"Franchise Headquarters' Direct Store Operation Experience Also Helps Increase Franchisee Profits"

Fair Trade Commission Announces Results of Written Survey in Franchise Sector

Perception of Improvement in Transaction Practices.

[Sejong=Asia Economy Reporter Joo Sang-don] It has been found that franchisors' experience in operating directly managed stores helps in recruiting franchisees and supporting and educating franchisees after recruitment, thereby aiding the operation of franchise businesses.

On the 29th, the Fair Trade Commission announced the results of a written survey conducted from September to November last year targeting 20 franchise market sectors, 200 franchisors, and 12,000 franchise stores.

According to the survey results, 59.6% of franchisors have experience operating directly managed stores under their current business signage before recruiting franchisees. Directly managed stores are operated directly by the franchisor’s CEO (67.3%), executives and employees (11.1%), or relatives (7.0%).

Many respondents (93.6%) said that experience operating directly managed stores before recruiting franchisees not only helps increase franchisees’ sales but also benefits the franchisor’s franchise business. Additionally, franchisors operating directly managed stores showed an average franchise store sales approximately 42,474,000 KRW (14.5%) higher than those without such experience, indicating that direct store operation positively impacts franchise sales.

The proportion of respondents who felt that unfair trade practices in the franchise sector have improved was 86.3%, showing continuous improvement since 64.4% in 2016. Satisfaction with franchise sector policies was 83.4%, up 2.1 percentage points from 81.3% the previous year, maintaining a high satisfaction rate above 80% for three consecutive years.

Franchisees highly recognize the necessity of prior consent for joint cost-sharing advertising and promotional events (92.2%), and a consent rate above 70% is considered appropriate. In practice, 54.4% of franchisors decide on advertising and promotional events through a 'prior consent' method, and the average franchisee consent rate across surveyed sectors is 80.3%.

29.5% of franchisees viewed the franchisor’s designation of mandatory items as problematic, citing reasons such as high prices and unnecessary item designations.

The proportion of franchisees experiencing disadvantages due to joining or participating in franchisee associations increased by 5.7 percentage points to 8.5% compared to 2.8% the previous year.

The number of store environment improvement cases and the average cost burden ratio borne by franchisors also increased. The number of store environment improvements was 1,850 cases, up 30.9% from 1,413 cases the previous year. The average franchisor cost burden ratio for these improvements was 84.6%, up 3.8 percentage points from 80.8% the previous year.

The number of early contract terminations (3,611 cases) decreased by 5.2% compared to 3,810 cases the previous year, while the penalty charge rate (11.0%) increased by 2.1 percentage points from 8.9%. Early terminations were concentrated in four sectors: convenience stores with 1,095 cases (30.3%), education (curriculum) with 861 cases (23.8%), education (foreign language) with 489 cases (13.5%), and chicken with 184 cases (5.1%), accounting for 72.8% of the total.

184 franchisors (92.0%) used the standard franchise contract, while 15 franchisors (7.5%) did not, indicating most are using it.

The proportion of respondents aware that the registration and management of disclosure documents were transferred to three local governments (Seoul, Gyeonggi, Incheon) from January 1 last year was 88.8%. Awareness of the transfer of dispute mediation duties was 81.0%.

The Fair Trade Commission plans to actively work to legislate amendments to the Franchise Business Act (proposed by lawmakers) currently pending in the National Assembly, including mandatory prior consent for advertising and promotions and mandatory experience operating directly managed stores (1+1). Additionally, as franchisee associations increase, contract terminations due to association activities are occurring, so unclear immediate termination reasons will be revised.

A Fair Trade Commission official said, "To improve the practice of mandatory item designation, we will induce voluntary correction by conducting joint local government surveys and analyzing disclosure documents to publicly compare the scope of designated and non-designated mandatory items by major food service sectors. Furthermore, based on this, we will establish a 'Mandatory Item Designation Guideline' for companies to utilize."