Why fast-growing coffee chains fail to get listed in Korea

A Twosome Place has scrapped its initial public offering plans after being touted as the country’s first coffee chain to go public. This has raised questions over why fast-growing coffee chains in Korea continuously fail to make successful trading debuts.

Over the last decade, coffee chains have experienced explosive growth in Korea in terms of market size and profit, but not a single operator has completed a successful IPO.

Some market watchers say it could be due to coffee chains having to expand via franchises, which often experience revenue discrepancy depending on factors such as location, competition and the economy. Such factors make it difficult to show a stable growth trend to investors.

PRIORITIZING COMPANY PROMOTION RATHER THAN IPO

On June 1, A Twosome Place announced that it will not move forward with the planned IPO to brokerage firms that had responded to the request for proposal (RFP) to be the IPO manager.

Instead of being surprised, the investment banking industry responded as if it was expected, given that there had been some doubt as to whether A Twosome Place would follow through with IPO plans that seemed to be moving too quickly.

Industry watchers also say that it may have been challenging for A Twosome Place to push for an IPO since the industry frontrunner Starbucks is unlisted and it would've been difficult to determine its enterprise value or perform an industry analysis.

Another roadblock was a private equity firm being the biggest shareholder of A Twosome Place, as its enterprise value would need to be above the initial acquisition cost alongside concerns that the IPO would be centered around selling existing shares. Two years ago, Anchor Equity Partners acquired A Twosome Place from CJ Foodville Co. At the time, the coffee chain was valued at 450 billion won.

“Anchor Equity Partners is only going to push for an IPO if A Twosome Place receives a valuation of over 700 billion won. But investors will disregard an excessive valuation, meaning there’s a high chance that the listing will fail,” said an IB industry official.

Meanwhile, there are other views that the IPO was just a means for A Twosome Place to promote its strong revenue growth to investment banks.

Last year, A Twosome Place logged revenue of 365.5 billion won, up by 10.4% from the previous year. The company’s operating profit also climbed 8.7% over the same period, reaching 38.8 billion won.

COFFEE CHAINS DELAY IPO PLANS INDEFINITELY 

This is not the first time a coffee chain has retracted its IPO plans.

A homegrown coffee chain, Caffe Bene, had eyed an IPO since 2011 but eventually withdrew due to poor sales and excessive business expansion. The same year, another popular coffee chain Coffine Gurunaru ended up scrapping its listing plans despite having hired an IPO manager.

Also, Ediya Coffee, which began pushing for an IPO in 2017, abandoned plans to go public given intense backlash from its franchisees, who felt pressured to maximize profit for an IPO despite a drastic hike in the minimum wage.

The circumstances for Ediya Coffee franchisees have not changed since then, making it difficult to revisit plans for an IPO. In 2020, the company logged revenue of 223.9 billion won, similar to the year-earlier period, while the operating profit dropped by 5.4 billion won to 14 billion won.

COFFEE CHAINS REMAIN POPULAR TARGETS IN M&A INDUSTRY

Coffee chains are not preferred in the IPO market due to intense industry rivalry, low returns and franchise maintenance issues.

Also, it's fairly easy to open a coffee chain because it requires less seed money compared to other sectors. According to the Tax Statistics Information Service, there were around 71,906 coffee shops in Korea as of February this year, up by 15% compared to the year-earlier period.

Such factors have increased coffee shops' popularity in the M&A market rather than the IPO market.

In April 2019, CJ Foodville Co. sold a 45% stake in A Twosome Place for 202.5 billion won to Anchor Equity Partners. Also last year, KG Group acquired a 93.8% stake in Korea's Hollys Coffee for 145 billion won from Seoul-based IMM Private Equity.

Meanwhile, the popular coffee house Coffee Bean Korea Co. is also seeking to sell a 100% stake in the company.

Write to A-young Yoon at youngmoney@hankyung.com
Danbee Lee edited this article.