Do Je-hae edits news stories as part of the AI team.
Minding your own business
There are a lot of coffee shops in Seoul, but not all of them are financially successful. / Korea Times file
By Do Je-hae
Authors offering differing tales of surviving Korea’s self-employment hell
By Kim Tong-hyung
“Struggles of a Backstreet Businessman,” Paul Kang, Encounter
“Establishing a Business for Free in the Republic of Korea,” Lee Seon-yeong and Hong Nan-yeong, Myungjin Books
In these tough economic times, more and more people are becoming self-employed. And the majority of them are marching blindly into retirement poverty.
After reaching historic highs in previous years, the share of self-employed people in the country’s workforce dropped sharply to 22 percent in April, the lowest monthly figure since 1983. This is despite more than a million people taking a stab at opening their own business every year, suggesting that bankruptcies have practically caught up to the pace of new entries.
Statistics show that nearly half of self-employed businesses, including coffee shops, fried chicken pubs and convenience stores, derail within three years and nearly eight out of ten fail to last a decade.
It’s a vicious cycle: there are not enough jobs to go around, so an increasing number of people are forced to start their own businesses out of necessity. But with not enough jobs, and incomes remaining stagnant, there isn’t a market for all these shops.
The picture is gruesome but it’s not like these small business owners have other options as payrolls are disappearing quickly. The plight of the self-employed is studiously described in two recent books that also attempt to be self-help guides. In one of the books, the author shares a painful experience of failure. The two authors of the other book, in comparison, seem to have a real shot at success.
While the tones of the two books couldn’t be more different, they are more similar in the recommendations they make for those about to set up on their own: minimize costs, reduce dependence on credit, and draw up a business plan grounded on deep research and self-assessment. Most importantly, find a way to be a business but not a shop.
It was in 2009 when Paul Kang, then a financial company employee, raised 150 million won with a number of friends to open a coffee shop near Hongik University, an area commonly called Hongdae, one of Seoul’s most bustling leisure districts. The shop barely lasted two-and-a-half years and accumulated more than 200 million won in debt by the time of its closure.
Kang has a better talent in selling books. His "Struggles of a Backstreet Businessman,’’ which mixes economic analysis and social commentary rooted on his failed coffee shop experience, has been a steady seller and well received by critics.
The ubiquity of coffee shops is perhaps the most distinctive visual legacy of Korea’s prolonged economic sluggishness, which began with the financial meltdown of the late 1990s.
When Kang opened the 112-square-meter coffee shop at the second-floor of a building, he found there were 16 other coffee shops just within the 300-meter radius.
Kang calculated that he needed to sell at least 100 cups of coffees per day to cover the costs and stay relevant as a business. He soon found he didn’t have a prayer at doing that.
He was paying 3 million won per month in recent, much cheaper than the cost of a similar first-floor space, which will cost around 10 million won a month. Aside of rent, Kang needed 1 million won more to cover maintenance costs and pay interest, another 1.5 million won month going to his barista, another 1.5 million won spent on buying coffee beans and food ingredients, before the 500,000 won bill for water and electricity.
The combined 6.8 million won in monthly costs was crippling as the shop struggled to hit 7 million won in revenue on its best months, meaning that the barista was earning more money than him. Kang had to cut his experiment short.
Kang has a cold advice for future coffee shop owners. Unless you have the financial ability to rent out a huge space that could dominate that commercial area to near monopolistic levels, never think about a coffee shop again, he says.
And is a coffee shop monopoly really worth paying for? Running a three-floor Caffe Bene shop in a leisure district like Hondae will cost 25 to 35 million won in monthly rent alone and 300 to 400 million won in lease deposit that is paid up front, Kang estimates. Considering other expenses like equipment and furniture, the investor will need at least 1 billion won (about $873,000) to begin with.
A Caffe Bene of this size in Hongdae will get about 200 customers per day on weekdays and 600 on weekends. That would be enough to generate revenue of 50 million won per month. But after paying rent, maintenance expenses, employee wages and other costs, the take-home pay will barely be 6 million won per month.
Now, 6 million won is nothing to sneeze at. But it’s hard to say this is a smart way to spend that money when simply sticking it in a savings account will generate 4.5 million won a month in interest income.
"Coffee shops are not a market for the average retiree with severance pay of around 200 to 300 million won. You can lose a several hundred million won in a blink of an eye,’’ Kang writes.
Kang’s advice to self-employed people is simple: avoid businesses that require rented space. The country’s criminally high rents and premiums, results of a distorted real estate market, frequently kill small businesses at birth. Semiconductor marketers or computer technicians can easily work from home and have more room to innovate with their skills. On the other hand, there is only so much you can differentiate with a cup of coffee.
In "Establishing a Business for Free
in the Republic of Korea,’’ authors Lee Seon-yeong and Hong Nan-yeong do their best to argue for a glass-half-full approach. The two women are respected marketing experts in their fields ― Lee in film and digital content and Hong in restaurant and books.
They suggest their readers to be alert in detecting new opportunities and niche markets and unhesitant in testing whether their ideas will have a market. They share Kang’s concern about spending too much on rent. Saturated markets like coffee shops, restaurants and motels should be avoided of course.
The authors share their experience of succeeding with items that are fun, smart and different. It seems that they have dabbled with anything and everything, such as movie planning, teaching Korean to foreign business and leisure travelers, selling paper toys, and inventing quirky products, like "one-touch’’ electrical sockets that allow users to plug and unplug cords with a touch of a finger.
The authors also benefited from several government programs financially assisting entrepreneurs. Lee benefited from an annual program of the Seoul Business Agency (a unit of the Seoul Metropolitan Government), which selects 150 entrepreneurs every year and provide them free office space for a year.