Dayeon Lee, Director of the Shared Growth Research Institute: "Ensuring Information Transparency Is Urgent for Korea's Franchise Crisis"

All Problems Stem from 'Information Asymmetry'

"Current Crisis Represents System Failure and Structural Limitations"

"Headquarters Must Shift Profit Structure from Logistics Fees to Royalties"

Franchises Must Pursue Globalization Thro

Dayeon Lee, Director of the Win-Win Growth Institute and Head of the Youth Center

"The conflicts occurring within Korea's franchise industry are not caused by the ethical lapses of a few unscrupulous companies. Rather, they represent a 'system failure' and 'structural limitation' resulting from the distortion of the industry's overall profit model."

Dayeon Lee, Director of the Win-Win Growth Institute and Head of the Youth Center, offered this diagnosis of the recent crisis facing Korea's franchise industry. We asked Director Lee about the causes of the franchise crisis in Korea and possible solutions.

The following is a Q&A with Director Lee.

-What do you see as the fundamental cause of the crisis in Korea's franchise industry?

▲The fundamental problem with Korea's franchise ecosystem starts with 'information asymmetry.' The nine structural issues all stem from a single root: 'non-transparent information' and a 'skewed power structure.' Rather than forcibly reallocating someone's share of the pie, the process of dividing the pie from the outset must be made as transparent as glass. In other words, ensuring 'information transparency' is the most urgent and important task.

If, from the beginning, all information between headquarters and franchisees—such as logistics costs and expense execution details—is transparently shared and fair rules are set, then specific issues like excessive collection of differential franchise fees or forced purchases of goods can be naturally corrected through market self-regulation.

-What government policies or legislative measures are necessary to solve the challenges facing the franchise industry?

▲There are four key issues that the government and National Assembly must recognize and address. First is the establishment of an integrated control tower. Currently, the management system is divided between the Ministry of Trade, Industry and Energy (promotion) and the Ministry of SMEs and Startups (protection). This should be unified to produce consistent policies for the entire industry.

The second is strengthening the Fair Trade Commission's legislation on differential franchise fees and enacting a clear definition of 'wholesale price.' Under the current Franchise Business Act and related regulations, the price supplied by headquarters that exceeds a 'reasonable wholesale price' is considered a differential franchise fee. The problem is there is no clear legal definition of 'wholesale price.' Headquarters can exploit this legal loophole to arbitrarily set the wholesale price and force franchisees to purchase goods at prices far higher than market value, with little recourse for enforcement. It is urgent to establish a legal definition for wholesale price.

Third, it is necessary to prevent the so-called 'Straw Effect,' which undermines the effectiveness of government policy and perpetuates a vicious cycle. Franchisees' sales fluctuate depending on the external economic environment, but headquarters seek stable 'logistics fee (supply price) income' through the supply of essential goods. When franchise sales decline due to a recession, a proper partner would share the burden, but in reality, headquarters often maintain or even increase their logistics income by artificially increasing the number or unit price of essential goods supplied to franchisees. As a result, franchisees fall into a pit of losses and go out of business, while headquarters' profits increase—a distorted phenomenon. Even if the government injects large amounts of public funds as subsidies, this money is ultimately siphoned off into headquarters' distribution margins. If this 'Straw Effect' is not prevented, government policies for small business owners will be futile and can never succeed.

Lastly, punitive damages and fines must be strengthened. For chronic unfair practices such as collecting toll fees or unjustly passing on costs, there must be a robust system of fines severe enough to threaten the very existence of violating companies.

-What suggestions do you have for the development of the franchise industry?

▲Franchising, at its core, is a 'win-win model' whereby small business owners lacking experience can generate sales within the protection of a system, and headquarters earn royalties through the growth of their franchisees. However, the current structure has become distorted, with headquarters no longer growing brand value for profit, but instead extracting margins by selling logistics at inflated prices and passing costs onto franchisees. The structure must shift to a global standard, where headquarters take only a minimal, reasonable fee necessary to maintain the distribution network, and brand profits are earned properly through royalties.

The annual sales of the Korean franchise industry amount to approximately 120 trillion to 150 trillion won, accounting for about 7–8% of Korea's GDP—a massive share. If the system of such a central industry for the national economy is not innovated, the capillaries of the Korean economy will inevitably atrophy.

If the current system of exploiting franchisees to keep headquarters afloat continues, it will ultimately lead to collective lawsuits and the mutual destruction of brands. Win-win growth is not a shackle that burdens headquarters; rather, it is the most powerful macro-level survival strategy for K-Franchise to leap beyond the domestic market and become a global enterprise. Just as no franchisee exists without headquarters, headquarters cannot exist without franchisees. This common sense must be embedded in management practices.

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