IMM taps Korea’s coffee cravings

Yet the Korean coffee craze didn't start with Starbucks, argues Joseph Lee, partner and senior managing director at IMM Private Equity. Its origins lie in South Korea's tea house culture and the need for space in a densely populated country. 

In the past decade, the industry has grown 30-40% per year but per capita coffee consumption is still 60-80% of the US and Japan. Industry analysts say there are 5,000 coffee shops nationwide and space for 2,000-3,000 more.

This explains why IMM last week bought a controlling stake in Hollys F&B, parent of Hollys Coffee, a top five domestic franchise in the space with around 400 outlets. Including bolt-on acquisitions the deal is expected to be worth up to $100 million. The entry valuation is approximately 6x EBITDA.

"Although the coffee industry won't grow at 30-40% per year much longer, it will still reach 10-15% over the next 5-10 years. You don't normally see this kind of underlying consumer/retail growth in more developed countries," Lee explains."Competition is cutthroat but Hollys has posted strong results in this environment and proved itself effective in real estate management."

IMM will retain the CEO and senior management team assembled by the previous owner, a financial investor who chose to exit after concluding he could take the business no further.

Real estate is a key consideration for coffee chains operating in well penetrated market. Operating under a franchise model, Hollys is to a certain extent insulated from property prices. Several other domestic coffee chains that owned their stores directly have previously struggled - they paid too much for plum sites and then couldn't make the economics work after same-store sales growth slipped.

IMM's priorities as owner include expanding the Hollys network of franchise and self-owned stores at home and overseas. The company recently entered into a master franchise agreement with a Chinese partner and plans to open 100 stores in the country over the next few years. Inroads have also been made in the Philippines and other Southeast Asian countries with a strong affiliation for Korean culture.

In this respect, the investment also represents IMM's view on the evolution of the Korean economy. "Korea is good at building ships and making televisions but the likes of China are becoming more competitive," says Lee. "We are looking at the next phase of growth - softer industries like content, healthcare and food and beverage."

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• Topics
• North Asia
• Buyouts
• Consumer
• IMM Investment
• South Korea
• Consumer
• buyout