"Headquarters Demands This Fee, That Fee"?The Ultimate in Franchise Charges: Chicken Shop Owners Pay 35 Million Won [Why&Next]

Aftermath of the Gwanak-gu Pizza Franchise Stabbing Incident
Franchisees Struggle with Ingredient Markups and Renewal Costs
Up to 70% of Franchise Sales Flow to Headquarters
National Assembly Moves to Revise the Franchise Business Act

The knife attack that occurred earlier this month at a pizza franchise store in Gwanak-gu, Seoul, has amplified calls to address the structural issues within the franchise industry. There is a growing consensus that the excessive fees demanded by headquarters-such as inflated ingredient costs due to markup commissions, equipment usage fees, and royalties-must be reformed.

According to the food service industry and other sources on September 16, a pizza franchise store owner in Gwanak-gu, Seoul, fatally stabbed a headquarters employee and interior contractors at his store on September 3. It was reported that the franchisee had ongoing conflicts with headquarters regarding store renovation work.

Why Did the Franchisee Stab the Headquarters Employee?

It is said that the franchise headquarters has collected approximately 57 million won from franchisees for kitchen equipment and other items. The franchisee’s family testified to the police that "the renovation was carried out through an interior company recommended by headquarters, but there were many issues such as water leaks and broken tiles," and that there were frequent demands such as "requests for new menu items."

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This pizza brand, which operates around 100 stores nationwide, began franchising in August 2021. Headquarters revenue more than doubled from 3.198 billion won in 2022 to 8.508 billion won last year. During this period, headquarters assets increased from about 700 million won to 1.9 billion won.

Among self-employed business owners, there are growing complaints that franchise headquarters take more than 50% of franchise store sales as various fees, creating a heavy burden. According to the Seoul Metropolitan Government, the average startup cost for a franchise store in Seoul last year was 113 million won, with interior costs accounting for the largest share at 45.6%. The problem is that franchisees are required to use contractors designated by headquarters for renovations, and are also obligated to undergo 'renewals' every four to five years. Franchisees point out that "headquarters makes franchisees bear at least half, and sometimes the entire cost, of renovation work."

Burden of Ingredient Markup Commissions, Renewal Costs, and Training Fees

The cost pressure continues even after opening. Most franchisees receive ingredients needed for operations from headquarters, which typically supplies goods at a markup to secure so-called 'markup commissions.' When regular store renewal costs, POS system usage fees, advertising costs, and additional training fees are added, 60-70% of sales flow back to headquarters. In fact, an analysis of sales data from 186 franchise stores by the Seoul Metropolitan Government showed that ingredient costs supplied by headquarters accounted for the largest share (49.5%) of franchisee operating expenses.

The average markup commission for franchisees was found to be 23 million won as of 2023. According to the "2024 Franchise Business Status Statistics" released by the Fair Trade Commission, the average markup commission by sector was 35 million won for chicken, 22 million won for Korean food, 22 million won for coffee, 23 million won for bakery, and 21 million won for pizza. The ratio of markup commission to average franchisee sales was highest for chicken at 8.6%, followed by coffee at 6.8%, bakery at 5.7%, Korean food at 5.1%, and pizza at 5.0%. The overall ratio for the food service industry was 4.2%.

This structure has ultimately led to legal disputes. In November 2020, more than 90 Pizza Hut franchisees filed a lawsuit against Korea Pizza Hut to recover markup commissions, sparking similar lawsuits involving Puradak Chicken, BHC, Baskin Robbins, Kyochon Chicken, and BBQ. The Pizza Hut case is currently awaiting a Supreme Court ruling, with lower courts in both the first and second trials ruling in favor of the franchisees. Notably, the appellate court ordered Korea Pizza Hut to return approximately 21 billion won, creating a significant impact.

In addition to legal disputes, there have also been a series of administrative sanctions. Hansot, a lunchbox franchise, was investigated by the Fair Trade Commission for failing to pay 294.49 million won in renovation costs that the headquarters was legally required to cover for 36 franchisees, and in June last year, the company implemented voluntary corrective measures. Cheong-O DPK, which operates Domino’s Pizza, was fined 700 million won by the Fair Trade Commission in November 2022 for failing to pay 1.528 billion won in renovation costs to 70 franchisees.

Growing Calls to Amend the Franchise Business Act

Experts emphasize that this incident should serve as an opportunity to overhaul the Franchise Business Act. Although the Fair Trade Commission discloses the fee structures of headquarters annually through information disclosure documents, costs not specified in contracts, such as markup commissions, remain in a blind spot.

There are already many cases overseas where franchisee rights are institutionally protected. In the United States, franchise contracts require mandatory disclosure of 23 items, including costs and conditions, through the Franchise Disclosure Document (FDD). In Japan, headquarters are strictly prohibited from forcing franchisees to purchase specific items.

As conflicts between franchisees and headquarters escalate into a social issue, politicians have also begun to take action. Protecting franchisee rights was one of President Lee Jaemyung's campaign pledges. The Democratic Party included the "Franchise Business Act Amendment" among the 224 priority bills for this regular session of the National Assembly. The amendment aims to grant franchisees collective bargaining rights similar to those of labor unions.

If the amendment passes the National Assembly this year, franchisees will be able to form organizations and, when they request negotiations with headquarters regarding transaction terms, headquarters will be required to respond. Failure to do so will result in corrective orders or prosecution. This is expected to help rectify unfair transaction terms such as unilateral contract termination or forced purchases of specific items by headquarters. An industry insider commented, "If excessive fee demands from headquarters accumulate, franchisees will find themselves in unsustainable situations," adding, "If these structural issues are not addressed, similar conflicts could occur at any time."

However, the franchise industry is concerned that if franchisee organizations insist on sourcing necessary ingredients from other suppliers, it will be difficult to maintain the core principle of 'consistent quality control' in the franchise sector. They also argue that a proliferation of franchisee organizations could lead to a surge in disputes and stunted growth in the franchise industry.