[Why&Next] Baek Jong-won's The Born Korea Ahead of IPO... Franchise Risks 'Hold Back'

Some Franchise Owners Complain of "False and Exaggerated Sales Advertising" Damage
Report Decline in Number of Stores and Profit Deterioration, Plan to Report to Fair Trade Commission
Head Office States "Claims Are Inaccurate, Will Not Hesitate to Take Legal Action"

Yeondon Bolkatsu, a brand under the dining company The Born Korea led by CEO Baek Jong-won, has been embroiled in internal conflict just three years after its establishment. Some franchisees have announced their intention to report the headquarters to the Fair Trade Commission, claiming that The Born Korea exaggerated expected sales figures while recruiting franchisees and was passive in preparing follow-up measures despite worsening profits. The Born Korea has refuted these claims with supporting evidence, stating that the allegations by some franchisees are not true and that the company has been striving for mutual growth with its franchisees. They also stated that they will not hesitate to take legal action based on objective facts regarding any inaccuracies.

Baek Jong-won, CEO of The Born Korea
Photo by Yonhap News

Franchisees: "Advertised daily maximum sales of 4.65 million KRW, reality is a mountain of debt"

According to the distribution industry on the 19th, seven Yeondon Bolkatsu franchisees held a press conference titled "Yeondon Bolkatsu Franchisee Damage Cases Announcement" in front of The Born Korea headquarters in Gangnam-gu, Seoul, the previous afternoon, stating, "We plan to submit a report to the Fair Trade Commission during this week."

They belong to the Yeondon Bolkatsu Franchisee Council and the National Franchisee Council. Among them, two recently decided to close their stores and attended the conference. The franchisees who held the conference claimed, "The headquarters recruited franchisees by promising false and exaggerated sales figures and profit margins, causing damage, yet no countermeasures have been presented."

On the afternoon of the 18th, representatives from the Yeondon Bolkatsu Franchise Owners Association and the National Franchise Owners Association held a press conference in front of The Born Korea headquarters in Gangnam-gu, Seoul, to announce cases of damages suffered by Yeondon Bolkatsu franchisees. [Image source=Yonhap News]

The franchisee of Yeondon Bolkatsu Dangok Station branch said, "At the time of opening, the promotional website advertised daily maximum sales of 3.38 million to 4.65 million KRW, but sales began to decline rapidly from one month after opening and are now at about 10%," adding, "After paying rent, taxes, and employee salaries from sales, there is nothing left." He continued, "If our sales were even 50% of what the headquarters promoted, I would think it was my fault if only my sales were low, but many franchisees operating Yeondon Bolkatsu are struggling with a sharp drop in sales."

In fact, the average sales of Yeondon Bolkatsu franchises sharply declined last year. According to the franchise business disclosure document registered on the Fair Trade Commission's franchise business website, the average annual sales per store of 68 Yeondon Bolkatsu franchises in 2022 was 259.8 million KRW. However, last year, the number of franchises decreased to 49, and the average annual sales dropped to 157 million KRW. Converted to monthly sales, this is 13.08 million KRW, and based on 30 days, the average daily sales per store is about 430,000 KRW. The number of franchises, which had cumulatively opened 83 new stores until last year, has decreased to only 35 as of this month due to contract cancellations and name changes.

The franchisees also pointed out that the low rate of customer revisits to Yeondon Bolkatsu is a problem. The franchisee of Gimpo Raveniche branch said, "We submitted feedback that the Bolkatsu was too salty or that it took too long to prepare, but it took a long time to reflect these," adding, "Ultimately, disappointed customers did not return." Some franchisees also claimed that they tried to raise product prices, but the headquarters did not agree. One franchisee who recently decided to close said, "The contract states that prices can be adjusted if both the headquarters and franchisee agree, but the headquarters never agreed to price adjustments."

Yeondon Bolkatsu is a franchise business that officially started in 2021, based on the famous pork cutlet restaurant Yeondon, which gained fame after CEO Baek appeared on a broadcast in 2018. At the press conference, franchise transaction expert Jeong Jong-yeol said, "For a franchise to succeed, the intangible value of the products provided by the headquarters must be high," adding, "The problem with Yeondon Bolkatsu was that it recruited franchisees based on Yeondon's fame and then started the franchise business."

The Born Korea: "We never promised exaggerated sales figures or profit margins"

The Born Korea refuted the claims that it promised false or exaggerated sales figures, stating that these allegations by some franchisees are clearly untrue. Baek Gwang-hyun, Park Sang-oh, and Han Won-cheol, lawyers from the law firm Barun representing The Born Korea, explained in a statement on the 17th, "There was no promise of false or exaggerated sales figures or profit margins during the franchise recruitment process," and added, "We provided franchisees with a sales estimate sheet showing monthly sales of about 17 million KRW in 2022."

The Born Korea also presented the franchise business disclosure document as evidence that the average monthly sales of Yeondon Bolkatsu franchises in the same year were not low compared to similar takeout brands. According to this data, the average monthly sales of Yeondon Bolkatsu franchises in 2022 was 21.65 million KRW, which was 4 to 9 million KRW higher than similar industries specializing in toast, hot dogs, walnut cookies, and pork loin cutlets.

The legal representatives also emphasized that from November 2022 to August 2023, the headquarters reduced the supply cost of main raw materials for Yeondon Bolkatsu's key menu items by an average of about 15%, and after launching new menu items, the supply cost of main raw materials for those items was reduced by up to 25%. They added, "Due to changes after COVID-19 and inflation, the overall conditions of the dining market deteriorated, and some franchisees switched to other brands through consultations with us," and claimed, "The decrease in the number of Yeondon Bolkatsu franchises is due to various external factors."

On the day, the franchisees claimed, "The headquarters maximized its profits by opening many franchises in a short period based on sales generated by customers curious about Yeondon featured on broadcasts." In response, lawyer Baek Gwang-hyun rebutted, "The Born Korea's sales have increased every year from 2021 to last year, but this reflects the performance of other franchises such as Baekdabang and Hong Kong Banjeom 0410."

According to data presented by the company, The Born Korea's consolidated sales rose from 282.2 billion KRW in 2022 to 410.7 billion KRW last year, while Yeondon Bolkatsu headquarters' sales decreased from 4.5 billion KRW in January-November 2022 to 3.16 billion KRW last year. Yeondon Bolkatsu headquarters' sales included food ingredients, franchise fees, and royalties.

During this period, Yeondon Bolkatsu's operating loss increased from 14.8 million KRW to 195 million KRW, but The Born Korea did not reduce advertising and promotional expenses necessary to promote its brands, including Yeondon Bolkatsu. According to the franchise business disclosure document, the company's promotional expenses nearly doubled from 3.2 billion KRW in 2022 to 6.1 billion KRW last year, and advertising expenses rose from 890 million KRW to 1.7 billion KRW.

The Born Korea submitted a preliminary review application for listing on the Korea Exchange's KOSPI market on the 29th of last month. Separately, regarding Yeondon Bolkatsu, the company stated it will respond strongly to correct the facts. The legal representatives said, "We will actively take legal action against false, exaggerated, or sensational reports that are not based on facts to protect our legitimate rights in the future."