Concerns Over Franchise Industry Contraction Due to Franchise Business Act
Class Action System Poses Bankruptcy Risk from Reduced Food Industry Lawsuits
Food Sector with Vertical Integration Faces 'Distress' Due to High Internal Transaction Ratio
[Asia Economy Reporter Lee Seon-ae] "We are suffocating under immature legislation." The domestic food industry is showing distress over tightened regulations. Despite the positive intentions behind the regulations, there are widespread concerns that various side effects will cause the loss of growth momentum.
Protecting 'Franchisees' Raises Concerns Over Shrinking 'Franchise Industry'
On the 28th, the Fair Trade Commission announced a legislative proposal to amend the "Act on the Fairness of Franchise Business Transactions (Franchise Business Act)" and opened it for public comment until November 9, sparking strong opposition from the franchise industry. The amendment includes a provision requiring franchisors to operate direct management stores for at least one year. This is intended to ensure that franchisors gain business experience and know-how through operating direct stores before recruiting franchisees, so that franchisees do not suffer unnecessary damages. While the industry agrees that the policy aims to prevent franchisee damages, it expressed concerns that the regulations will inevitably shrink the franchise industry. Given the domestic and international economic downturn and the already low economic vitality due to the COVID-19 pandemic, strengthening franchisor qualification requirements and making franchise recruitment more difficult is not considered an appropriate policy.
Additionally, the amendment requires franchisors to obtain prior consent from a certain percentage of franchisees before conducting advertising and promotional events that impose costs on franchisees. Currently, franchisors conduct advertising and promotional events first and only notify franchisees of the cost details afterward, exposing franchisees to cost shifting. The industry argues that the time required to obtain prior consent will inevitably reduce the effectiveness of advertising and promotions, and if marketing activities become difficult, it will ultimately lead to a decline in sales.
An industry official stated, "Government policy denies the 'efforts of franchisees,' which is a key factor in franchise success, and places all responsibility on franchisors," adding, "Comprehensive regulations will not only shrink the franchise industry but also eliminate its growth momentum."
Class Action System 'Leads to Excessive Lawsuits and Bankruptcies'
On the same day, the legislative proposal for the enactment of the Class Action Act to expand the class action system was also announced, casting a cold shadow over the food industry. Considering the characteristics of the food sector, the industry believes that the side effects such as abuse of lawsuits will outweigh the intended benefits of introducing the class action system. The cases of Starbucks in the U.S., sued for having too much ice and too little coffee, and McDonald's, sued for the high calorie content of its hamburgers compared to advertisements, are already well known. Domestic companies are inevitably exposed to similar 'lawsuit' risks. Ultimately, so-called 'planned lawsuits' where dissatisfied consumers band together to sue companies will become rampant, and smaller businesses will face the risk of bankruptcy.
A food industry representative said, "Food consumption varies individually, and the process involves complex stages from primary production of agricultural, livestock, and fishery products to processing, manufacturing, transportation, storage, sales, and consumption, making it difficult to immediately identify victims and damages," adding, "Furthermore, due to the small scale of the industry, it is impossible to bear the time and costs required for class actions, and even if suspicions about food safety are disproven and no responsibility is found, the damages are not recoverable." The representative also noted that the food industry frequently encounters black consumer-related incidents, and the introduction of class actions could exacerbate these negative effects.
There is particular concern that franchise formats within the food sector will be the hardest hit. Since franchise dining businesses operate on the principle of providing food of the same quality using the same ingredients, negligence in food hygiene management by franchisors could lead to large-scale lawsuits and compensation claims. An official from the dining franchise industry emphasized, "Although Starbucks and McDonald's in the U.S. ultimately won their lawsuits, they endured years of litigation, suffering brand image damage and having to pay settlements."
Strengthened Regulations on Internal Transactions 'Excessive Regulation'
If the proposed amendment to the Fair Trade Act under legislative notice passes, the scope of internal transaction regulations will be strengthened from "cases where the controlling family's stake is 30% or more in listed companies and 20% or more in unlisted companies" to "cases where the controlling family's stake is 20% or more regardless of listed or unlisted status," and "companies where a company with a controlling family stake of 20% or more holds more than 50% of shares in another company."
The industry has raised its voice against what it calls 'excessive regulation' that treats companies as criminal groups. The Fair Trade Commission claims that ▲the controlling family can exert influence and ▲internal transactions are increasing in 358 companies, but the industry counters this as 'regulation omnipotence thinking.' The food industry, which has a high controlling family shareholding and has established vertical integration, is particularly sensitive.
In the food industry, many companies have succession management centered on founders, resulting in high controlling family shareholdings in holding companies or major affiliates. Moreover, due to lower operating profit margins compared to manufacturing, vertical integration has been pursued to improve business efficiency, increasing the proportion of internal transactions.
An industry official said, "Ownership is centered on owner management rather than professional managers, and controlling family shareholdings are relatively high, making internal transactions unavoidable to improve business efficiency," adding, "With many quasi-large and medium-sized companies expanding into the scope of regulation, even though sanctions are only for unfair internal transactions, being subject to investigation by the Fair Trade Commission is burdensome." The industry expects that if the amendment passes, most food companies such as Harim, Nongshim, Ottogi, Dongwon, and Samyang Foods will become investigation targets.
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