Low-Margin, High-Volume Small Coffee Shops Now Can't Even Break Even

Raw Material Prices Surge for Coffee Beans and Milk
Franchise Competition Forces Price Freeze
Profits Decline but Prices Cannot Be Raised

[Asia Economy Reporter Seungjin Lee] Due to the surge in coffee bean and milk prices amid COVID-19 and cutthroat competition, small coffee shops are closing down. They purchase raw materials at higher prices than large franchises but have to sell at lower prices, making it impossible to earn stable profits even when family members work directly.

Smaller Shops Pay More for Coffee Beans

According to the industry on the 6th, coffee bean prices recently rose about 80% compared to last year, reaching the highest level in 10 years. This is due to a significant reduction in bean supply caused by abnormal weather and lockdown measures related to the COVID-19 situation in major producing countries such as Brazil and Vietnam. As international coffee bean prices soared sharply, the price of beans distributed domestically also increased from 20,000 won per 1kg to 25,000 won recently. Additionally, the recent rise in milk prices has further increased cost burdens.

A coffee shop named A near a university in Dongdaemun-gu, Seoul, saw its profits drop by more than 400,000 won over the past two months. Monthly sales remained the same as two months ago, but the cost of raw materials such as coffee beans and milk increased. A coffee shop sells its main menu item, caf? latte, for 3,500 won. The price of coffee beans rose from 20,000 won to 25,000 won per 1kg two months ago, and milk increased from 1,800 won to 2,100 won. As a result, the proportion of raw material costs in the product price rose from 30% to 40%, causing net profits to plummet.

Baek Seunggon (37, pseudonym), who operates A coffee shop, explained, "After excluding rent and labor costs, about 2.5 million won remains from an average monthly sales of 8 million won, which translates to only 11,000 won per hour. If coffee bean prices rise again early next year and labor costs also increase, the hourly wage will fall below that of part-time workers."

Although cost burdens are increasing, individual coffee shops cannot raise prices. Raising prices would make it impossible to survive due to losing price competitiveness against franchise companies. Despite the rise in international coffee bean prices, franchise companies bear relatively less cost burden by purchasing in bulk.

In fact, a nationwide franchise coffee shop B sells a caf? latte for 4,800 won and earns about 3,700 won per cup. This is about 1.7 times more than the 2,200 won earned by A coffee shop for the same size caf? latte. The coffee bean cost per cup at A coffee shop is 600 won, whereas at B coffee shop it is only 350 won, resulting in more than a 10% difference in the proportion of raw material costs in the overall coffee cost.

Small Coffee Shops Closing Down

With the full-scale rise in coffee bean prices expected to continue from next year, the business difficulties of individual coffee shops are likely to worsen. According to the Small Enterprise and Market Service, the number of coffee shops nationwide was about 80,000 in 2018 and exceeded 100,000 last year. The number of coffee shops continues to increase this year as well. In Seoul, the number rose from about 19,300 last year to about 21,200 as of September this year. Although cost burdens are temporarily offset by price increases, the narrowing price gap with large coffee franchises has led to a decrease in customers, putting small shops in even greater crisis.

Large coffee franchises recently announced no plans to raise prices despite the surge in coffee bean prices. Franchises secure coffee beans in bulk through annual pre-purchases and own roasting factories, which relatively reduces their cost burden.

An industry insider said, "It is true that the burden of coffee bean prices has increased, but there are no plans to raise prices immediately considering consumer prices. Small business owners, however, receive the same beans in small quantities at much higher unit prices, so the pressure they feel is different."