Having reached a remarkable level of density and coverage in a relatively short time, South Korea's booming specialist coffee shop category has become a key retail channel for premium soft drinks manufacturers.

With coffee shops now a fixture in most major cities—and seemingly on every street corner in Seoul—a growing symbiosis continues to emerge between soft drinks manufacturers seeking to leverage the strong traffic and attractive demographics of coffee shops to drive new product awareness and coffee shop owners looking to reinforce their branding with a strong portfolio of interesting, high-quality bottled beverages. With similar growth stories playing out in multiple global markets, specialist coffee shops (and foodservice outlets in general) are expected to take on growing importance as a launching pad for new products, as operators' thirst for high-end beverage options continues to intensify.

Scorching growth draws attention from drinks players

Coffee consumption is nothing new in South Korea—instant coffee has long been highly popular, and remains the preferred choice for home coffee consumption, while traditional cafes, or dabang, gained prominence in the 1960's and 70's as a place to sip (usually instant) coffee and listen to popular music, not unlike Japan's kissaten. What's more, vending machines remain a popular means of coffee consumption, and are found throughout major cities. In the last 3-4 years, however, modern specialist coffee shops have exploded in popularity, with sales surpassing US$1.4 billion (1.5 trillion won) in 2011. As it has in other countries, Starbucks has served as a key catalyst of this trend, introducing many Koreans, particularly young people, to the virtues of high-quality drip coffee and espresso drinks. The American chain remains the leading specialist coffee shop chain in South Korea, with estimated 2010 sales of US$230 million (250 billion won), while average annual sales growth has remained in the double-digits since the chain's arrival.

This kind of growth has not gone unnoticed among drinks manufacturers, particularly small “boutique” players looking to maximise exposure for premium brands. One example of this is I'm Real, by Pulmuone Co Ltd, the first not from concentrate 100% juice in South Korea, which was introduced in 2009 with initial distribution confined solely to chained specialist coffee shops such as Starbucks, Coffee Bean, Tom N Toms and in department stores. Limited distribution helped to reinforce an image of exclusivity and quality for the relatively high-priced brand, which sells for US$2.60 per 190ml bottle. Despite the

South Korea’s Booming Coffee Shops Category Becoming a Key Channel for Premium Soft Drinks Article | 27 Mar 2012

Page 1 of 3

high unit price, the limited distribution strategy has proven quite successful, setting up a wider push into South Korea's massive convenience store channel in 2010. Similar stories can be seen in categories such as carbonated bottled water, where major brands such as Nestlé Korea's Perrier are widely available through coffee shops, which enjoy significant traffic from Perrier's core demographic of young female consumers in their 20s and 30s. Carbonated bottled water has emerged as a high-value niche category in South Korea, with total value sales nearly tripling (albeit from a very small base) to approach US$9 million in 2011. This is of a piece with a broader process of premiumisation in bottled water, with high-end still brands such as Evian, Chojung, and the newly-introduced Fiji brand all enjoying strong growth in the last 2-3 years.

A perfect match

While prominent placement in high-traffic, high-prestige coffee shop locations is an obvious positive for soft drinks manufacturers looking to establish new products, a strong beverage portfolio carries real benefits for operators, as well. The category's meteoric growth in South Korea—total outlets now stand at just over 7,000, up from 4,000 in 2006—has created a brutal competitive environment, particularly for smaller players lacking the branding power of a Starbucks or a local chain like Angel-in-us. Finding a way to stand out in a field which grows more crowded by the day is essential, and a differentiated beverage portfolio can form a vital component of this strategy. This is particularly true given current trends among South Korean consumers—premium products and premium branding continue to receive an enthusiastic reception, particularly among urban young people with high disposable incomes, likely fuelling a continued push for unique, upscale products and cutting-edge outlet designs in a specialist coffee shop category which is ripe for further segmentation. Chilled, not-from-concentrate juices, premium carbonates, bottled water sourced from 10,000 metre-deep ocean water—these products have all carved out a market in South Korea, and a carefully curated collection can prove highly effective in further reinforcing any coffee shop's chosen brand identity.

The relatively unique structure of the category in South Korea could also play a role in driving this trend—several of South Korea's largest foodservice and retail players operate coffee shop chains, with Starbucks outlets operated as part of a joint venture with department store chain Shinsegae, while local chain Angel-in-us is a subsidiary or retail/foodservice giant Lotte Group. For companies with an interest in both the retail and foodservice sides of the equation, the ability to roll out new products through specialist coffee shops and other select on-trade channels could prove highly effective in building scale and interest for a profitable rollout through supermarkets and other retail channels, in much the same way Starbucks has used its vast network of outlets in the US to drive the adoption of its own branded retail products there.

A global trend set to intensify

While foodservice outlets have long been an important component of branding and sales for the largest global drinks players, recent trends have combined to create a wide array of new opportunities, particularly in developed markets. Large-scale initiatives to upgrade and enhance

Page 2 of 3

 

 

the in-store experience from the likes of McDonald's, Starbucks, and YUM! Brands have created a large number of highly inviting spaces, with contemporary designs and comfortable furnishings helping to create an effective halo for new bottled beverage products, one which soft drinks players have only just begun to tap into.

What's more, demand for new beverage products among the largest foodservice players is growing by the day, part of an ongoing quest for differentiation and relevance across multiple eating occasions. This combination of demand for new products and the emergence of highly attractive “showpiece” foodservice outlets is likely to fuel a host of potential innovations, among the introduction of special limited-time only products for particular chains and locations, not unlike the use of duty-free shops as specialised channels for rolling out high-end and/or limited edition spirits products. As foodservice operators continue to invest in creating in-store experiences as unique and carefully-planned as any retailer, the potential for effective new product push through this channel will only grow.

For further insight, please contact Michael Schaefer, Head of Global Consumer Foodservice Research: Michael.Schaefer@Euromonitorintl.com

© Euromonitor International 2014

Page 3 of 3