Fair Trade Commission Revises Standard Franchise Agreement for 'Cosmetics, Health Functional Foods, and Other Retail and Wholesale Businesses'

Resolving Franchisees' Difficulties Including Expansion of Online Sales by Gaemaeng Headquarters

[Asia Economy Reporter Jusangdon] The Fair Trade Commission announced on the 10th that it has newly established and revised the standard franchise agreements for three retail and wholesale sectors?cosmetics, health functional foods, and other retail and wholesale businesses?with the main focus on strengthening the rights and interests of franchisees who are facing difficulties such as declining sales due to the expansion of online sales by franchisors.

The newly established and revised standard franchise agreements primarily aim to enhance the rights and interests of franchisees in relation to the franchisors’ expansion of online sales.

First, when the franchisor sells products online, the agreements stipulate that the franchisor must provide franchisees with a disclosure document containing information such as the proportion of online sales revenue and the proportion of online-exclusive products, as well as other up-to-date information related to online sales. Additionally, considering that the franchisor’s online sales items, prices, and other transaction conditions significantly affect the franchisee’s business and sales, franchisees are allowed to request negotiations directly or through franchisee associations regarding the franchisor’s online sales prices. The franchisor receiving such a request must commence negotiations within 10 days from the date of the request.

Furthermore, the agreements include provisions that require the franchisor to reduce penalties if the franchisee terminates the franchise contract early due to a sharp decline in sales caused by the expansion of the franchisor’s online sales. They also require the franchisor to prepare support measures for franchisees, such as launching franchisee-exclusive products and introducing profit-related win-win cooperation systems.

In addition, the agreements reflect provisions such as: ▲ the franchisor cannot refuse if a franchisee wishes to pay for goods by credit card or force cash payments; ▲ the franchisor must renew the franchise contract for long-term stores exceeding 10 years if they meet the pre-notified evaluation criteria; and ▲ if the average monthly sales during the first year after opening fall below the lower limit of the expected sales presented by the franchisor without any fault of the franchisee, the franchisee can terminate the contract without penalty.

Moreover, the agreements include detailed regulations reflecting the characteristics of the sectors, such as prohibiting false or exaggerated advertisements that may cause consumers to perceive cosmetics and health functional foods as having disease prevention or treatment effects when franchisors and franchisees advertise these products, and the franchisee’s obligation to notify and explain the intake methods and precautions for health functional foods.

A Fair Trade Commission official stated, "By imposing the obligation on franchisors to provide the latest information related to online sales and granting franchisees the right to request negotiations on the franchisor’s online sales prices, the information gap between franchisors and franchisees in retail and wholesale sectors such as cosmetics is expected to decrease, and the negotiation power of franchisees will be enhanced." The official added, "The Fair Trade Commission plans to actively encourage the introduction and use of the standard franchise agreements through related industry business groups and franchisee associations to promote the dissemination and expansion of the newly established and revised standard franchise agreements."