Last October, Starbucks Coffee Korea's "Buddy Pass" service became a focal point of controversy. The Buddy Pass is a subscription service that provides consumers who pay 7,900 won per month with a 30% discount on coffee purchased after 2 p.m., as well as benefits like free delivery. It can keep consumers tied to the Starbucks platform longer and prevent them from shifting to competitors.
According to the retail industry on the 26th, the launch of the Buddy Pass appears to have positively impacted Starbucks Coffee Korea's performance. Starbucks Coffee Korea's operating profit in the first quarter of this year was 35.1 billion won, an increase of 7.3% compared to the same period last year. During the same period, sales also rose by 3.7% to reach 761.9 billion won.
A representative from Starbucks Coffee Korea explained the reason for the improvement in first-quarter results, saying, "The continuous expansion of membership customers and the launch of premium stores have led to stable growth."
In the retail industry, it has been anticipated that Starbucks Coffee Korea would emphasize the effects of the Buddy Pass in its first-quarter earnings report, as it sees the Buddy Pass as one of its new growth engines.
In fact, Starbucks Coffee Korea has previously boasted about the effects of the Buddy Pass. According to a statement released two months after the Buddy Pass launch in December of last year, average purchase amounts and the number of purchases among Buddy Pass users in November last year increased by 61% and 72%, respectively, compared to the period before the service.
However, Starbucks Coffee Korea has recently adopted a more reserved tone regarding the Buddy Pass. This is due to a lawsuit recently filed by several landlords against Starbucks Coffee Korea. The suing landlords claim that Starbucks Coffee Korea unilaterally introduced the Buddy Pass and failed to include part of the rent they owe in their calculations. What is the relationship between the Buddy Pass and rent?
Starbucks Coffee Korea operates most of its stores in a leased format, spending a certain percentage of its net sales on rent. If they generate 100 million won in net sales in a month, they will pay between 10 million won (10% of sales) and 16 million won (16% of sales) in rent.
The issue here is the discounts provided through the Buddy Pass and other promotional benefits. Landlords argue that sales should be reported based on the amount before discounts, but they claim that Starbucks Coffee Korea calculated sales based on the discounted amount and paid rent accordingly.
As the lawsuit was filed, a representative from Starbucks Coffee Korea stated, "The number of Buddy Pass subscribers is not substantial compared to the total user base, so it does not significantly impact rent." This suggests that they find it difficult to actively promote the Buddy Pass's success. A representative from the retail industry noted, "If not handled correctly, it could strengthen the landlords' claims," adding that "Starbucks finds itself in a difficult position, where it cannot easily say the Buddy Pass is successful even if it is."
The retail industry views the key cause of the lawsuit as a slowdown in sales at Starbucks Coffee Korea. While there have been past promotional events such as discounts from telecommunication companies or employee discounts, landlord complaints regarding sales omissions are significantly lower.
One landlord with Starbucks as a tenant commented, "To open a drive-thru store in the suburbs, we had to design and renovate according to what Starbucks wanted, so we ended up needing more money than expected. Excluding loan interest, the revenue from rent is not as high as we thought, so ultimately, sales need to increase more than they are now to solve the issue."
By the numbers, Starbucks Coffee Korea is steadily growing. Since 2020, sales have consistently increased, and last year, it surpassed 3 trillion won in sales for the first time. However, the operating profit has not kept pace with the increase in sales.
While issues such as rising raw material prices and labor costs exist, increased competition in the coffee market is the biggest problem. Despite raising prices three times from August of last year to January of this year, it still has not achieved operating profits comparable to those of 2021.
A representative from Starbucks Coffee Korea stated, "Amid intensified competition in the coffee market, we are striving to maximize sales through the introduction of the Buddy Pass and extended operating hours," adding that "a comparison of consumer purchasing patterns before and after Buddy Pass enrollment shows increased visit frequency and purchase amounts, positively impacting store rent."
The real estate industry is observing that the era of strong landlords versus weak tenants, like Starbucks Coffee Korea, may be coming to an end. Many predict that it could be better to have tenants like Daiso or Olive Young rather than Starbucks Coffee Korea. Recently, Starbucks has been making various efforts, such as increasing specialty stores. Attention is now focused on whether the day will come when Starbucks once again dominates the Korean coffee market.