"Worked Unpaid for Nearly a Year to Become a Store Owner..." Dad Lost His Livelihood [The Two Faces of McDonald's]①

Interview with Long-term McDonald's Franchise Owner
'10-year Contract Period' Abuse of Franchise Business Act
Conversion to Company-owned Store After Termination of Profitable Store Contract

On August 29th, in courtroom 561 of the East Building at the Seoul Central District Court.

"The Fair Trade Commission decided there was no suspicion regarding the violation of the Franchise Business Act, stating that the refusal to renew was not unfair. Since the plaintiff's claim is based on a violation of the Franchise Business Act, the necessity for witness examination by the plaintiff to prove invalidity has significantly decreased."

As the lawyer from Korea's largest law firm Kim & Chang finished his statement, the plaintiff's side grew increasingly bleak. From the start, it was a lawsuit known to be like 'throwing eggs at a rock.'

"I trained by working eight hours a day, 40 hours a week for nine months at a directly operated store, grilling patties. I firmly believed the head office's promise that the business could be passed down through generations. If I had planned to quit after 10 years, why would I have worked nearly a year without pay?"

Ms. Yeo, who operated the McDonald's Daegu Jincheon branch, broke down in frustration during an interview with Asia Economy held at the Renaissance Law Firm in Gangnam-gu, Seoul. She had been running the McDonald's Daegu Jincheon Drive-Thru (DT) branch near Jincheon Station on Daegu Subway Line 1 since April 2013 but was refused franchise contract renewal by McDonald's Korea last April.

Ms. Yeo, along with Mr. Go, the franchisee of McDonald's Gimpo Gochon branch, and Mr. Kim, the franchisee of Cheonan Dujeong branch?both of whom were also refused contract renewals around the same time?filed a lawsuit last year against McDonald's Korea seeking confirmation of invalidity of the renewal refusal. The first trial is currently underway. After arguments on the 17th of last month, they plan to examine Han Yeon-mi, Vice President of McDonald's Korea, as a witness on December 12th.

"Vice President Han's Promise of a 'Long-Term Business'"

Ms. Yeo signed a franchise contract with McDonald's Korea in April 2013 to operate the Daegu Jincheon DT branch. The contract period was from April 29, 2013, to April 28, 2023?10 years. The franchise fee was $22,500 (approximately 30 million KRW). McDonald's Korea subleased the building it rented and agreed to pay 14% of sales as rent. Additionally, Ms. Yeo paid a total of 1 billion KRW to McDonald's Korea for goodwill, equipment, and interior costs.

According to Ms. Yeo, when the Daegu Jincheon branch opened, Vice President Han, who was the head of the franchise business at the time, said, "McDonald's is a long-term business of over 10 years," and encouraged operating multiple stores, saying "You need to run several stores to make money." Believing this, Ms. Yeo opened a total of five stores starting with Daegu Jincheon in 2013 and Daegu Gyodae branch in 2015. She also took out loans arranged by the head office to do so.

Former Daegu Jincheon branch owner Mr. Yeo and former Gimpo Gochon branch owner Mr. Ko, who filed a lawsuit against McDonald's Korea for invalidation of contract renewal refusal. Photo by Onyu Lim ioy@

However, in 2017, a controversy known as the "hamburger disease" erupted when a consumer who claimed to have developed hemolytic uremic syndrome and was diagnosed with stage 2 kidney failure after eating a McDonald's hamburger sued McDonald's Korea. This led to a boycott, and during the COVID-19 pandemic in 2020, sales plummeted. Ms. Yeo claims she experienced five years of business difficulties.

She said, "Due to the hamburger disease controversy and the COVID-19 crisis, sales dropped sharply, resulting in a loss of 1 billion KRW. I canceled insurance and even took out unsecured loans, but with the contract renewal of even high-performing branches failing, I am in a hopeless situation with no way to recover." Mr. Go, the Gimpo Gochon branch franchisee, also said, "Vice President Han, who was the franchise team leader in 2015, encouraged multi-store operations during quarterly franchisee meetings, saying 'All contracts will be renewed, so run a business that can be passed down,' and we believed him. This statement can easily be found in interviews and promotional articles."

"Sudden Change After McDonald's Korea's Sale Attempt"

McDonald's Korea, which promised 'business passed down through generations,' changed abruptly when it attempted a sale in 2016. At that time, McDonald's Global, which owned 100% of McDonald's Korea's shares, negotiated a sale with the Maeil Dairies and Carlyle consortium but the deal fell through. Subsequently, McDonald's Korea was put up for sale and potential buyers were continuously sought.

After the sale to Dongwon Group failed last year, McDonald's Korea formed a strategic partnership in September with the Qatari company 'Kamal Al Mana,' considered a preliminary step toward sale. A strategic partner acts as a master franchisee, and through this negotiation, Al Mana gained operational rights of McDonald's Korea. Ms. Yeo claims, "McDonald's Korea rapidly converted high-performing franchise stores into directly operated stores to increase its valuation once the sale became imminent."

In fact, McDonald's Korea has been rapidly increasing directly operated stores. In March 2018, it voluntarily canceled its franchise disclosure document and stopped recruiting franchisees. According to the Fair Trade Commission, the number of McDonald's franchise stores dropped sharply from 127 in 2018 to 106 in 2020, and 83 in 2022. Last year, it was only 76. Most of the terminated franchise contracts were converted to directly operated stores. As a result, 80% of the approximately 400 stores are now directly operated.

A McDonald's Korea official distanced the issue from the sale, saying, "It has nothing to do with the sale." However, McDonald's Korea has started registering franchise disclosure documents again this year and is recruiting new franchisees.

‘Franchise Business Act’s 10-Year Contract’ Becomes a ‘Hindrance’

McDonald's refusal to renew franchise contracts is a typical case of abusing the current Franchise Business Act. Article 13, Paragraph 2 of the Franchise Business Act stipulates that franchisees can exercise contract renewal rights only within the total franchise contract period not exceeding 10 years. Because of this, there have been repeated cases where franchisors unfairly terminate contracts with franchisees who have operated for more than 10 years.

In 2019, the Fair Trade Commission issued the 'Guidelines for Stable Contract Renewal of Long-Term Franchise Stores,' which prohibits franchisors from refusing contract renewal without serious reasons such as major contract violations or poor business evaluations even if the contract period exceeds 10 years. However, many criticize the guidelines as ineffective.

According to data received by Kim Jong-min, a member of the Democratic Party of Korea (currently independent), from the Fair Trade Commission during last year's National Assembly audit, only nine reports related to renewal refusals were filed with the FTC from May 2019 to August last year. Of these, five were dismissed as the refusal reasons were not deemed unfair. Punishments against franchisors included only one corrective order and one warning, considered mild. The FTC concluded 'no suspicion' regarding McDonald's Korea's violation of the Franchise Business Act raised by Ms. Yeo in August.

McDonald's Korea also cited 'owner reviews' as the basis for refusing contract renewals. A McDonald's Korea official said, "All franchisees who filed lawsuits failed the owner reviews multiple times, which are the grounds for non-renewal." Owner reviews are annual franchisee evaluations divided into seven major categories, and failing even one category results in disqualification.

However, franchisees claim the owner reviews were made deliberately difficult to minimize contract renewals. Franchisees requested data from McDonald's Korea to clarify the exact correlation between contract renewals and owner reviews but were refused. Ms. Yeo pointed out, "I passed the owner reviews from 2013 when I opened the Daegu Jincheon branch until 2016, but have continuously failed since 2017. The Cheonan Dujeong branch, which ranked second nationwide in sales, is the same." She added, "It is absurd that when multi-store operators were given artificially boosted scores in the past, now they claim contract renewal is difficult based on owner reviews lacking objectivity."

Franchisees Left in Debt Without a Penny of Goodwill Payment... "Law for the Weak Applied Favorably to the Strong"

Ms. Yeo, who once managed five McDonald's stores, now operates only the Daegu Gyodae branch. Mr. Go operates the Ujangsan branch. However, they expect their contract renewals to be refused next year.

What frustrates Ms. Yeo even more is that unlike typical franchise businesses, they receive no goodwill payment. Franchisees paid a nominal franchise fee of $22,500 (about 30 million KRW) along with approximately 500 million to 1 billion KRW for 10 years of business rights and facilities related to the store. However, these amounts all vanish after contract termination.

Ms. Yeo explained, "In McDonald's stores, the head office is the lessee, and franchisees sublease (re-rent) the premises, so no matter how well the business performs, franchisees cannot receive goodwill payments." No matter how well franchisees operate and achieve excellent sales, if contract renewal is refused, they must leave the store without receiving any goodwill payment?this is the current reality for McDonald's franchisees.

Attorney Kim Tae-jung of Renaissance Law Firm said, "The Franchise Business Act guarantees a 10-year contract renewal right to protect the weaker franchisees, but McDonald's Korea exploits this to their advantage. The Fair Trade Commission created guidelines to ensure stable contract renewals for long-term stores to fill this gap, but even those have become ineffective."

※ We are accepting reports of damages where franchise contract renewals were refused under the current Franchise Business Act stipulating a 10-year franchise contract.