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 explore ways for mutual growth between franchisors (headquarters) and franchise operators (franchise owners).

At the forum, franchise owners voiced strong complaints that their livelihoods are threatened by surging raw material prices and various unfair practices by headquarters. Specific proposals for institutional reforms to resolve these issues were also put forward.

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, Assemblywoman Lee Unju of the Democratic Party announced that she held the "Franchise Industry, A Discussion for a Better Tomorrow" forum in Seminar Room 1 of the National Assembly Members' Office Building the previous day. The event was hosted by Lee’s office, who also serves as the Chairperson of the Democratic Party’s Future Economic Growth Strategy Committee, and organized by the Win-Win Growth Institute’s Youth Center.

In her opening address, Assemblywoman Lee stated, "The franchise industry in Korea has served as a 'safety net' for small business owners seeking stable startups and has grown into a major pillar of our economy, but now it faces an unprecedented crisis. Last year, 1 million small business owners were confronted with the reality of closure, and we can no longer ignore the outcry over unreasonable logistics systems and opaque settlement processes on the ground."

She continued, "The core keyword of today's forum is 'mutual growth.' There can be no headquarters without franchisees, and no franchisees without headquarters—an awareness of this shared fate is essential. Headquarters should guarantee appropriate margins for franchisees through a transparent, royalty-based revenue structure, and the government and National Assembly must take the lead in correcting the tilted playing field through fundamental institutional reform, rather than simply providing short-term financial support."

Choi Seungjae, the Small and Medium Business Ombudsman, who sponsored the event, said in his congratulatory remarks, "The government needs to establish rational standards to ensure that the pursuit of profit by our self-employed and companies does not lead to mutual destruction. Regulations, systems, and policies must be fine-tuned to prevent the collapse of local economies. As the SME Ombudsman, I will work with you to untangle these complicated issues."

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 the economic downturn or external recession. The real reason franchise owners working hard on the ground are being driven to the brink is the 'unreasonable system and profit structure' that has become entrenched within the franchise industry over many years."

Director Lee explained, "During the period of rapid quantitative expansion in the past, profit models based on logistics margins (differential franchise fees), distribution profits from required and recommended items, and store expansion became the norm. However, as the market has matured, these closed systems and profit structures have increased the management burden on franchisees and fostered distrust with headquarters. Now is the time to transparently improve the industry system, shifting from a focus on 'distribution profits' from franchisees to 'royalty profits' based on brand value and know-how."

She also pointed out, "Currently, the Ministry of Trade, Industry and Energy is responsible for franchise headquarters, while the Ministry of SMEs and Startups is in charge of individual franchisees, making it impossible to implement comprehensive and consistent policies for the industry as a whole." She listed nine current issues facing the domestic franchise industry: ▲declining real income and management crisis due to soaring cost ratios; ▲unreasonable logistics payment system (OMS) and forced cash payments; ▲forced purchase of planned products (goods) and the transfer of inventory risk; ▲need to normalize headquarters' payment gateway (PG) transaction fees, ensure transparency in settlement systems, and establish oversight mechanisms; ▲abuse of the recommended item designation system and excessive acquisition of differential franchise fees; ▲need to strengthen effectiveness of indiscriminate nearby store opening restrictions and protection of business rights; ▲passing on mobile gift certificate fees and promotional costs to franchisees; ▲delays in mandating disclosure of advertising and promotional expenses and establishing a prior consent system; ▲measures to reduce management burdens for small business owners by improving the franchise PG fee structure.

Lee Jeonghee, a professor at Chung-Ang University who served as moderator, said, "I will first listen to the voices from the field," giving the floor to representatives of both franchisee and headquarters among the six panelists.

Kim Sujin, a franchisee who operates a Mega Coffee store, shared, "The minimum wage, which was 8,350 won in 2019, has risen to 10,320 won now—a 23.5% increase. However, the price of a Mega Coffee Americano has remained at 2,000 won for seven years; it has never gone up. All that burden falls on franchisees."

She added, "The price of coffee beans, the most widely used material, rose from 17,600 won in 2022 to 28,650 won now. According to headquarters, they say the price had to go up because of raw material costs. But when bean prices fell at one point, headquarters did not lower the price. Once prices go up, they never come down."

Kim also said, "We are told to use only cups and containers from headquarters. When I bought them in the market, they cost half as much. Headquarters buys in bulk and should get even lower prices, but they charge us double. Does that make sense?"

She further commented, "I invested 150 million to 200 million won to open a franchise, but there is nothing left. How are we supposed to make a living?"

Additionally, Kim cited specific examples of issues with Mega Coffee’s logistics payment system, which requires franchisees to make advance cash payments to order raw materials and goods, the enforcement of goods sales, and headquarters opening directly operated stores in prime locations under the pretext of "special commercial 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 franchisee claims, Kim Sanghoon, Secretary General of the Korea Franchise Association, said, "I have listened carefully to the franchisees' statements," but added, "I wonder if the issues raised between franchisees and headquarters can really be generalized."

Secretary General Kim stated, "Forcing recommended prices, pushing goods, and opening stores nearby—these are, as I understand it, violations of the Fair Transactions in Franchise Business Act. Even if not, they appear to constitute unfair trade under the Fair Trade Act."

He continued, "The Franchise Business Act is in effect, and disclosure statements are being strengthened. Also, standard contracts—such as for coffee—are, to my knowledge, 50 to 60 pages long. Is it appropriate to discuss such specific cases here? I wonder whether discussing the particularities of the coffee industry in this setting is appropriate."

Regarding the criticism that headquarters forces franchisees to pay in cash, Kim responded, "Headquarters is a business, and franchisees are also businesses. Because it is a B2B transaction between businesses, cash transactions are common."

Finally, Kim stated, "I believe mutual growth can only be achieved when there is a fierce debate about sharing each other's cost burdens. Our association will also listen with an open mind."

Meanwhile, officials from ministries that directly oversee the franchise industry—including Cho Geunsang, Director of Distribution and Logistics at the Ministry of Trade, Industry and Energy, and Pi Gyerim, Director of Franchise Transactions at the Fair Trade Commission—attended the forum to listen to both franchisees and headquarters 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, as Secretary General Kim Sanghoon mentioned, there would be no major issues if the law were perfectly observed, but the problem is that it is not being properly enforced, and I suspect this is widespread."

She continued, "I believe the franchise industry should become more global and target the world market. From the perspective of franchisees, they should be able to start as owners and grow their franchises, but if they are struggling just to get by each day, there is no vision. Growth that is just about getting through the day will not lead to anyone's advancement, and there are clear limits to this approach."

She added, "It is not enough to simply address each illegal issue raised today; we need to redraw a broader vision for the entire franchise sector. The Director of Distribution and Logistics from the Ministry of Trade, Industry and Energy is here today—I hope you will conduct research into how we can turn the franchise industry into a K-brand and expand the market. In my view, this is a task for both the Fair Trade Commission and the Ministry of Trade, Industry and Energy, rather than just the Ministry of SMEs and Startups. There is a need for comprehensive research on this."

Finally, she requested, "I would appreciate it if the two directors could refer to my comments and reflect today’s discussion in policy."

Meanwhile, during the Q&A session at the end of the forum, Mega Coffee franchisees drew attention by repeatedly requesting the opportunity to speak. On March 31, 323 Mega Coffee franchisees filed a lawsuit against their headquarters, MGC Global Co., Ltd., each claiming a refund of 1 million won for overcharged differential franchise fees (as a specified partial claim).

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