Starting up the Coffee in South Korea

TRYING TO CREATE A STIR: OPENING A COFFEE SHOP IN KOREA

QUESTION 1:

EVALUATING THE DECISION OF KIM AND ANDES TO OPEN A COFFEE SHOP IN KOREA

Frankly speaking, opening a coffee shop is a good fit for Kim and Andes as entrepreneurs. Possessing tremendous knowledge of business management in Korea, this will be a valuable asset and come into handy when they need training and management their staffs. Furthermore, being a Korean this has given the firm the insider's knowledge which is a great competitive advantage over foreign-base entities. Secondly, obtaining the funding from investors is an important key element for a young firm; this can be achieved with the help from Andes. Upholding such optimistic scenario, this has gained Kim and Andes a competitive advantage and ahead others who want to enter the market. Thirdly, as mentioned in the case, the market potential in opening a coffee shop in South Korea is huge as with numerous of target audiences both coffee-drinker and non-coffee drinkers ranging from high-school to universities students, office workers etc. With a dynamic culture of coffee culture in Korea, even non-coffee drinkers will pay their visit to the coffee shop as the concept of 'third place' is strongly adopted. Hence, Kim and Andes might not need to limit their target audience to those who drink coffee but in fact, can widen up to include those non coffee drinkers as well. Through this, this report believes it is a good idea for Kim and Andes to open a coffee shop in South Korea even though the decision is quite contentious as there are many things that need to be taken into a great consideration before making a decision e.g. market size and its potential, competition, entry barriers, etc. Each of those elements need to be evaluated carefully as it will determine the success rate of the shop itself.

QUESTION 2

I.FACTORS INFLUENCE THEIR MODE OF ENTRY

There are many factors that influence their mode of entry decisions, they are:

1/ Entry barriers

As mentioned, South Korea has a dynamic market for café'. There are quite a number of barriers to entry such as:

-Competition: quite a fierce competition as large firms is competing for the market leader position. There are 740 different coffee brands listed in Seoul in 2007.

-Differentiation of product ranges that are offered by existing firms especially the foreign-based firms like Starbucks or Coffee Beans as they already had a ranges of developed products and R&D department who constantly work to discover new products.

-Capital as the Kim and Andes need financial to set up the coffee of purchasing the franchise.

-Customer loyalty as large incumbent firms may already have existing customers loyal to established products.

-Government regulations imposed some tariff on coffee beans as shown in the table below. However it is not significant comparing to other markets.

Source: Korea Coffee Market Brief Update 2011

2/ Economic environment

Economic environment depicts the stage of economic growth within a country has a great impact of the firm's strategy as it will determine the demand for goods and services within that country. Hence, by grapping those researches information can be a vital for young entity like Kim and Andes. Over the past several decades, the Republic of Korea has achieved a remarkably high level of economic growth. It is listed as the 15th largest economic in the world and is the 7th largest trading partner with the United States.

-GDP per capita of $20,757 per capita (2010)

-GDP (purchasing power parity in 2010): $1.459 trillion (2010)

-Unemployment rate is 3.3% (2010)

-Inflation rate (consumer prices) is 2.9% in 2010

(Source: Background note: South Korea 2012)

Those figures above highlights that, South Korea is a stable environment for young entrepreneur to operate in.

3/ Market potential & size

Clearly, Korea has huge market potential for Kim and Andes to consider of opening a cafe. As mentioned in the case, it is quite obvious that many Korean students were moving from libraries to comfortable coffee shops to study, take a brief nap, meet with friends, drink coffee and eat light snacks. With such a huge market size as there were more than 400 colleges and universities in South Korea in 2008 which consists of 3.4 million students. This has created a huge potential for young entrepreneur like Kim and Andes of their willing to make an attempt of opening the coffee shop in Korea.

Despite the huge market potential, there is a fierce competition of firms who compete over market share. As said, by 2010, there are 740 different coffee brands in Seoul. Most of the coffee shops are located around Seoul many college campuses to serve the huge demand from students. The market leaders in the coffee café market are Ediya and Rosebud; both of them are operated and owned by Korean. Those mentioned café has large number of outlets as 370 and 250 respectively. The only two foreign-based café is Starbucks and Coffee Bean. Apart from those big players, there are numerous of local coffee shops as well e.g. caffee bene, pascucci, etc.

4/ Culture

Korea has already built up the concept of 'the third place' which refers to the coffee shop while the first place is home and second place is work. The coffee shop acts as an escape from the pressure for other two places. They have treated a café as the place to meet friends, do some homework, get out the rains or into the air conditioning and enjoy a modern, comfortable environment. Through this, by upholding such an importance position, this has claimed how important a café is in Korean consumer's minds. However, not all customers have the same taste and preferences, as some some customers go to the coffee shop but ironically they do not order coffee but rather having tea or smoothies instead. Those non-coffee drinkers visit the café solely based on the facility that the coffee shop offers e.g. comfortable chair, nice ambience