Risks grow for booming franchising businesses

Members of the Korea Franchise Association bow before the press in this July 2017 file photo after incidents by a few franchise owners caused controversies in the first half of the year. The association has since set up a self-help measure while a related bill regulating the franchise sector pends in the National Assembly./ Yonhap

Preferred second job for Korean retirees poses various challenges

By Kim Ji-soo

When the 1998 Asian financial crisis began taking a toll on Korean companies, Han Se-won, now 67, and Kim Eun-sook, 62, opened a popular "gimbap" (rice rolled with vegetables wrapped in seaweed) franchise store near Namdaemun, central Seoul.

"My husband had to leave his construction company, and one of our acquaintances who was operating several franchise stores recommended this store," Kim said of her Gimgane gimbap franchise. Franchising offers a relatively easy and safe track — for those with a certain amount of seed money, in Han's case around 200 million won — to earn an income.

"It's hard work but we have raised our family, two children," Kim said.

They work 12 hours a day, six days a week.

That's why new shops continue to spring up. In 2016, Korea had 4 ,268 franchisers, which is a 59.4 percent increase over four years, the Korea Fair Trade Mediation Agency statistics showed in July. Of those, 76.2 percent were eateries.

It's a booming business that highlights current Korean society: an aging society, the need for people to work longer years and a lower tolerance for authoritarian business practices.

In June, Choi Ho-sig, founder and chairman of the Hosigi Chicken franchise, stepped down over sexual harassment allegations. Public furor rose and Hosigi stores saw as much as a 40 percent drop in sales in the 10 days after the case was reported.

Jung Woo-hyun, chairman of MP Group and founder of Mr. Pizza, also resigned in June after prosecutors began investigating the company for malpractices such as requiring franchisees to buy cheese at a higher price from a company owned by the chairman's family. Another reason "Owner/CEO-risk" has become more public is that a forceful regulator, Kim Sang-jo, heads the fair trade regulator the Fair Trade Commission (FTC).

Han of Gimgane said they follow the news and find themselves fortunate for the longevity and popularity of the brand.

"I think people are mindful of what our brand is," Han said.

Kim Chris Young-hoon, 50, who operates a store of Oppadak, a chicken franchise near Seoul Station, is another retiree.

A view of the Oppadak store run by Kim Young-hoon near Seoul Station in Seoul / Korea Times photo by Cho Sang-won

Kim says he is one of the lucky ones because his background lies in food and beverages and he has extensive knowledge of the industry. He stresses the same for anyone looking to open a franchise: carefully study consumer trends and also learn about the brands before selecting one.

"I think a lot of the success of a franchise store depends on consumers' tastes and the health of the economy. If people feel their wallets are thickening, they will eat out more. Even in lean times, people will eat out but at more approachable stores like ours," he said, explaining why he chose a chicken place and why he worries less about "Owner risk." Kim said he also pays a royalty to the franchiser.

One of the main causes that may well have resulted in the lopsided relationship with franchisers and franchisees is that many franchisers often require franchise fees and the purchase of supplies while not all have royalty payment systems.

"We could say only about 20 percent of the restaurant franchises have a royalty system," a PR official of the Korea Franchise Association said.

That can mean a franchiser's excessive requests for the purchase of supplies, something franchisees may find difficult to ignore in order to continue their business. Recently, another popular gimbap franchise, Teacher Kim, has been slapped with a 600 million won punitive fine for requiring its franchisees to purchase 18 items such as hygiene masks unrelated to maintaining the standardized taste of its product.

The association's PR official said such practices, set in place after the 1998 Asian financial crisis, at times resulted in the franchisers compelling the purchase of supplies by the franchisees with the threat of retaliation.

Faced with mounting criticism and warnings from the FTC, the association in late October announced self-correcting steps including strengthening communication between franchisers and franchisees, rooting out the practice of franchisers earning excessive gains through logistics such as the mandatory purchases of supplies.

Some industry watchers have pointed out the array of "incidents" as part of the 40-year history of Korea's franchising business.

Legislators and the commission however believe self-help measures may need more binding force by revising the related law to give franchisees the right to demand compensation from franchisers if "owner-risk" affects sales. The association however believes its self-help measures should be sufficient.

Not all franchise brands suffer from lopsided relationships. Kim Do-yoon, president of the Marugame Seimen's Hongdae store, said he experiences a "win-win" case with his franchisees.

"I think for our brand, a Japanese brand with a relatively short history of operating in Korea, the practice is for both the franchiser and the individual franchisees to thrive," Kim said.

Kim Chris Young-hoon of Oppadak near Seoul Station has sincere advice.

"I would say that people who are looking to enter the franchise business should really know consumer trends and the economy," Kim said. "I know people enter it because it's familiar. They have eaten out before or have bought things at convenience stores, which is also a franchise. This is hard work."