Starbucks fiasco puts Shinsegae under financial strain

Starbucks global corporate headquarters building is seen in Seattle, May 11. AP-Yonhap

Starbucks Korea’s recent marketing blunder, seen as mocking the country’s democracy movements of the 1980s and leading to widespread public outrage, is posing a financial risk to Shinsegae Group, the retail conglomerate that controls the coffee chain through its affiliate Emart.

Starbucks Korea has become a core business for the conglomerate, which has 59 subsidiaries. The fallout from the controversy surrounding a promotional event called “Tank Day,” which launched on May 18, has raised questions over whether the cafe chain will face challenges from the blowback and create a negative impact on the conglomerate headed by Chairman Chung Yong-jin.

One of the financial risks is a possible loss of 640 billion won ($427 million) if Seattle-based Starbucks Corp. seeks to buy Starbucks Korea back from Emart. The scenario is plausible, thanks to a call option agreed on by the U.S. company and Emart in 2021. At the time, Emart acquired an additional 700,000 shares in unlisted Starbucks Korea from Starbucks Coffee International (SCI), the overseas business and licensing arm of Starbucks Corp., for 474 billion won to become the largest shareholder with 67.5 percent.

The licensing agreement includes two call option conditions. Under the first, SCI can repurchase the shares at a mutually agreed fair valuation. The second states that if the licensing agreement is terminated due to liability on the part of Emart, SCI can buy back its stake at a 35 percent discount to the valuation.

When it acquired the shares in 2021, Emart evaluated Starbucks Korea’s overall value at 2.71 trillion won, with its stake worth 1.83 trillion won. If the second clause of the call option is triggered, the loss to Emart amounts to 640 billion won.

Losing Starbucks Korea could be a major blow for Shinsegae. After posting an operating profit of 114 billion won in 2017, the company never earned less than 100 billion won annually. After Shinsegae Department Store, Starbucks Korea saw the second-highest operating profit among Shinsegae subsidiaries last year.

A patron at a Starbucks store in Seoul orders using the company's online app in this 2022 photo. Courtesy of Starbucks Korea

Starbucks Korea reported a record operating profit of 240 billion won in 2021, when Emart became its largest shareholder. In 2024, the company’s sales surpassed 3 trillion won for the first time, a landmark in the country’s cafe industry, and operating profit reached 191 billion won. Last year, when coffee bean prices surged due to low yields, constricting margins for businesses worldwide, the company still secured a profit of 170 billion won.

Following the botched promotional event, the company’s weekly sales dropped 26 percent from the previous week, according to artificial intelligence-based market analysis firm IGAWorks. Consumer boycotts in Gwangju — the site of the Gwangju Uprising and a symbolic city in the nation’s democratic history — particularly intensified the company’s financial setback. The number of newly installed Starbucks mobile app downloads also fell 23.6 percent during the same period.

Starbucks prepaid gift cards are another area of concern. Starbucks Korea said Sunday that a total residual of 428 billion won remained loaded on cards by customers as of December, along with unused reward points from affiliated payment cards totaling approximately 26.7 billion won. The company announced Tuesday that it will refund all prepaid gift cards, temporarily freezing its policy of providing refunds only after 60 percent or more of the money loaded on the card has been spent. The offer, which lasts from June 1 to 14, is expected to lead to a significant volume of prepaid cash taken away from the company.

The money from prepaid gift cards has been earning bank interest for Starbucks Korea for years. According to the Financial Supervisory Service, the company has earned 40.8 billion won since 2020, using accumulated cash funneled through the prepaid gift cards to installment savings or short-term nonbank trust accounts.

"Starbucks, a place meant for conversation and casual hangouts, has now turned into a political and ideological arena between those who condemn the company and Chung, and those who support them," Park Ju-gun, CEO of Leaders Index, a market analysis company, said in a report.

"If this lasts long, it will be even more fatal for Starbucks Korea."