Caffe Bene, the nation’s largest coffee shop franchise, has started cutting jobs and executive salaries, blaming regulations against expansion of its bakery and restaurant chains.

Industry watchers say, however, that there is more to the sudden “emergency management.”

Caffe Bene took over bakery chain Mainz Dom in December despite the National Commission for Corporate Partnership’s advice to reconsider the acquisition as the panel was discussing restricting bakery franchises.

The state-funded commission last month designated bakeries and restaurants as “SME-only” businesses, barring franchises to keep from opening too many stores or within 500 meters from small bakeries. Large companies in the dining industry including Caffe Bene, which runs Black’smith, were also told not to open more restaurants.

Early this month, Caffe Bene assigned about 100 employees at its headquarters who mostly worked on store expansions, or 10 percent of the total staff at the head office, to work at stores.

About 70 of them quit as they didn’t want to transfer, and left with severance pay and compensation. It was the first time Caffe Bene had cut jobs since the company was launched in 2008.

Caffe Bene chief executive Kim Sun-kwon decided to return his entire paycheck to the company starting this month. Executives are set to give up 30 percent of their monthly salaries.

“Our plans to expand Mainz Dom and Black’smith restaurants this year were altered due to the commission’s decision,” said Caffe Bene spokesman Kim Dong-han.

“Mainz Dome, which has 20 stores, cannot open a new store because the panel limited the number of stores a bakery franchise can open per year to only 2 percent of existing stores. Black’smith, which we started in November 2011, can’t expand further, either.”

Caffe Bene’s revenue and operating profit have continued to grow, but some industry observers say the latest austerity measures have to do with the company’s expansion strategy reaching breaking point.

A franchise business makes profit out of the franchise fees and interior decoration fees it receives from store owners when they open new shops. But for more stable management, the money it earns from supplying coffee to the stores should be its main source of income.

In the case of Caffe Bene, however, interior decoration fees account for more than half of its sales and show an operating profit-to-sales ratio of 27 percent, while it is losing money in its main business of coffee sales.

This means that Caffe Bene has to keep opening new stores to maintain profits.

This is why the company started a restaurant business, as the coffee shop market reached saturation point and diversified to other business areas such as drugstores and bakeries, as well as opening 76 Black’smith diners in a year.

But they were not as lucrative as the coffee shop business, leading the firm to shut down the drugstore business in just five months.

Caffe Bene was in the red in the first half of last year as it invested heavily overseas and in Black’smith, according to Kim.

In addition to some 800 Caffe Bene shops that sprung up nationwide in just five years, there are 35 more abroad ― six in the U.S., 27 in China and two in the Philippines.

“More are under construction in the U.S. and China, and we plan to open more shops in Saudi Arabia, Indonesia, Malaysia and Cambodia this year,” Kim said.

Caffe Bene’s sales more than doubled from 101 billion won in 2010 to an estimated 210 billion won last year. The company’s operating profit grew from 14.8 billion won in 2010 to 17.2 billion won in 2011 and more in 2012.

By Kim So-hyun (sophie@heraldcorp.com)