Kim Namgeun of the Democratic Party: "Headquarters Hold All the Power in Korea... I Will Pass a Bill to Break the Mold" [The Trap of Low-Capital Startups] ⑧

Franchise Headquarters Must Pursue Profits Through Royalties, Not Distribution Margins, for Win-Win With Franchisees
Will Push for Swift Passage of Franchise Business Act and Online Platform Act

Editor's NoteIn Korea, starting a franchise business often begins with taking on debt. Small business owners fall into the trap of "low-capital startup" schemes aggressively promoted by franchises eager to expand their networks, only to find themselves ensnared by forced loans. Even when these business owners generate sales, it is difficult for them to realize a profit. If their business falters even slightly, they are unable to sustain operations and are driven to bankruptcy. This article examines how small business owners are lured by the promise of "low-capital startups" during the franchise launch process, and how excessive borrowing can lead to dangerous consequences.

"I will do my best to ensure the swift passage of the franchise package bill, which consists of three key legislative proposals aimed at resolving disputes between franchise headquarters and franchisees."

Kim Namgeun, a member of the National Assembly's Political Affairs Committee from the Democratic Party of Korea, stated this during an interview at the National Assembly Members’ Office Building on November 3. He emphasized, "To establish a win-win model between franchise headquarters and franchisees, there must be a balance of power, and the bargaining power of franchisees must be strengthened first."

Kim Namgeun, a member of the Democratic Party of Korea, is being interviewed by The Asia Business Daily. Photo by Yoon Dongju

Currently, the main franchise-related bills under discussion in the National Assembly include two amendments to the Fair Transactions in Franchise Business Act and one amendment to the Fair Transactions in Online Platform Intermediary Business Act. The amendment to the Franchise Business Act, which aims to strengthen the bargaining power of franchisees, has been placed on the fast-track (expedited agenda) and is highly likely to pass at the plenary session scheduled for this month. In addition, Assemblyman Kim plans to further strengthen the rights of franchisees through an amendment to the Franchise Business Act that changes the definition of franchise business from "education and control by headquarters" to "education and management by headquarters." Furthermore, he expressed his intention to pass the amendment to the Online Platform Act, which seeks to prevent unfair transactions on online platforms such as Coupang and Baemin (Baedal Minjok).

The following is a Q&A with Assemblyman Kim.

-Why do you think conflicts between franchise headquarters and franchisees persist?

▲The biggest problem is that a relationship has formed in which "the headquarters exploits franchisees" or "abuses its power." The basic principle of a franchise is that the headquarters generates profit by charging royalties in exchange for allowing franchisees to use its brand. This is how it began in the United States as well. However, in Korea, the franchise industry has become distorted because the main purpose for headquarters has shifted to securing distribution margins. In an attempt to maximize profits, headquarters force franchisees to purchase goods-sometimes at more than double the market price-even for products widely available elsewhere. As a result, the relationship has become adversarial rather than mutually beneficial.

-What weaknesses in the franchise ecosystem have been revealed by frequent disputes over loans?

▲Under the current system, where headquarters secure distribution margins from franchisees, it is difficult for franchisees to maintain a stable income. In this situation, banks are unable to extend high credit ratings to franchisees, which means franchisees have very limited access to loans. Even the franchise loan programs offered by banks are gradually being reduced. This appears to be because headquarters are more interested in connecting franchisees with secondary financial institutions and private lenders that offer quick and easy loans, rather than informing them about low-interest loan products.

-What are the necessary conditions for a franchise to become a long-lasting, mutually beneficial business with its franchisees?

▲The United States offers a useful example. Like Korea, there were many disputes between franchise headquarters and franchisees in the U.S. At that time, U.S. franchise headquarters chose to create purchasing cooperatives to foster a win-win relationship with franchisees. Instead of forcing franchisees to purchase goods at inflated prices, franchisees formed purchasing cooperatives to maintain brand consistency. Through this, franchisees were able to receive products of the same quality at reasonable prices. While headquarters did not profit from the distribution structure, they maintained quality and developed a win-win model.

Kim Namgeun, a member of the Democratic Party of Korea, is giving an interview to The Asia Business Daily. Photo by Yoon Dongju

-What institutional changes are needed to establish purchasing cooperatives?

▲The reason purchasing cooperatives could be established was that franchisees united. In order for franchisees to form cooperatives and gain bargaining power, there must be a balance of power between headquarters and franchisees. Legislation is needed to achieve this. Related bills have already been designated as fast-track legislation. I will work to ensure their passage during this regular session of the National Assembly.

-If the amendment to the Franchise Business Act passes, what effects do you expect?

▲Franchisees will be able to demand negotiations. Unilateral imposition of goods and similar issues can be resolved through negotiation. This is a step toward finding a win-win model, and through this process, I believe we can gradually move away from Korea’s outdated practice of generating profits through distribution margins. Instead, we can shift toward a model that aligns with the true nature of franchising-enhancing the value of the brand and collecting royalties. I will also work to ensure the passage of the Online Platform Act, which can protect participating businesses by preventing excessive fees and various forms of unfair transactions on online platforms.

-Franchise headquarters and related interest groups continue to express opposition to the passage of these bills. Why do you think that is?

▲I believe headquarters are instinctively opposed. If the amendments pass, it will become difficult for headquarters to negotiate with individual franchisees in ways that favor headquarters. Some argue that things should be left to self-regulation rather than regulation, but for private autonomy to work, there must first be a balance of power. We need to create conditions that allow franchisees to engage in collective bargaining, so that negotiations can be conducted on equal footing.

-It is taking too long for these bills to pass.

▲Legislation related to people’s livelihoods often receives surprisingly little attention in the National Assembly. Because the Assembly tends to focus on politically contentious issues, livelihood-related bills can fall out of the public eye. If their passage continues to be delayed, the public may misunderstand and think that only political bills are being addressed. As the newly appointed Deputy Floor Leader for Livelihood Affairs, I will ensure that these important bills are managed and passed.

About Assemblyman Kim Namgeun

▲Born in Seoul in 1963 ▲Graduated from Seoul National University, College of Law ▲Ph.D., Korea University Graduate School ▲Passed the 38th National Judicial Examination ▲Adjunct Professor, Korea University Law School ▲Vice President, Lawyers for a Democratic Society ▲Director, Center for People’s Livelihood Hope, People’s Solidarity for Participatory Democracy ▲22nd National Assembly member (Seongbuk-gu, Seoul, District B) ▲Deputy Floor Leader for Livelihood Affairs, Democratic Party of Korea