A new battle is unfolding in South Korea’s budget coffee market. While foreign chains like Starbucks, Pascucci, and Coffee Bean led the coffee scene in the 1990s, domestic budget coffee brands offering 1,000-won iced Americanos began to gain momentum in the 2010s. The market, initially shaped by the three franchise brands with yellow signboards—Mega MGC Coffee, Paik’s Coffee, and Compose Coffee—now faces a new wave of budget coffee brands challenging with even lower prices and larger sizes, signaling the start of the second round in the budget coffee war.

South Korea's three leading budget coffee brands, Mega MGC Coffee, Compose Coffee, and Paik’s Coffee, are lined up side by side in a building in Jongno-gu, Seoul, on Sept. 2, 2024. /Ko Woon-ho

The top three budget coffee brands, Mega Coffee, Paik’s Coffee, and Compose Coffee, are collectively known as the “yellow signboard trio” due to their yellow signage. Their success hinged on high turnover rates and low prices, targeting take-out customers and selling large quantities at minimal cost. As these brands grew, they expanded store sizes and leveraged celebrity endorsements to enhance their market presence. However, as they gradually increased prices, their competitiveness waned compared to newer cafés that offer even lower prices and rapidly expand their local presence.

Many franchise owners within the yellow signboard trio have struggled to maintain their businesses, with over 100 ownership transfers occurring annually. There are accusations that these companies are imposing excessive advertising costs on franchisees to maximize profits. In response, one company reportedly adjusted its accounting practices to artificially lower its profit margins. The once-dominant yellow signboard trio appears to be losing its edge in the budget coffee market.

Graphics by Yang Jin-kyung

To differentiate themselves from newcomers, the yellow signboard trio has been increasing store sizes. According to data from the Korea Fair Trade Commission, Mega Coffee’s average store size grew from 15.1 pyeong (49.9 m²) in 2020 to 17.1 pyeong (56.5 m²) in 2022, while Paik’s Coffee expanded from 13.4 pyeong (44.3 m²) in 2020 to 14.9 pyeong (49.3 m²) in 2023.

The yellow signboard trio had fiercely competed over advertising models, with Mega Coffee enlisting football star Son Heung-min and Compose Coffee choosing BTS member V. This sparked criticism that the costs of these endorsements were unfairly passed on to franchise owners. In response, Mega Coffee reportedly altered its accounting practices to make its profit margins appear smaller by boosting sales.

As competition in the industry intensified, the number of franchise owners unable to sustain their businesses began to rise. Increasing store sizes has led to higher rental costs, and the added burden of advertising expenses has further reduced franchisees’ profits. In 2023 alone, Paik’s Coffee saw 20 contract terminations and 108 ownership transfers, while Compose Coffee had 15 terminations and 338 transfers. Mega Coffee experienced eight contract terminations and 246 ownership transfers in 2022.

New budget coffee chains challenging the yellow signboard trio have adopted unique strategies, such as targeting the delivery market with unconventional menu items like tteokbokki and popcorn. Cafés like “Bongmyung Dongnae Coffee” and “10 Billion Coffee” specialize in delivery and focus on building brand recognition by concentrating their stores in specific neighborhoods. With lower startup and interior costs, these new players offer coffee priced 100 to 200 won cheaper than the yellow signboard trio.

Some newcomers also compete by offering ultra-large coffee sizes, even bigger than the typical Venti size (about 600ml). Brands like “3X-Large Coffee” and “I’m1L Coffee” sell one-liter iced Americanos for 2,000 to 3,000 won, further intensifying the competition in the budget coffee market.