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Opinion pieces on business & economic issues

KIM Keun-Young

A Cupful of Socioeconomics

KIM Keun-Young

Aug. 16, 2011

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The record-breaking price rise of gold gets a lot attention these days but there is another commodity that would have cost you hundreds of times less and doubled your money since last year: coffee beans. In April of this year, coffee bean prices rose to US$3.18 per pound, coming close to the 1977 historic high of $3.40.

In the past, the backdrop to such meteoric hikes was supply disruptions caused by floods and droughts in coffee-growing countries, the weak US dollar, higher costs of inputs like fertilizer, and market speculators. However, the recent surges are a result of the rise in consumer demand in emerging economies such as Brazil , China and India , and their economic growth.

Case in point is the increased demand for high-grade Arabica coffee beans in Brazil , the biggest producer of coffee beans. Traditionally, Brazil has exported most of its coffee but its bulging middle class has upped the taste for better quality coffee, which means more Arabica beans are staying home.

Even in countries with a traditionally predominant tea culture such as China and India , the consumption of coffee is rapidly increasing. To take advantage of the growing market, coffee franchise giant Starbucks shifted away from the saturated US market to Brazil and China as globally strategic regions.

Obviously Korea is no exception to the coffee craze. According to Korea Customs Service, Korea 's coffee imports reached an all time high in 2010, totaling 117 thousand tons. This amounts to 11.7 billion cups of coffee which equals an annual average of 312 cups of coffee per person. To boot, as in emerging economies, the consumption patterns of Korean coffee drinkers have also become more refined. While imports of the cheaper Robusta coffee, which is mainly used to make instant coffee, is on the decline, imports of both Brazilian and Colombian Arabica coffee has increased 47% year-on-year.

As of now, Korea 's coffee market totals 2.7 trillion won. Coffee-mix packets take up the lion's share at 1.2 trillion won followed by the coffee shops at 830 billion won and canned and bottled coffee at 680 billion won. Although it is a distant second, the coffee shop market is growing the fastest and wields the most influence.

Notably, the number of coffee shops has rapidly increased despite fallout from the global financial crisis, including a tepid job market and galloping inflation. This is in stark contrast to the US , where the crisis put the brakes on coffee shops. In Korea , the number of coffee shops has skyrocketed six-fold from 1,500 at the end of 2006 to more than 9,000 in 2010. Interestingly, much of the growth has occurred since 2008 when the global financial crisis unfolded.

The start-up cost and entry barriers for coffee shops are low. And because of the refined image coffee possesses, the business has a high start-up preference. Those who lost their jobs due to the recession and investors shunning financial markets flocked to the coffee business, fueling an explosion of coffee shop franchises. Their moves were justified by no drastic changes in coffee drinking despite the economic turbulence.

While it is common to reduce discretionary spending during an economic downturn, coffee drinking has a strong habitual tendency and is considered a “comfort purchase” where consumers increase purchases of “the little things” to compensate for not being able to spend as they please.

Another distinctive feature of the Korean coffee scene is the changes in consumer sentiment. According a survey conducted by Seoul University professor Kim Rando and his research team in 2010, 86% of coffee drinkers felt that coffee prices were too high. It is not surprising since prices of lattes and cappuccinos bulked up with whip cream and other extras come close to those of a simple lunch. Yet, that has not reversed the coffee guzzling because it is being driven by factors apart from the cost.

For many Korean coffee drinkers, their java is not merely a beverage but a medium for new experiences that far outweigh the price. Being in a nice coffee shop is seen to be a means to satisfy exhibitionist tendencies, bringing to mind images of spoilt, extravagant consumers sipping overpriced cups of coffee when brewed coffee truly was a luxury in Korea, or effet de panoplie , the need to consume in order to fit into a certain group. Thus, if you add the emotional and pragmatic experiences coffee offers, the right price for a cup becomes relative.

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