U.S. Franchises Last 47 Years, but in Korea Only a Brief 5 Years [The Trap of Low-Capital Startups] ⑥

Short Lifespan of South Korean Franchises
An Abnormal Structure Dependent on Network Expansion
Simple Royalty-Based Model in the US and Japan
In Contrast to South Korea's Complex Fee System Beyond Royalties

Editor's NoteIn Korea, starting a franchise business often begins with taking on debt. Small business owners fall into the trap of "low-capital startups" promoted by franchises eager to expand their network, only to find themselves pressured into taking out loans. Even if sales are generated, it is difficult for these entrepreneurs to actually make a profit. If business slows down even slightly, the structure makes it hard to survive, often leading to bankruptcy. This article examines how small business owners are lured by the promise of "low-capital startups" during the franchise process, and how excessive borrowing can lead to dangerous consequences.

According to the Korea Franchise Association, the average lifespan of a restaurant franchise company in Korea is 5.7 years as of 2021. This is extremely short compared to the United States, a "franchise powerhouse," where the average is 47.5 years. This means that many brands fail to survive long in the market and are quickly forgotten. This is the result of franchise headquarters failing to secure a stable profit structure and instead relying solely on various fees gained from expanding franchise locations, such as franchise fees and supply margins (the difference between the cost of goods and the price charged to franchisees) added to raw material and supply logistics costs.

According to the Fair Trade Commission's franchise business statistics released on October 19, the number of franchise outlets operating in Korea reached 365,014 as of last year. This is more than 40 times the number of franchise headquarters, which stands at 8,802. When compared to the number of overseas franchise outlets published by the Korea Trade-Investment Promotion Agency (KOTRA), Korea falls short of the United States, which has 806,270 outlets, but far exceeds Japan, which started its franchise industry 20 years earlier and has 252,783 outlets. This is why the Korean franchise industry is often described as being saturated with franchise locations.

Despite the large number of franchise outlets, the average number of outlets per brand is significantly lower than in other countries. In Korea, a franchise brand has an average of 29.5 outlets, whereas in the United States and Japan, the averages are 207.8 and 196.7, respectively. In Korea, only about 4% of brands have more than 100 outlets, meaning that most franchise expansion is being driven by companies with limited capital and small scale.

The main reason for the market failure of so many franchises can be found in the structure where headquarters depend excessively on franchisee revenue. In Korea, it is industry practice for headquarters to frequently collect not only franchise fees and royalties (brand usage fees), but also training fees, supply margins, advertising contributions, and other types of fees from franchisees. In contrast, the United States and Japan have a higher proportion of company-owned stores, and headquarters typically only collect royalties from franchisees, focusing their support on helping franchisees maximize profits through efficient store operations.

Korean franchises promoting 'Royalty Zero' and 'Royalty Exemption'.

For example, in the United States and Japan, restaurant franchise headquarters typically take 4-8% of sales as royalties on a weekly or monthly basis. McDonald's collects 4-5% of monthly sales, while Smoothie King and The Halal Guys take 6%. Japan's bento franchise Hotto Motto charges a fixed royalty of 80,000 yen (about 750,000 won) per month, and the Nagasaki champon chain Ringer Hut takes 5% of monthly sales. When there is competition to attract franchisees, Korean franchises highlight "zero royalty" and offer discounts, but in exchange, they increase the number of fees collected at the time of the franchise contract-a stark contrast to practices abroad.

Chick-fil-A, a leading American chicken and sandwich franchise, takes 15% of sales as royalties from franchisees and requires that 50% of profits be shared with headquarters, yet still maintains positive relationships with its franchisees.

Minimum Requirements for Franchisees Specified by the American Franchise 'Chick-fil-A'. Chick-fil-A.

Chick-fil-A, instead of promoting "start a business as a beginner" or "start a business with no capital," sets other conditions. New franchisees are required to specifically demonstrate whether they have led a team and exercised leadership, whether they have ever gone bankrupt due to poor financial management, and whether they are running other businesses. Rather than indiscriminately expanding the number of outlets, headquarters selects franchisees who will take full responsibility for and carefully manage a single location. This approach has increased brand value, guaranteeing high profits for franchisees, and as a result, franchisees are willing to accept headquarters' demands for royalties and profit sharing.

In the United States, in particular, instead of forcing franchisees to purchase ingredients and equipment from headquarters for profit, franchisees establish cooperatives to purchase supplies together. This purchasing cooperative model emerged in the 1990s, when franchisees in the United States struggled with soaring raw material prices and needed a solution. Since then, the U.S. franchise industry has shifted its profit structure away from making money by supplying goods to franchisees, focusing instead on growth through royalties alone.

Yambrand's Cooperative Restaurant Supply Chain Solution (RSCS) Introduction Website. KFC, Pizza Hut, Taco Bell, and others are affiliated. RSCS.

Yambrand, which operates multiple restaurant brands such as KFC, Pizza Hut, Taco Bell, and The Habit Burger Grill, has established a cooperative subsidiary called Restaurant Supply Chain Solutions (RSCS). Through joint purchasing, RSCS negotiates prices for 22,000 products, including food, packaging, and equipment, and supplies them to franchisees at prices with virtually no margin. In France and other European countries, it is also common for franchisees to form cooperatives and purchase food ingredients and goods at low prices without having to pay supply margins.

In Japan, headquarters have the right to designate suppliers but are strictly limited by detailed guidelines to prevent abuse, creating an environment where franchisees can operate independently. The Japan Fair Trade Commission's franchise guidelines specify that it is a violation of antitrust law for headquarters to: ▲ require franchisees to do business with designated suppliers without just cause for raw material supply or interior construction; ▲ force franchisees to purchase certain quantities; or ▲ require franchisees to bear costs for new business ventures not specified in the contract. These practices are closely monitored and regulated.