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Conflicts in the franchise industry : How to forge a win-win partnership

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  • Conflicts in the franchise industry
  • Lee Jinkook
  • Korea Development Institute


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Title Conflicts in the franchise industry
Similar Titles
Sub Title

How to forge a win-win partnership

Material Type Report
Author(English)

Lee Jinkook

Publisher

[Sejong] : Korea Development Institute

Date 2019-09
Series Title; No KDI Focus / 96
Subject Country South Korea(Asia and Pacific)
Language English
File Type Link
Original Format pdf
Subject Industry and Technology < Others
Holding Korea Development Institute
License

Abstract

□ Korea’s franchise market is wavering. Amid the heavy concentration of foodservice businesses and the high number of inexperienced franchisors, franchisees have had little opportunity to grow. Moreover, the terms and conditions of franchise agreements have become a source of contention due to their contradicting impact on the performances of franchisors and franchisees. Accordingly, government efforts are needed to overhaul information disclosure documents so that they accurately reflect the information and data on, for example, the franchisor’s experience and background, and the franchise store’s average sales figures, etc. At the same time, the fixed-percentage royalty should be promoted through discussions with respective industries and guidelines established for essential items. Actions must include exploring temporary measures to strengthen the qualifications for franchise businesses, particularly in sectors that show a high concentration of certain businesses.

- Korea’s franchise market is growing rapidly, not only in size but also in terms of the number of franchisors, brands and franchisees.

- The growth has come with increasing conflict over issues such as information asymmetry and imbalances in bargaining power.

- The growth has come with increasing conflict over issues such as information asymmetry and imbalances in bargaining power.

- Just as in the self-employed sector, food service accounts for a huge percentage of the franchise market.

- More than half of food service franchise stores sell fried chicken, traditional Korean food (hansik ) and coffee.

- About 60% of franchisors have no experience in operating directly-managed stores and rely solely on their franchisees.

- The percentage of brands with directly-managed stores is high in lowsales sectors such as fried chicken, drinking establishments and hansik .

- The more franchisors are in contact with the market through direct management of stores, the more likely it is for franchisees to improve their sales.

- The setup cost that franchisees pay to franchisors is approximately 120 million won on average.

- Fanchise fee is the price of a brand’s reputational capital and tends to rise as the brand adds more directlymanaged stores or stays longer in business.

- Costs for interior fit-outs account for the largest percentage in the setup cost.

- When a franchisee independently hires an interior contractor, the franchisor charges a high supervision fee which cuts into the franchisee’s cost savings.

- 25.4% of brands adopted a fixed-percentage royalty while 41.8% use a fixed-sum royalty.

- In the fixed-sum royalty contract, franchisors have less incentive to work to improve the sales of franchisees.

- In some cases, franchisees are given royalty discounts (70-100%) in return for purchasing raw materials and equipment from a supplier designated by the franchisor.

- Closed territory is an exclusive geographic and administrative area where a franchisee may conduct its business. 80% of closed territories are established based on distance.

- High franchise fees tend to entail significantly high sales gains.

- The number or percentage of direct stores can be a useful metric to measure the stability of sales.

- The sales increase from the fixed-percentage royalty implies that franchisors are more motivated to improve franchisees’ sales if their profits are aligned.

- Increases in franchise fees and royalties erode the operating profit of franchisees.

- Of the franchise agreement conditions, what actually improved franchisees’ sales and operating profits was the protection of closed territories.

- Franchise fees and royalties generate certain increases in franchisors’ sales.

- Increases in the franchise fee and royalty also incur an increase in franchisors’ operating profits.

- Franchise disclosure documents should contain more specific information particularly about the franchisor’s experience with directly-managed stores to enable prospective franchisees to make prudent decisions about the business item and brand.

- Franchisors should strive to establish IT infrastructure to transparently examine franchisees’ sales.

- Guidelines should be drawn up for essential items through discussions between the government and industry, and franchisors should be encouraged to include the distribution margin for raw materials and equipment in the royalty.

- Actions should be taken to temporarily impose stricter requirements for franchise businesses in sectors with a heavy concentration in a few items.