Shinsegae to continue its partnership with Starbucks

By Kim Jae-heun

Shinsegae Group Vice Chairman Chung Yong-jin

Reports surfaced last year that Shinsegae Group will extend its partnership contract with Starbucks Korea, continuing their 20-year run.

The 20-year-contract between Shinsaegae and Starbucks will see the local retail giant operating the American coffee chain throughout Korea and supplying necessary products to the franchise coffee shops.

Starbucks Korea is a partnership of the Starbucks and Shinsegae Corporations and therefore affiliated by proxy with E-mart.

With worsened sales performance from E-mart, Shinsegae experienced a loss in earnings during the second quarter of last year. Despite these losses Shinsegae was hoping to continue its partnership with Starbucks.

Starbucks Korea CEO Song Ho-seob

Starbucks Korea has been showing double-digit growth every year since 2016 and has now positioned itself at the top of the coffee franchise industry.

According to E-mart, Starbucks Korea recorded 1.86 trillion won ($15.72 billion) sales last year, up 22.8 percent from 2018. Its business profits have also increased from 142.8 billion won to 175.1 billion won during the same period at a growth rate of 22.6 percent.

It doesn't look like it will be difficult for Starbucks Korea to achieve annual sales of 2 trillion this year considering the company's growth trend.

Meanwhile, E-mart suffered a drop in earnings last year with 150.7 billion won in profit, which is 67.4 percent lower compared to that in the previous year.

The discount store decided to change its CEO last October and close down businesses that fall short of expectations shutting down 13 E-mart stores that were not recording profits.

The retailor also reviewed launching a coffee franchise but it decided not to after calculating its viability in the saturated market.

Shinsegae saw no reason to discard its cash cow amid a quickly changing retail market that is pushing offline stores to the brink of extinction.

But ending a license deal with one of the country's largest retailers costs time and money while finding new business partners and a distribution network for Starbucks.

Starbucks' relied heavily on Shinsegae's distribution network when it first expanded into the Korean market. The retail giant opened Starbucks stores in their department stores across the country.

Also, Shinsegae is currently supplying confectionery to Starbucks stores, which means the American franchise will have to find a new subcontractor if they end the partnership.

With all factors mentioned above being considered, the two firms have decided to continue their partnership.

“The contract that expires at the end of this year is not a deal concerning the ownership of the license for Starbucks here,” an E-mart official said. “It's a deal to supply products and open Starbucks stores in Korea. If we were to end the partnership with Starbucks, there is only one way (to proceed) and it is to sell our 50 percent share in the joint venture. However, we have no plan to sell at the moment. To tell you the truth, we have not even start discussions about extending the contract for confectionery supply and coffee chain operation. We don't know when that will take place and how,” an E-mart official said.

Starbucks Korea declined to provide any information about possible extension of the contract.