[Exclusive] "Preventing Another Baek Jongwon Incident"... Seoul to Score 'Good Franchisors'

Seoul to Introduce 'Seoul-Type Win-Win Franchise' Initiative
Damage Spreads Due to Lack of Regulations on Mandatory Item Standards
SME and Small Business Community Also Plans Meetings and Consultations

Amid renewed controversy over the abuse of power by franchise headquarters toward franchisees?most recently involving Baek Jongwon, CEO of Theborn Korea?Seoul Metropolitan Government has launched an initiative to introduce a system aimed at encouraging mutually beneficial cooperation between franchisors and franchisees. While the Fair Trade Commission is currently distributing guidelines to prevent excessive designation of 'mandatory items' and other abuses by franchisors, these guidelines lack legal binding force and have been criticized as ineffective. Seoul's new system is intended to address this shortcoming.

Reference image. Asia Economy

According to industry sources on July 10, Seoul plans to introduce a system tentatively called the 'Seoul-Type Win-Win Franchise' in the second half of this year. Under this system, the city will comprehensively review franchisors for compliance with the Franchise Business Act, the status of mandatory purchase item designations, and efforts to cooperate with franchisees. Franchisors will then be divided into four or five grades, with incentives provided to those with excellent results. This concept is similar to the 'Shared Growth Index Evaluation' implemented by the Korea Commission for Corporate Partnership for large corporations. Seoul intends to develop and utilize its own evaluation indicators. An official from the Seoul Metropolitan Government stated, "We are currently in the process of developing evaluation indicators," and added, "We are considering a variety of incentive measures so that franchisors who receive high scores can clearly experience advantages."

The decision by local government to actively promote mutually beneficial cooperation between franchisors and franchisees is seen as a response to the recent controversy over excessive designation of mandatory items. Mandatory items refer to goods or services that franchisors require franchisees to purchase in order to maintain brand consistency, quality, and hygiene. These items can include raw materials, subsidiary materials, services, and equipment.

The problem lies in the fact that the Franchise Business Act has so far lacked direct regulations on the designation of mandatory items. This has led to issues such as excessive designation of mandatory items by franchisors and high differential franchise fees (the amount paid by franchisees to franchisors in excess of the appropriate wholesale price for mandatory items). According to a survey conducted earlier this year by the Korea Federation of SMEs on 514 franchise outlets, among franchisees who experienced unfair practices, a high proportion (33.0%) reported experiencing 'forced purchases.' In June last year, the Fair Trade Commission issued guidelines recommending that the types of mandatory items and the reasons for calculating supply prices be specified in franchise contracts. However, these remain non-binding recommendations without legal force.

Baek Jongwon, CEO of Theborn Korea, is apologizing to shareholders at the first regular general meeting held on March 28 at Space Share Gangnam Station Center in Seocho-gu, Seoul. Photo by Yonhap News

The small and medium-sized business community has also been calling for systems to prevent franchisor abuses and protect small business owners based on similar concerns. In March, organizations such as the Korea Federation of SMEs attended the Minsheng Joint Conference, a standing body of the Democratic Party of Korea, to make such proposals. The industry plans to continue demanding appropriate standards for mandatory items and supply prices in franchise businesses through further research and meetings with relevant ministers, and to push for legislative measures to ensure legal enforceability.

An industry representative said, "Since more than half of all franchisors are based in Seoul, if the city can use its own evaluation system to indirectly encourage franchisors to pursue mutually beneficial cooperation, it is expected to have a significant positive impact across the industry." The representative added, "We plan to actively communicate the industry's position to the authorities in order to raise awareness of and prevent the harm caused to small business owners by excessive logistics margins and the designation of mandatory items by franchisors."