'1,500-Won Coffee' Chains Rush to Say "Let's Sign Son Heung-min and V"; Franchisees Groan as Ad Costs Soar [Why&Next]

Advertising Spending Rose at Five Low-Cost Coffee Franchises Last Year
High-Profile Star Marketing Intensifies... Concerns Grow Over a Costly Marketing Arms Race
Mixed Results for Franchisors and Franchisees

Marketing campaigns featuring famous singers, actors, and sports stars have been rolled out on a large scale in the fiercely competitive low-cost coffee market, driving a sharp increase in advertising spending last year. Given the nature of the franchise business, higher advertising costs are likely to increase the burden not only on franchisors but also on franchisees. Despite the rise in advertising spending, sales per store have diverged by brand, prompting concerns that companies could suffer from a costly marketing arms race in a saturated market.

Low-cost coffee shops line a building in Jongno-gu, Seoul. Photo by Jung Hyunjin

All Five Low-Cost Brands Increased Advertising Spending... "Essential Strategic Investment"

According to the Fair Trade Commission and audit reports released on the 10th, five major low-cost coffee franchises in South Korea—Mega MGC Coffee, Compose Coffee, Paik's Coffee, The Venti, and Mammoth Express—substantially increased their advertising spending last year from the previous year.

Mega MGC Coffee, which has the largest number of stores among low-cost coffee franchises in South Korea, reported in its disclosure statement that it spent 32.28404 billion won on advertising last year. Its advertising spending rose 50.8%, from 12.5 billion won in 2023 to 18.8 billion won in 2024, before increasing another 71.3% in just one year. Mega MGC Coffee has conducted extensive brand marketing since selecting soccer player Son Heung-min as its advertising model in 2022.

Compose Coffee, which had more than 3,000 stores last year, reported 10.07869 billion won in advertising and promotion expenses in its audit report, up 30.1% from the previous year. As recently as 2023, the company's advertising spending stood at 900 million won, but it surged to 7.7 billion won in 2024 and topped 10 billion won last year. Compose Coffee selected BTS member V as its advertising model in 2024, the brand's 10th anniversary, and continues to work with him.

The Venti, which has more than 1,300 stores nationwide, also reported spending 10.3 billion won on advertising last year in its disclosure statement. That was up 168% from a year earlier and 10 times the 2023 figure. Last year, The Venti selected singer G-Dragon as its official brand model and conducted extensive marketing activities, including advertising videos. The Born Korea's total advertising spending, including that for Paik's Coffee, rose from 3.9 billion won in 2024 to 5.9 billion won last year. Over the same period, Mammoth Express increased its advertising spending from 800 million won to 2.8 billion won. Last year, Mammoth Express hired actor Kim Woo-bin as its exclusive model.

As competition in the low-cost coffee industry intensifies, companies appear to be pouring money into advertising to promote their brands. In recent years, it has become common to see stores of several low-cost coffee brands lined up within a single block in busy commercial districts and office areas, competing aggressively. This is thought to reflect the growing importance of catching consumers' attention as more low-cost coffee brands enter the market. "Because profit margins are low in the low-cost coffee market, companies have to increase sales volume to generate profits, and a high-profile advertising model can make a significant difference," an industry official said.

Soccer player Son Heung-min, advertising model for Mega MGC Coffee. Photo courtesy of Mega MGC Coffee.

Companies said they increased advertising spending to strengthen their brands' competitiveness and boost franchisee sales. In response to an inquiry, Mega MGC Coffee said, "We view this as an essential strategic investment to lead the market."

It is also understood that companies consider brand models important as they seek to expand overseas. Mega MGC Coffee, Compose Coffee, Paik's Coffee, and The Venti are successively opening stores in North America, Japan, Southeast Asia, and other regions. They appear to believe that working with advertising models who have global fan bases and strong brand influence, and investing in advertising to promote their brands, can help their overseas expansion.

Franchisees Also Face Higher Costs, Despite Consent Process

The problem is that the increased advertising costs are shared not only by franchisors but also by franchisees. Typically, when a franchisor selects an advertising model and decides to launch related marketing activities, it seeks consent from franchisees. Under the Fair Transactions in Franchise Business Act, advertising expenses require the consent of at least 50% of franchisees, while promotional expenses require consent from at least 70%. Once consent is obtained, franchisees pay equal shares, regardless of store size or sales per store. The costs are shared on the premise that franchisees also benefit from the advertising.

BTS member V, advertising model for Compose Coffee. Courtesy of Compose Coffee.

It became known that in June, as Compose Coffee sought to renew its advertising-model contract with V, it held a vote asking franchisees to approve an advertising plan under which they would cover 40% of the costs. The franchisor said at the time that the advertising budget was 7.3 billion won, and that each franchisee would pay about 80,000 won per month, excluding VAT. Compose Coffee said, "We have continued to improve the efficiency of our advertising operations and reduced our total advertising spending this year. As a result, we lowered franchisees' average monthly advertising burden by about 11.3% from the previous year."

Mega MGC Coffee, which has the largest advertising budget, also said, "Annual advertising and promotional expenses are shared by the headquarters and franchisees, and the headquarters pays more than 60% of the costs to ease the burden on franchisees." The Venti said, "Advertising expenses are determined and shared through mutual discussions and voting between the headquarters and franchisees."

Paik's Coffee reported in its 2024 disclosure statement that the franchisor paid the entire 3.9 billion won in advertising expenses that year. Of the 3.2 billion won in promotional expenses, the franchisor paid 1.2 billion won and franchisees paid 1.9 billion won. The company said these advertising expenses covered all of The Born Korea's brands, including Paik's Coffee. The Born Korea also reported in its disclosure statement that it spent an additional 39.6 billion won on promotional expenses last year, separate from advertising costs. This included a 30 billion won support program for shared growth that the company launched in May last year.

The Born Korea said, "In 2024, the headquarters covered all the costs of promoting the brands overall. Promotional activities, such as discount events, are directly linked to sales at individual stores, so the headquarters and franchisees shared the costs. The franchisor also covered all advertising expenses last year."

Mammoth Express reported in its disclosure statement that last year the franchisor paid the entire 2.8 billion won in advertising expenses and 100 million won of its promotional expenses. Franchisees shared 1 billion won in promotional expenses used to provide loyalty coupons, paying an average of 1.25 million won per store.

"Higher Advertising Spending Does Not Necessarily Mean Higher Sales"... Impact on Franchisors' Results

However, the increase in advertising spending does not appear to necessarily lead to higher sales per store. Mega MGC Coffee's average sales per franchise store reached 412.87 million won last year, up 6.3% from the previous year. Its average sales per pyeong also rose 5.7% over the same period. By contrast, Paik's Coffee saw average sales per franchise store fall 9.1% and average sales per pyeong decline 9.9%. The Venti and Mammoth Express posted slight year-on-year increases in average sales per franchise store, but their average sales per pyeong fell 1.5% and 3.8%, respectively. Compose Coffee's average sales per franchise store increased 2.6% in 2024 from 2023, but its average sales per pyeong fell by more than 30%.

In response, a representative of The Venti said, "Sales at franchise stores and the franchisor's profitability are affected by various factors, including consumer trends, market conditions, raw material costs, and operating expenses, as well as advertising costs, so it is difficult to assess them based on any single factor." A representative of The Born Korea said the results reflected "the impact of the economic slowdown" and added, "We believe advertising and promotional activities helped partially limit the decline in sales."

Over the same period, the franchisors' business results also diverged. Mega MGC Coffee's franchisor revenue rose 30.4% last year from the previous year, significantly outpacing both average sales per franchise store and average sales per pyeong, while operating profit increased 3.5%. Paik's Coffee's franchisor revenue and operating profit both declined last year, by 22.9% and 174.3%, respectively. The Venti's revenue rose 4.8%, but its operating profit fell 101.1%. Mammoth Express's revenue and operating profit increased 12.1% and 152.8%, respectively.

"Competition is so fierce that franchisors are pushing hard, increasing advertising spending to drive growth. But if doubts about the actual effectiveness of the advertising grow, they will inevitably face resistance from franchisees," an industry official said. "Efforts to step up marketing are likely to continue for the time being, but there may also be a period of adjustment later on."

This content was produced with the assistance of AI translation services.