[Business & Issues] Only Paikdabang Thrives... Theborn Korea Faces 'Franchise Curse' Concerns Amid 'Jackpot' Success

IPO Price Exceeds Upper Range
High Dependence on Domestic Brands Raises Growth Concerns
Frequent Delisting in Industry Post-Listing
Will the 'Franchise Curse' Be Dispelled?

TheBORN Korea's final offering price was set at 34,000 KRW, exceeding the upper limit of the expected range, in the demand forecast conducted ahead of its listing. It is evaluated that the company received a high valuation thanks to recent performance growth and the recognition of CEO Baek Jong-won. However, the excessive reliance on sales from certain domestic brands such as Paik’s Coffee and Hong Kong Banjeom significantly limits future growth potential, and risks are highlighted due to weakening overall conditions such as the domestic economic downturn and minimum wage increases. Attention is focused on whether TheBORN Korea will achieve stable results in the domestic stock market, where franchise companies have repeatedly faced setbacks, often referred to as the 'curse of franchises.'

Offering Price at 34,000 KRW, Surpassing the Upper Band... The Effect of the 'Black and White Chef'

On the 25th, TheBORN Korea announced that the final offering price was set at 34,000 KRW following the demand forecast for institutional investors conducted from the 18th to the 24th. This far exceeded the initial expected price range of 23,000 to 28,000 KRW. The total amount raised was 102 billion KRW, with 2,216 institutions participating, resulting in a competition rate of 734.67 to 1. The high recognition of CEO Baek Jong-won and the popularity of the Netflix original series 'Black and White Chef,' currently airing, are considered to have had a significant impact.

After confirming the final offering price, TheBORN Korea plans to conduct a subscription for general investors over two days on the 28th and 29th. The total number of shares offered is 3 million, of which 600,000 shares are allocated to the employee stock ownership association, and the remaining 2.4 million shares will be publicly offered. The company aims to be listed on the KOSPI market in November. The industry estimates the company’s valuation to be approximately 350 to 400 billion KRW. The raised funds are planned to be invested in expanding TheBORN Korea’s core business in the food service franchise sector and distribution business.

Along with CEO Baek’s recognition, TheBORN Korea’s sales growth is also regarded as a major driving force behind the IPO’s success. Last year, TheBORN Korea recorded sales of 410.7 billion KRW, a 45.5% increase from the previous year, while operating profit slightly decreased by 0.6% to 25.6 billion KRW. This year, sales are projected to grow by 12.6% to 463 billion KRW and operating profit by 25.5% to 32 billion KRW compared to the previous year.

Dependence on Domestic Brands like Paik’s Coffee and Hong Kong Banjeom... Concerns Over Growth Limitations

Nevertheless, concerns persist that TheBORN Korea’s future stock price performance may be sluggish. This is due to the excessive reliance on sales from a few domestic brands such as Paik’s Coffee and Hong Kong Banjeom, which poses a risk of significant decline in growth depending on the domestic economic situation.

According to TheBORN Korea’s disclosure of last year’s total franchise brand sales, Paik’s Coffee accounted for 135.3 billion KRW, representing 34.9%. The second largest was Hong Kong Banjeom with 52.1 billion KRW (13.4%). Combined, these two brands accounted for 48.3% of TheBORN Korea’s total sales, nearly half. The top five domestic brands accounted for 64.1% of sales.

Of TheBORN Korea’s total sales, domestic sales amounted to 399 billion KRW, while overseas sales were 11.5 billion KRW, a difference of more than 34 times. Although there are about 150 franchise stores in 14 overseas countries, overseas sales remain minimal compared to domestic sales. Seong Hyun-dong, a researcher at KB Securities, pointed out, "High sales dependence on specific brands is a risk," and added, "The worsening domestic business environment due to minimum wage increases and economic slowdown is also a risk factor."

It is also a burden that domestic franchise companies that previously went public have mostly been delisted or suspended from trading due to deteriorating franchise management and slowing sales growth. Haemaro Food Service, famous for the Mom’s Touch brand, was listed on KOSDAQ in 2016 but voluntarily delisted in 2022. Didim E&F, which owns brands such as Mapo Galmaegi and Yeonan Sikdang, was listed in 2017 but has been suspended from trading since June this year due to audit opinion rejections and uncertainties about its ability to continue as a going concern. Currently, the only franchise company trading normally is Kyochon F&B, which was directly listed on KOSPI in 2020. The industry refers to this as the 'curse of franchises.'

Despite this, concerns have been raised that TheBORN Korea’s offering price was set excessively high because it selected food manufacturing companies rather than franchise companies as comparables during the pricing process. TheBORN Korea chose four companies?CJ Seafood, Daesang, Pulmuone, and Shinsegae Food?as comparables and applied their average price-earnings ratio (PER) of 15.78 times to calculate a per-share valuation of 30,465 KRW to determine the expected offering price. The actual franchise company Kyochon F&B was excluded from comparables because its PER was high at 29.65 times due to a recent significant stock price decline.

Can It Overcome the 'Curse of Franchises'? Lingering Issues Including the Yeondon Bolkatsu Dispute

[Image source=Yonhap News]

The prolonged dispute with franchisees of Yeondon Bolkatsu remains a major negative factor. The Fair Trade Commission (FTC) recently conducted an on-site investigation into Yeondon Bolkatsu franchises on suspicion of violating the Franchise Business Act, and some franchisees have petitioned the National Assembly to enact the 'Baek Jong-won Prevention Act.'

Some Yeondon Bolkatsu franchisees reported TheBORN Korea to the FTC in June, alleging that the company recruited franchisees with false and exaggerated information. The FTC sent investigators to TheBORN Korea’s headquarters on the 24th and 25th of last month to investigate allegations of false and exaggerated advertising in the Yeondon Bolkatsu franchise business and is currently reviewing the findings. If violations of the Franchise Business Act are confirmed, penalties could include imprisonment of up to five years or fines up to 300 million KRW. Other franchise stores may also suffer sales damage due to reputational harm.

Yeondon Bolkatsu, which was launched in August 2021, expanded from four franchise stores to 75 by 2022. However, many stores closed by the first half of this year, leaving only 34. Ongoing conflicts between franchisees and TheBORN Korea over the causes of business failure are expected to prolong the dispute further.