Can South Koreans today manage a day without coffee?

Data from market research company Euromonitor International suggests it's unlikely, as they consume an average of 405 cups annually as of last year -- well above the global average of 152 cups.

Korea's voracious coffee consumers have unleashed a price war among retailers, leading budget coffee shops here to converge on the standard price of 1,500 won ($1.09) per Americano for several years now.

At the opposite end of the spectrum, a distinct group of coffee businesses have eschewed price competition, thriving instead on delivering coffee experiences that transcend a mere caffeine fix.

According to a 2023 survey of 1,000 Korean nationals aged 20 to 59 -- conducted by consumer data platform Opensurvey and allowing multiple answers -- 72.6 percent said they frequent upscale coffee chains, while 61 percent patronize budget coffee franchises. Independent coffee shops attracted 54 percent of respondents.

Stuck in the shadows of budget and upscale coffee shops are midpriced chains, which are left struggling, hanging in the balance.

1,500-won Americanos

As inflation has climbed, coffee lovers have increasingly sought ways to cut back without sacrificing their daily cup.

To meet this demand, coffee shops have focused their value proposition on plain Americanos priced at approximately 1,500 won.

This price point has been a powerful draw for cost-conscious consumers, with Mega MGC Coffee, Compose Coffee and Paik's Coffee emerging as key players in the value-focused coffee market.

These coffee chains are also known for their generous portions.

They serve Americanos in 600 to 730-milliliter cups with two shots of espresso, further sweetening the deal with a supersized 960-ml cup including four shots for an affordable 3,000 won.

"Price is more important than taste for me," said 28-year-old Seoul resident Kim Min-hong, who explained that he cannot tell a difference between “cheap and pricey coffee.” “As long as it's cold and caffeinated, I'm happy with a low-cost option,” he reasoned.

Cheong, a Seoul-based office worker in her 30s, is also a fan of low-cost coffee. She said she needs a caffeine boost to power through her workday, so drinking a post-lunch iced Americano is a daily ritual.

"I can't justify spending on expensive coffee every day when cheaper options are just as good and even larger," she explained.

These budget coffee brands are experiencing substantial growth in sales.

Ann House, parent company of Mega MGC Coffee, reported in its regulatory filing that its sales and profits more than doubled last year compared to the previous year, reaching 368 billion won ($265 million) and 69.4 billion won, respectively.

Compose Coffee's sales surged 20.5 percent to 88.9 billion won last year, with profits jumping 47 percent to 36.7 billion won. In early July, Manila-based Jollibee Foods Corp. acquired 70 percent in the company, citing Compose Coffee's potential as a leading value coffee player.

Catalyzed by surging sales, they have also aggressively expanded their market presence.

The combined nationwide store count of Mega MGC, Compose and Paik shot up from 3,849 in 2021 to 5,285 in 2022, a 37.3 percent upswing. This rapid growth trajectory has continued into the current year, with the total number of outlets surpassing 7,000.

Mega boasts the largest store count with 3,000 outlets, marking a milestone in May with the opening of its 3,000th store in Siheung, Gyeonggi Province. Compose and Paik's trail behind with roughly 2,500 and 1,600 stores, respectively, as of May.

In fact, the total number of budget coffee franchises is even more substantial when considering other players like The Venti (1,170 stores) and Mammoth Coffee (750 stores), contributing to their widespread availability.

Midtier in bind

The budget coffee franchise model is not entirely a recent development in Korea's coffee market.

Ediya Coffee pioneered the affordable coffee market in 2001 by offering Americanos at the competitive price of 2,500 won.

Now charging 3,200 won for an Americano, Ediya stands as the nation’s largest coffee brand by store count with over 3,900 locations. In a strategic move in December 2022, the company even increased its Americano size from 420 ml to 540 ml and added a second shot of espresso without raising the price.

Ediya, however, has faced declining sales amid the rapid growth of budget coffee chains. Since releasing its audit report in 2012, the company's annual profit has fallen below the 10-billion-won mark for the first time last year, dropping from 10 billion won in 2022 to 8.2 billion won.

Tom N Toms, a local coffee chain established in 2004, has experienced a more precipitous decline. Charging 4,400 won for an Americano, the brand has reported operating losses for four consecutive years since 2020. Losses amounted to 3.5 billion won in 2020, 7.2 billion won in 2021 and 2.4 billion won last year.

A lack of distinct brand positioning seems to be a critical stumbling block for these mid-tier coffee franchises, said Choi Chul, a consumer science professor at Sookmyung Women's University.

“These coffee chains are caught in a bind as higher rents prevent aggressive price cuts, while they struggle to match the atmosphere of premium competitors like Starbucks and Twosome Place,” he said.

Twenty-eight-year-old Kim's remark directly captures Choi's point: "I go to Mega Coffee for quick takeouts and Starbucks for longer stays."

Premium brand positioning

The 2023 Opensurvey findings show Starbucks dominating the preferred coffee brand of Koreans aged 20-59, with a 65.6 percent share, followed by Mega Coffee at 35.5 percent.

Generating nearly 3 trillion won in sales last year, Starbucks Korea has solidified its market leadership here. According to Choi, this dominance is due to its strong brand identity characterized by consistent coffee quality, advanced digital services, and a comfortable in-store environment for customers to work or study in.

Furthermore, Starbucks Korea has been operating Starbucks Reserve stores to target consumers seeking premium coffee experiences.

The survey indicates that, unlike budget-conscious customers, this consumer segment is willing to spend more, with average expenditures exceeding 7,600 won at specialty coffee franchises and reaching over 8,000 won at independent coffee shops.

Blue Bottle Coffee, originally from Oakland, California, a specialty coffee brand committed to elevating "the craft of coffee in everything we do," successfully entered the Korean market in 2019.

With 13 stores nationwide and one pop-up location now, the brand's dedication to high-quality coffee has cemented its image of craftsmanship in a refined, understated setting. Financial Supervisory Service data shows an 18.6 percent on-year sales increase to 26.4 billion won last year.

In early July, 22-year-old Park visited Blue Bottle Coffee in The Hyundai Seoul to savor its manually brewed coffee priced at over 6,500 won. "I appreciate their manual pour-over process, which produces a distinctive flavor profile," she said, adding, "I also love the soothing, modern vibe of their stores."

A growing number of specialty coffee brands are actively pursuing this market segment.

Bonanza Coffee Roasters, a Berlin-based brand, has rapidly expanded its presence in South Korea since its 2022 launch here. With approximately 10 stores now operating nationwide, the brand has quickly gained traction in the market.

Chicago-based Intelligentsia Coffee joined the Korean market in February, opening its first branch in Seoul's Seochon area. Additionally, Morocco's Bacha Coffee is poised to enter the Seoul market this month with its first outlet in Cheongdam-dong.

Song Ji-hyun, 35, a self-proclaimed coffee connoisseur, seeks out diverse coffee experiences, exploring both franchises and independent coffee shops.

"While I appreciate the rich flavor of coffee, the overall experience is equally important," she said. "Customer service, cleanliness, interior design and atmosphere all contribute to enhancing the coffee-tasting experience."

Song's preference for unique coffee experiences is echoed in the 2023 Opensurvey results: Among 347 nonfranchise coffee shop patrons, 45.5 percent prioritized interior design, followed by 27.7 percent who valued beverage quality.