defect levels, cultivation processes, and processing methods are communicated to customers.
Terarosa and Libre are leading specialty coffee brands in Korea. Notably, Terarosa sold a 35% stake for 70 billion won in 2021.
Selling a 35% stake for 70 billion won implies an estimated corporate value of approximately 200 billion won. Considering its 2020 revenue of approximately 35 billion won and operating profit of about 7.2 billion won, this indicates the brand was highly valued for its significant future growth potential. Dividing the 200 billion won valuation by the 7.2 billion won operating profit yields a multiple of about 27.7x—a valuation typically reserved for highly growth-oriented companies. In 2023, fixed costs like labor expenses increased as the company expanded stores and actively prepared for overseas expansion. Consequently, the operating profit margin decreased. However, the fact that an existing investor purchased a 13% stake in May 2024 at a valuation similar to previous levels suggests Terra Rosa internally has no major concerns about its long-term outlook. At this point, it’s fair to say specialty coffee is moving from a niche to a mainstream category, right?

The story of instant coffee, indispensable in Korea’s coffee scene

Instant coffee undoubtedly played the biggest role in popularizing coffee in Korea. It still firmly holds a pillar position in the domestic coffee market. And there’s a company that has held the undisputed top spot in this market for over 30 years. Yes, Dong-A Foods.
Boasting a whopping 88% market share, Dong-A Foods delivers consistently stable and outstanding performance. It steadily maintains annual sales of approximately 1.5 trillion won and operating profits of about 200 billion won. It’s impressive that coffee accounts for 80% of this revenue, right? Of course, the launch of KANU also played a significant role here.
However, the once sweet and solid instant coffee market is now shaking. The reason? ‘Capsule coffee’. The consumer base for instant coffee is steadily shifting towards capsule coffee. After all, it better replicates the taste of coffee enjoyed at cafes while remaining as convenient as instant coffee. It’s intriguing to see how the instant coffee industry will respond to this shift and how its once-stable consumer base will change.