Secretly Shifting Fees and Forcing Headquarters Purchases: MegaMGC Coffee Hit with Record Fine for Unfair Practices

Forced Purchase of Ice Makers and Grinders from Headquarters

The franchisor of MegaMGC Coffee, which secretly shifted mobile gift certificate fees onto franchisees and forced them to purchase overpriced cafe equipment, has been fined more than 2 billion won.

The Fair Trade Commission announced on October 1 that it will impose corrective orders and a total fine of 2,292 million won on N House, the operator of MegaMGC Coffee, for violations of the Franchise Business Act.

According to the Fair Trade Commission, from August 2016 to July 2020, N House abused its superior bargaining position by making franchisees bear the full amount of mobile gift certificate fees, which accounted for 11% of sales, without prior consent or consultation.

In order to make franchisees bear such costs, the franchisor is required to notify them in advance and obtain their consent. However, investigations found that franchisees entered into franchise agreements without being aware of this, until the information was included in the disclosure document in July 2020.

Although the exact amount passed on to franchisees could not be determined due to destroyed records, it was found that the amount reached 276 million won over just two years from 2018.

The Fair Trade Commission explained that N House even received 1.1% of the total issuance amount from the mobile gift certificate issuer as a form of rebate, while secretly shifting the fee burden onto franchisees.

In addition, N House is accused of forcing franchisees to purchase ice makers and coffee grinders from headquarters as mandatory items from December 2019 to February this year.

The franchise agreement included clauses stating that if franchisees purchased these items elsewhere, the supply of products such as raw and subsidiary materials could be suspended, or the franchise agreement could be terminated.

The prices charged by N House (about 1.6 million won for a grinder and 4.7 to over 6 million won for an ice maker) were higher than market prices, with profit margins ranging from 22% to 60%.

In May 2022, N House also obtained consent from franchisees for cost-sharing promotional events to be held over the following year, but failed to clearly specify the costs and cost-sharing ratios.

As a result, it was found that the company held 120 promotional events over the next year and six months without obtaining individual consent from franchisees, based only on this broad consent.

Park Jinseok, head of the Franchise Transaction Investigation Team at the Fair Trade Commission, stated, "This sanction is the largest fine ever imposed in the food service franchise sector for violations of the Franchise Business Act. It penalizes a new type of unfair trade practice in which mobile gift certificate fees were passed on to franchisees without consent or prior consultation."