Nine Structural Problems and Solutions in Korea's Franchise Industry [Choi Seokjin's Law & Biz]

Win-Win Growth Research Institute Presents at National Assembly Forum
Points Out Excessive Logistics Margins and Transfer of Advertising Costs
Highlights Issues of Opaque Settlements, Forced Goods Purchases, and Nearby Store Openings

According to the "2025 Franchise Business Status Statistics" released by the Korea Fair Trade Commission last month, as of the end of last year, the total number of franchise headquarters stood at 9,960, the number of brands at 13,725, and the number of franchise stores at 379,739. These figures represent increases of 13.2%, 10.9%, and 4.0% respectively compared to the previous year, indicating that the franchise industry has overcome stagnation following the COVID-19 crisis and has returned to a growth trajectory.

However, the reality of the market remains challenging. Starting with Pizza Hut, more than 20 well-known domestic franchise companies are currently facing lawsuits against their headquarters over "franchise fee differentials," and more than 35,000 franchise stores closed last year alone. The franchise closure rate reached double digits for the first time, at approximately 10.1%.

On the afternoon of the 20th of last month, Lee Dayeon, Director at the Shared Growth Research Institute, delivered the keynote speech at the "Franchise Industry, A Discussion for a Better Tomorrow" held in Seminar Room 1 at the National Assembly Members' Office Building in Yeouido, Seoul. Photo by Seokjin Choi

The domestic franchise industry, which has focused solely on growth, now stands at a turning point where it must overcome its crisis by addressing structural issues and take a further leap forward.

Against this backdrop, at the "Franchise Industry, A Discussion for a Better Tomorrow" held at the National Assembly on the 20th of last month, Lee Dayeon, Director at the Shared Growth Research Institute and Head of the Youth Center, highlighted nine structural issues based on challenges heard directly from franchisees and research findings. These include: ▲unrealistic pricing strategies and passing on cost increases by headquarters; ▲unreasonable logistics payment systems (OMS) and forced cash payments; ▲forced sales of promotional merchandise (goods); ▲mandatory designation of payment gateway (PG) providers and lack of transparency in settlements; ▲abuse of recommended product designations and excessive franchise fee differentials; ▲indiscriminate opening of nearby outlets, among others. She also proposed solutions to these problems. The Shared Growth Research Institute is a private research organization founded by former Prime Minister Chung Un-chan in 2012, after stepping down as Chairman of the Committee for Shared Growth, with the aim of addressing social polarization and building a more inclusive society.

Excessive Logistics Margins and Cost Transfers

The most serious issue raised by franchisees is that headquarters designate essential or recommended items, effectively forcing franchisees to purchase raw materials at prices higher than market value, maximizing profits through the resulting margin (logistics margin). A franchisee from Mega Coffee, who attended the discussion, stated, "The ice cups provided by headquarters could be bought on the open market for half the price." For industrial goods or equipment not directly related to brand image or product quality standards, franchisees should be guaranteed the freedom to source these individually.

The second issue is that even when there are cost increases such as labor, raw materials, or logistics, these are not reflected in product prices. Instead, headquarters defend their margins by raising the supply price to franchisees. In the case of Mega Coffee, in order to maintain its reputation as a "cost-effective brand," the price of iced Americano has been frozen at 2,000 won for seven consecutive years. However, the minimum wage rose by 23.6% from 8,350 won in 2019 to 10,320 won this year, and the price of 1kg of coffee beans increased by 34%, from 17,600 won in March 2022 to 23,650 won in April 2025, just three years later. There is a need for flexible price increase guidelines that ensure appropriate margins for franchisees. Furthermore, the transfer of mobile gift certificate fees and various promotional costs to franchisees has also been identified as a problem.

BHC, which had announced that "the headquarters will bear all advertising expenses," was found to have charged franchisees 400 won per whole chicken for advertising since October 2015, and, from 2017, to have added this 400 won advertising fee to the supply price of fresh chicken, effectively raising the price. According to estimates by the franchisee association, the total advertising costs passed on to franchisees since 2015 amount to a staggering 20.4 billion won. Director Lee argued that disclosure of advertising and promotional expenses should be made mandatory, and that information sharing and consultation should be required from the stage of calculating and planning advertising costs.

Unreasonable Payment and Settlement Systems

The logistics payment system, which requires franchisees to prepay various logistics costs in cash into virtual accounts under the headquarters' name, along with excessive PG (payment gateway) fees and a lack of transparency in settlements, are urgent issues that need to be addressed. In the case of Mega Coffee, company-owned stores operated by headquarters can pay logistics costs by credit card, but regular franchisees are required to deposit cash into an account under the headquarters' name to purchase raw materials such as milk and coffee beans. With more than 4,000 franchisees each depositing 1 million won, headquarters can generate 4 billion won in interest income from this massive cash pool. Director Lee suggested that introducing a credit card payment system and maintaining the existing Seoul Guarantee Insurance-based deferred payment system in parallel would help ease the financial burden on franchisees.

Another issue is that, under the pretext of operational consistency and data management, headquarters force franchisees to contract with a specific PG provider linked to a designated POS system, allowing headquarters to collect large rebates while franchisees bear high costs without benefiting from reduced fees. To address the lack of transparency in settlement related to various partnerships and promotions—including unclear cost-sharing rates and fee structures—Director Lee suggested that issuing integrated settlement statements by payment method should be mandatory, and that normalizing PG fees is necessary.

Forced Sales of Promotional Goods and Indiscriminate Nearby Openings

Another factor that burdens franchisees is the headquarters' practice of forcibly allocating various promotional goods under the pretext of boosting store sales. In the case of Mega Coffee, starting with a Minions collaboration in December 2023, franchisees were compelled to pay more than 2 million won per store for promotional goods on seven separate occasions over the course of a year, including the "Catch! Teenieping" collaboration. In some cases, the cost of these goods was forcibly deducted from logistics deposits, or headquarters sold the same goods at much lower prices through its own direct online mall, resulting in a "reverse margin" situation. Director Lee suggested that franchisees should be allowed to determine order quantities according to their business area and own judgment, and that unconditional returns and refunds for unsold inventory should be institutionalized.

Headquarters have also been criticized for granting new store approvals close to existing stores, or opening large company-owned outlets, by making exceptions to location restrictions on the grounds of "special business districts." For example, in September last year, Mega Coffee opened a five-story company-owned outlet in the central area near Myeongdong Station in Seoul, even though four franchise stores were already operating in the area. To protect franchisees' business rights, there is a need to establish business areas based on effective walking distances and to set up consultation and compensation standards with existing franchisees when opening new outlets nearby.

Kim Sangyun, Partner Attorney at Jipyung Law Firm and former Head of the Franchise Transaction Investigation Team at the Korea Fair Trade Commission, stated, "Disputes over franchise fee differentials stem from information asymmetry and differences in bargaining power between franchise headquarters and franchisees. To address this, the Fair Trade Commission has amended relevant laws to require franchise headquarters to specify the types and pricing methods for essential items in contracts, and to consult with franchisees if contract terms for essential items are changed to their disadvantage. Additionally, a registration system for franchisee organizations has been introduced, and improvements to the disclosure statement system are in progress," he said. "Based on the intent of these improvements, the government, franchise headquarters, and franchisees must work together to foster a culture of mutual growth in the market. If shortcomings are revealed during the implementation process, further institutional improvements will be necessary," he added.

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