Franchise Industry Forum Flooded with Franchisees' Complaints Over "Unfair Profits and Forced Goods Sales by Headquarters"

Hosted by Lee Eonju’s Office, Organized by Win-Win Growth Institute
From "Distribution Profits" to "Royalties" for Franchisees
"Franchisors Must Change Their Revenue Model"
Proposals for Institutional Reform to the Ministry of Trade and Fai

A forum was held to assess the crisis facing the domestic franchise industry and to seek ways for franchisors (headquarters) and franchise operators (franchise owners) to achieve mutual growth.

At the forum, franchise owners voiced strong complaints that their livelihoods are being threatened by soaring raw material prices and various unfair practices by franchisors, and specific institutional reforms to address these issues were also proposed.

On the afternoon of the 20th, at the National Assembly Members' Office Building Seminar Room 1, Lee Unju, a member of the Democratic Party, is seen speaking at the "Franchise Industry, Discussion for a Better Tomorrow" forum. Photo by Seokjin Choi

On April 21, Lee Unju, a member of the Democratic Party, announced that she had hosted the "Franchise Industry, A Discussion for a Better Tomorrow" forum the previous day at Seminar Room 1 of the National Assembly Members' Office Building. The event was organized by the office of Assemblywoman Lee, who also serves as the Chair of the Future Economic Growth Strategy Committee of the Democratic Party, and was hosted by the Youth Center of the Win-Win Growth Institute, a non-profit organization.

In her opening remarks, Lee stated, "The franchise industry in Korea has grown into a major pillar of our economy by providing small business owners with a 'safety net' for stable entrepreneurship, but now it faces an unprecedented crisis. Last year, one million small business owners faced closure, and the outcry from the field over unfair logistics systems and non-transparent settlement processes can no longer be ignored."

She continued, "The core keyword of today's forum is 'mutual growth.' There can be no headquarters without franchise owners, and no franchise owners without headquarters. It is urgent that we foster a sense of shared destiny. Headquarters should guarantee appropriate margins for franchisees through a transparent, royalty-based profit structure. The government and the National Assembly, rather than providing short-term financial support, must spearhead fundamental institutional reforms to level the playing field."

Choi Seungjae, the SME Ombudsman who sponsored the event, said in a congratulatory address, "It is necessary for the government to establish rational guidelines so that the pursuit of individual interests by self-employed people and companies does not lead to mutual ruin. Regulations, institutions, and policies must be improved to prevent the collapse of local economies. As the SME Ombudsman, I will help unravel these entangled issues together."

At the 'Franchise Industry, A Discussion for a Better Tomorrow' held at Seminar Room 1 of the National Assembly Members' Office Building on the afternoon of the 20th, Dayeon Lee, Director of the Win-Win Growth Institute, delivered the keynote address. Photo by Seokjin Choi

Dayeon Lee, Director of the Win-Win Growth Institute, who delivered the keynote address, said, "We should not simply blame the crisis in the domestic franchise industry on economic downturns or external recessions. The real reason franchise owners working hard on the ground are being driven to the brink is because of the 'unfair systems and profit structures' that have long been entrenched within the franchise industry itself."

Director Lee said, "During the quantitative expansion phase of franchises in the past, profit models based on logistics margins (differential franchise fees), distribution revenues from required and recommended items, and store expansion became customary. However, now that the market has matured, these closed systems and profit structures are increasing the management burden on franchisees and fostering distrust towards headquarters. It is time to improve the industry's system transparently, shifting from a distribution revenue focus toward a royalty-based model grounded in brand value and expertise."

Director Lee pointed out that "currently, the Ministry of Trade, Industry and Energy oversees franchisors, while the Ministry of SMEs and Startups is in charge of individual franchisees, resulting in a lack of integrated and consistent policies for the entire industry." She identified nine key issues currently facing the domestic franchise industry: ▲ Falling real incomes and management crises due to rising cost ratios; ▲ Irrationality of the logistics payment system (OMS) and compulsory cash settlement; ▲ Forced allocation of promotional items (goods) and shifting of inventory burdens; ▲ Need to normalize franchisor electronic payment agency (PG) fees and ensure transparency in settlement systems, as well as establish monitoring systems; ▲ Abuse of the recommended item designation system and excessive collection of differential franchise fees; ▲ Need to strengthen restrictions on indiscriminate nearby openings and enhance the effectiveness of business rights protection; ▲ Shifting of mobile voucher fees and promotion costs to franchisees; ▲ Delay in mandating the disclosure of advertising and promotional expenditure details and in establishing pre-approval systems; ▲ Measures to ease small business management burdens through improvement of franchise PG fee structures.

Lee Jeonghee, a professor at Chung-Ang University who chaired the forum, said, "Let's hear from the field first," and gave the floor to representatives from both the franchisee and franchisor sides among the six panelists.

Kim Sujin, a franchise owner who currently operates a Mega Coffee franchise, stated, "The minimum wage, which was 8,350 won in 2019, has now risen to 10,320 won, a 23.5% increase, but the price of a Mega Coffee Americano has remained at 2,000 won for seven years. There has never been a price increase," adding, "All of that burden is being shouldered by the franchise owners."

Kim continued, "The price of coffee beans, the most widely used material, also rose from 17,600 won in 2022 to 28,650 won now. According to the headquarters, the increase is due to rising raw material prices, but when coffee bean prices temporarily dropped, the headquarters did not lower the price. Once prices go up, they never come down."

Kim also said, "The headquarters requires us to use only their coffee cups and containers. When I bought them on the market, I paid half the price. Headquarters can buy in bulk even more cheaply, so how does it make sense that they charge us twice the price?"

Kim further stated, "We invest 150 million to 200 million won to open a franchise, but in the end, there is nothing left. How are we supposed to make a living?"

In addition, Kim specifically pointed out issues such as the Mega Coffee headquarters' logistics payment system, which requires advance cash payment for ordering raw materials or supplies, compulsory goods sales, and the practice of headquarters opening directly operated stores in prime locations under the pretext of so-called 'special business districts.'

On the afternoon of the 20th, the "Franchise Industry, Discussion for a Better Tomorrow" was held in Seminar Room 1 of the National Assembly Members' Office Building. Many franchise operators (franchise owners) crowded to watch the discussion, leaving no empty seats. Photo by Seokjin Choi

In response to these claims from the franchisee side, Kim Sanghoon, Secretary General of the Korea Franchise Association, said, "I have heard your concerns," but added, "I wonder whether the issues raised between franchisees and headquarters can really be generalized."

Secretary General Kim stated, "Forcing recommended prices, pushing goods, and opening stores nearby—as far as I know, these are violations of the Franchise Business Act. Even if they are not, they would likely be considered unfair practices under the Fair Trade Act."

He continued, "The Franchise Business Act is being enforced and the disclosure statements are being strengthened. The standard contract, at least for coffee shops, is 50 to 60 pages long based on what I have seen. Can we really discuss such specific facts here? I also wonder if it's appropriate to talk about the special cases of the coffee industry in this setting."

Addressing the criticism that headquarters forces franchisees to make cash payments, Secretary General Kim argued, "Headquarters are businesses, and so are the franchisees. Since this is B2B (business-to-business) trading, it is common to settle in cash."

Finally, Secretary General Kim said, "I believe that mutual growth is only possible if we establish a structure for coexistence and have serious discussions about sharing cost burdens. Our association will also listen with an open mind."

Meanwhile, the forum was attended by Cho Geunsang, Director of Distribution and Logistics at the Ministry of Trade, Industry and Energy, and Pi Gyelim, Director of Franchise Transaction Policy at the Fair Trade Commission, as well as other officials directly overseeing the franchise industry. They listened to the views of franchisees and headquarters representatives and expressed their commitment to institutional reform.

Participants are taking a commemorative photo at the "Franchise Industry, A Discussion for a Better Tomorrow" held in the No.1 Seminar Room of the National Assembly Members' Office Building on the afternoon of the 20th. Photo by Seokjin Choi

In her closing remarks, Assemblywoman Lee Unju said, "After listening, I agree with Secretary General Kim Sanghoon's point that if the law were fully and properly followed, there would be no major issues. The problem is that the laws are not being properly observed, and I think this is becoming widespread."

She added, "I believe the franchise industry should target the global market more aggressively. From the franchisee's perspective, they should be able to start as franchisees and grow their business, but if everyone is just struggling to survive day by day, there is no vision. If the industry continues to grow on a day-to-day basis, there are limits to everyone's growth."

Assemblywoman Lee continued, "We need to go beyond simply addressing today's individual legal problems and instead reimagine the overall vision for the franchise industry. The Director of Distribution and Logistics from the Ministry of Trade, Industry and Energy is here today—there should be research on how to grow the franchise industry as a 'K-brand' and expand the market. In my view, this is a task that should be taken on jointly by the Fair Trade Commission and the Ministry of Trade, Industry and Energy, rather than the Ministry of SMEs and Startups. It is necessary to study this matter comprehensively."

Finally, Assemblywoman Lee requested, "I hope that the two directors here today will take my suggestions into account and reflect the content of today's discussion in policy."

Meanwhile, during the Q&A session at the end of the forum, Mega Coffee franchise owners repeatedly requested the opportunity to speak. On March 31, 323 Mega Coffee franchise owners filed a lawsuit against MGC Global Co., Ltd., the headquarters, demanding the return of 1 million won each (as a partial claim) in differential franchise fees.

This content was produced with the assistance of AI translation services.