The Fair Trade Commission (FTC) is targeting franchise businesses owned by private equity funds. In particular, tensions within the industry have escalated recently after Mom’s Touch was fined 300 million won (US$225,989) for unfair practices towards its franchisees.
Yook Sung-kwon, the Secretary General of the FTC, had a meeting with the association of franchisees from 12 major restaurant brands last December. At the meeting, he said, “We are planning to conduct a focused ex officio investigation into franchise headquarters owned by private equity funds in 2024.”
The reason why the FTC specifically mentioned franchise businesses owned by private equity funds is because of concerns that they may exploit franchisees to improve financial conditions and profitability due to the nature of private equity funds seeking to increase the company’s value for sale, and this criticism has not subsided.
In fact, the FTC imposed a fine of 300 million won on Mom’s Touch headquarters on Jan. 31 for unfairly terminating the franchise agreement with Hwang, who led the franchisee group activities. Mom’s Touch, currently owned by the private equity fund KL Partners, was acquired for approximately 200 billion won in December 2019.
With the FTC’s recent actions, franchise businesses such as BHC Chicken, Burger King, and A Twosome Place, owned by private equity funds, are on high alert.
In July 2022, BHC Chicken, where private equity fund MBK Partners is the largest shareholder, sparked conflict with franchisees by raising the supply price of sunflower oil, a staple item for chicken franchises, by 61 percent at once. In response to continued criticism, it lowered the supply price again in the same month. Additionally, BHC Chicken received criticism for having a higher ratio of franchise fees burdened by franchisees compared to its competitors during last year’s parliamentary audit.
Burger King, owned by private equity fund Affinity Equity Partners, also faced issues related to franchisee exploitation and commission fees during last year’s parliamentary audit. While Burger King in the United States takes an 8.5 percent commission combining royalty and advertising fees, Burger King in Korea receives 17.8 percent, including royalty, advertising fees, logistics margins, and logistics delivery fees. Moreover, there have been criticisms that the headquarters have raised operating costs for promotional events or systems such as new employee training videos without prior consultation with franchisees.
Since its acquisition by private equity fund The Carlyle Group in November 2021, A Twosome Place has also been embroiled in ongoing conflicts with franchisees due to issues of exploitation. The franchisee association of A Twosome Place reported to the FTC in September last year that the headquarters was causing damage to franchisees through excessive logistics fees, passing on the price difference of mobile coupons and setting up stores near others that don’t accept card payments. Franchisees also raised concerns about the headquarters forcing them to purchase recommended items at prices higher than market prices.
While the franchise industry agrees on expanding the symbiotic relationship between franchise headquarters and franchisees, there is a consensus that labeling the headquarters as the sole aggressor should be avoided. Particularly, with the upcoming enforcement of amendments to the Franchise Business Act in July, which includes improvements to the essential items system, managing and controlling franchisees has become more challenging.