Dessert Cafés Shake Up South Korea’s Competitive Coffee Shop Market

South Korea’s specialist coffee shops category is one of the largest in the world, at US$1.4 billion in value and with explosive growth driven by rapid outlet expansion. Caffé Bene, the local outlet leader, went from 17 outlets in 2008 to over 600 in 2011, and plenty of local competitors have ramped up their own outlet expansion in order to keep up. This growth has also been driven by widespread appeal among urban demographics, from young professionals to retiring baby boomers, and just as demand has exploded, so too has the competition, with no less than ten major chains now battling for share of the vibrant market. While outlet expansion remains high, saturation is becoming a threat in premium locations, and operators are seeking out other ways to grow their revenue and differentiate themselves. Amidst this, a new kind of player is emerging: chained cafes with
significant food offers, modern Western-style outlets and positioning that goes far beyond coffee and baked goods.

A new niche

Local specialist coffee shops are moving in a similar direction as in other markets: Leading players are adding variety to food menus to attract meal-time traffic, seeking expansion in alternative locations and improving efficiency in outlets. Coffee Bean & Tea Leaf, for example, recently opened an outlet in a Hyundai auto showroom, and Angel-in-us Coffee is expected to begin opening drive-through outlets to appeal to Koreans’ “ppali ppali” culture of getting things done as quickly as possible. In addition to these somewhat standard strategies, new chains are also pursuing differentiation through different means, moving beyond standard specialist coffee shop positioning to base brands around entirely different beverages.

One such chain, Mango Six, puts a sweet twist on the ubiquitous specialist coffee shop concept with a mango theme and coffee sourced from Hawaii. The chain’s Western-style outlets are familiar—with high-end décor, comfortable lounge-seating and bakery displays—but the menu includes fresh fruit juices, fruit-topped ice cream, bakery goods, soups and sandwiches. The brand was developed by CEO Kang Hoon, who previously launched specialist coffee shop competitors Caffé Bene and Hollys Coffee, and who has stated that “dessert cafes” are the next major trend in local café culture. So far, the chain has spread to at least 40 outlets with dozens more opening soon.

Moving beyond coffee

Mango Six is notable not just for its unique positioning, but also because it straddles the line between specialist coffee shops and traditional cafés, one that has come to divide both modern and traditional café culture and, similarly, chained concepts and mom-and-pop independents. The brand is a chained player with the style and amenities of a specialist coffee shop but the menu variety and heft of a café, giving it the potential to serve a much broader range of eating occasions. This opens the door for the chain to carve out its own niche in a crowded marketplace and gives it access to a much larger pool of potential customers. Worldwide, the emergence of a significant chained presence in cafés would be particularly notable, as independents contribute an overwhelming majority of café demand, and the category has so far seen little in terms of large-scale innovation.

Also notable is what such new brands say about consumer dining habits and the growing importance of leisure benefits in foodservice. Whereas once the third-place concept was unique to specialist coffee shops (in addition to serving as one of its primary global demand drivers), consumers are now looking for similar benefits from a variety of outlet formats, and to accompany a variety of menus. This idea of the specialist coffee shop moving beyond coffee to be applied to other themes is also one Starbucks has been exploring in its domestic market, opening both juice/smoothie bar concepts and tea shops in select regions in the US. If such ventures prove successful, it could open the door for a much wider variety of foodservice concepts within the café space, offering valuable opportunities for differentiation and new growth.