After the Fair Trade Commission announced the "comprehensive plan to strengthen franchisee rights and interests" on the 23rd, franchisees voiced both expectations that conditions will improve compared with the past and criticism that details are lacking. This is the first policy unveiled since Chair Ju Byung-gi took office. The aim is to fix situations unilaterally unfavorable to franchisees—such as having to keep running stores despite continued operating losses because hefty penalty fees make it hard to close. A feature of the plan is that the system is designed in stages from startup to closure.
◇ Startup information improvement plan misses the "expected revenue" franchisees want
First, the Fair Trade Commission said it would provide sufficient information at the startup stage and decided to add mandatory items to the disclosure document. A disclosure document is a paper that includes not only the headquarters' financial status and the number of franchisees, but also data such as the annual average sales and average operating period of franchise operators by region. Prospective founders can review the disclosure document before deciding whether to start a business.
The items the Fair Trade Commission will add to the disclosure document this time are: ▲ information on franchisees' expense payments ▲ information on headquarters owned by private equity funds (PEFs) ▲ information on the long-term survival prospects of franchise stores ▲ details of partnership contracts such as with delivery applications ▲ information on overseas expansion ▲ information on average operating penalty fees.
However, among franchisees, there is criticism that profitability—the information they most want to know—is missing. A franchise official said, "What we most want to know is how much we can earn if we work hard," adding, "Headquarters does provide an estimated sales calculation sheet, but that's only once at the time of startup."
The person added, "The types and prices of mandatory items (expense) that must be purchased from headquarters change every year," and said, "In light of this, the disclosure document should be provided not only to prospective founders but also to franchisees already operating branches."
With this measure, the Fair Trade Commission included franchisees facing contract renewal, in addition to prospective founders, among those whom headquarters must provide with the disclosure document. Franchisees already operating branches are still excluded from this.
An official at the Fair Trade Commission explained, "Headquarters said it would be burdensome if sensitive information such as differential franchise fees (headquarters' distribution margin) is disclosed to many people," adding, "We struck a compromise between the opinions of headquarters and franchisees."
◇ Introducing a registration system for franchisee groups to prevent headquarters' retaliation… the key is the registration requirements
Regarding the operation phase of franchise stores, the Fair Trade Commission focused on strengthening franchisees' bargaining power. Until now, when franchisees formed their own groups and requested talks with headquarters, refusals were frequent on the grounds of a lack of representativeness. The commission will push a registration system that can grant public representativeness to franchisee groups.
Franchisees welcome the registration system itself. It can free them from retaliation by headquarters. In the past, when franchisees formed groups to discuss contract terms with headquarters, headquarters sometimes demanded the membership list of the franchisee group to verify representativeness.
But the result sometimes led to higher headquarters advertising fees for the stores that requested talks. This amounted to a form of retaliation at the headquarters level, and with a registration system, disputes over representativeness would not arise, removing the grounds for headquarters to demand access to a franchisee group's membership list.
However, to prevent a proliferation of franchisee groups, the Fair Trade Commission decided to allow registration only for groups that meet certain requirements. The question is what those requirements are, and the key issue is what percentage of franchisees must join for registration. The commission is considering "membership by at least 30% of all franchisees" as the registration requirement.
The market judges that meeting the commission's requirement will be difficult in practice. In reality, the average membership rate of franchisee groups is around 10%. Even the actively operating National Convenience Store Franchisee Council has only about 1 in 10 stores enrolled.
An official at a franchisee organization said, "Because weekly working hours are 55 to 60 hours, many franchisees are too busy running their businesses to join a group," adding, "There are almost no groups that meet the 30% requirement, and it is unrealistic."
Regarding the requirement, franchise headquarters are said to have argued for a 50% membership rate, because if an agreement is reached with some groups, it must be applied to all stores. A 30% membership rate is only one of the options under discussion and is not set. The Fair Trade Commission plans to finalize detailed standards by synthesizing the views of headquarters and franchisees.
◇ Contract termination without penalty fees possible… attention focuses on conditions for exercise
Under this plan, a franchisee's right to terminate a contract will be newly established at the closure stage. Even before a franchise contract ends, if operating losses occur due to headquarters' fault, the franchisee will have the right to terminate the contract without paying penalty fees. The Fair Trade Commission plans to gradually set the conditions for exercising the right to terminate through research projects and the like.
The general concept is to allow the right to terminate when the franchisee is not responsible for the cause of operating losses. As the right to terminate is itself an exception to the legal principle of contract compliance, the commission decided to strictly limit the conditions under which it can be exercised.
Because the conditions for exercising the right to terminate are not clearly set, there are predictions that disputes will ultimately lead to lawsuits between headquarters and franchisees. A prime example is owner risk. As CEO Paik Jong-won became embroiled in issues such as inflating the price of Paik Ham and controversies over ingredient content, sales at subsidiaries Hong Kong Banjeom and Saemaeul Sikdang fell by nearly 20% in two months.
An official at a franchise headquarters said, "There will certainly be cases where it is ambiguous to judge whether the party at fault is headquarters or the franchisee," adding, "Then ultimately it will go to court, making it unclear how this differs from the current situation."