메가커피, 한국에서 스타벅스를 앞지르다.

[홀랜]

As network expansion slows, sustained growth will hinge on franchise management and ingredient sales

(Mega Coffee)

Budget coffee chains are proving there’s still room to thrive in South Korea, however saturated the local market may be. Taking the lead is Mega Coffee, now the front-runner in both sales and store count.

Last year, Ann House, the parent company of Mega MGC Coffee, recorded 495.9 billion won ($350 million) in sales, up 34.6 percent from the previous year, while operating profit surged 55.2 percent to 107.6 billion won.

Its operating profit margin stood at 21.7 percent -- higher than 18.8 percent in 2023 and 17.6 percent in 2022. The figure is well above Starbucks Korea’s 6.2 percent margin, despite the latter’s far greater sales of 3.1 trillion won and operating profit of 190.8 billion won.

Behind the brisk sales of its 1,500-won Americano lies a business model that drives much of its profitability.

While Starbucks operates more than 2,000 stores under direct corporate management, Mega Coffee has adopted a franchise model -- of its 3,500 locations across the country as of February, fewer than 20 are company-owned.

For one, Mega Coffee generates a stream of revenue by supplying franchisees with coffee-related equipment and ingredients such as beans and syrups at a markup.

Product sales to franchise stores surged to 467.2 billion won last year, an increase of more than 120 billion won, or 34 percent, compared to the previous year. As the cost of goods sold rose by only 62.6 billion won over the same period, the company was able to widen its profit margin.

Citing rising global coffee bean prices and a weakening won, Mega Coffee announced it will raise prices on several menu items, including its hot Americano, by 200 won to 1,700 won starting April 21.

Its franchise-centric model has also shielded it from the financial burdens of labor and real estate costs incurred during large-scale expansion. Mega Coffee spent 34 billion won last year on fixed costs such as labor and rent, accounting for just 9 percent of its total expenses.

Beyond ingredient sales, the company brings in additional revenue from franchise fees, training costs and royalties.

According to industry insiders, these revenue streams tend to grow in tandem with a widening store network. “Such payments can, in fact, drive a rapid increase in operating profits during periods of widespread expansion,” said one industry official.

Data from the Fair Trade Commission shows that the number of Mega Coffee locations surged from 1,603 in 2021 to 2,173 in 2022 and 2,709 in 2023, reaching 3,500 early this year.

Mega Coffee has been raising the overall expenses associated with running a franchise store. For instance, from 2023 to 2024, it increased the franchise fee by 1.2 million won to 10 million won, and the training fee by 600,000 won to 5 million won.

When it comes to marketing expenses, the head office splits the cost equally with franchisees to promote the brand.

In 2022, however, the company courted controversy when some franchisees expressed discontent over its decision to name Korean soccer star Son Heung-min as brand ambassador and require them to split a 6 billion won advertising cost with headquarters.

The company defended the move, stating it had obtained the necessary consent from over 50 percent of its franchisees under relevant laws and proceeded in their interest.

In the years ahead, with explosive network growth losing steam, effective franchise management will be the engine of sustained success, according to industry insiders.

“As the company scales, it becomes more critical for headquarters to sharpen the brand’s competitive edge to keep franchisees committed and maintain its store count,” said the industry official. “Equally important is ensuring consistent quality across all outlets, as disparities may lead to customer dissatisfaction.”

In the end, the company will need to rely on steady revenue from ingredient sales to its franchisees, the official added.

minmin@heraldcorp.com