By Don Southerton, Editor
Korea Legal.org looks at Korea-facing legal issues and shares insights into a wide variety of topics. Franchising comes with its own set of rules, regulations, and compliance. With regard to Korea, franchising is popular. Korea Times‘ reporter Cathy Rose A. Garcia provides a great overview of the industry.
Franchise businesses booming in Korea
By Cathy Rose A. Garcia
What do BBQ Chicken, McDonald’s, Caffe Bene and Starbucks have in common? Aside from being popular food and drink businesses, all are franchises of international and Korean brands. Plus all of them have a ubiquitous presence in Korea.
The franchise industry has been growing significantly in the past few years in Korea. The trend was jumpstarted by fast food restaurants, which was followed by family restaurants, clothing chains, cleaning services, educational institutions and discount stores.
In 1999, the number of franchise businesses in Korea was only around 1,500 with 120,000 outlets. Now, the number has doubled.
According to the Ministry of Knowledge Economy’s distribution and logistics division, the franchise industry in Korea is worth an estimated $70.2 billion. Franchises for food services, including fast food chains and family restaurants, account for around 52 percent or $36.5 billion.
The retail sector, such as convenience stores and consumer goods, accounts for 36.2 percent or $25.4 billion of the total. The remaining 11.8 percent or $8.2 billion includes education, real estate, cleaning and mailing services.
And judging by the good turnout at the Franchise Seoul 2010 at the COEX last week, there is still a growing demand for these business opportunities. The fair featured mostly food service franchises, with familiar names such as Home Chicken, Papa John’s and Subway. There were also representatives from retail, children’s products, education, computers, health aids, cosmetics and rental services.
Experts believe the potential for the franchise industry are bright, especially in the service sector. Among the areas with good prospects are: senior care, party planning and catering, fitness, personal services, frozen yogurt, green growth, pet products and children’s items.
Capital costs
Lee Seong-kyu, a 35-year-old office worker, said he was looking for business ideas at the Franchise Seoul fair. He was considering opening a foreign food outlet but the popular franchises require a lot of capital, not to mention finding the right location.
“A franchise might seem easier because the business has already been tried and tested. The only obstacle would be raising the capital, some require big franchise and royalty fees, plus the equipment and rental expenses,’’ Lee said.
Data compiled by the Seoul Global Business Center showed that the average capital necessary to open a store is over 100 million won. Opening a restaurant or a bakery would need around 200 million won, while a service-related franchise would entail around 170 million won.
A report by the U.S. Commercial Service Market Report 2010 indicated that U.S. franchises are sought-after in Korea. “Korean franchisees are seeking and prefer to do business with U.S. franchisers that can offer established brand names to Korean consumers and value the transfer of American management skills provided by U.S. headquarters,’’ the report said.
But potential Korean franchisees are turned off by the high fees and royalties required by the American headquarters.
Subway, the American sandwich chain, charges a franchise fee of $10,000, but the total investment, including equipment, lease, and supplies, would reach between 100 million to 130 million won.
Another American pizza chain Papa John’s demands a 20 million won franchise fee, and an ongoing royalty of 5 percent of net sales every month, with a total cost of roughly 150 million won.
“Other common franchising requirements, such as a minimum facility size and the expected number of store openings within a certain period are often very challenging for Korean franchisers to meet,’’ the report said.
Boom in local franchises
There’s no doubt international franchises remain prominent, but domestic chains are also becoming popular among local businessmen. Korean franchises do not require much capital or large royalties. Also unlike foreign franchises, the local ones are already attuned to Korean tastes and targeting Korean consumers.
Consider the fried chicken craze in recent years. The Korea Franchise Association reported there are about 35,000 fried chicken franchises in the Korean market, as of last year, led by popular brands such as Kyochon Chicken, BBQ Chicken and Two Two Fried Chicken.
Another fried chicken chain, Chicken Mania, requires a 5 million won franchise fee and no royalties. The estimated total cost in opening a Chicken Mania franchise is around 46.5 million won.
To open a Cafe Kai ice cream & coffee shop branch, one needs to have 66 million won, which includes the 5 million won franchise fee and 3 million won in royalties.
Jun Hyung-joon, a franchising consultant, said the hottest property in Korea right now is local brand Caffe Bene. The coffee shop chain has set the record for the highest number of stores opened in the shortest amount of time, as it aims to challenge American giant Starbucks in Korea. It opened in 2008, but in just two years, the company has expanded to 240 stores.
As a purely local franchise brand, Caffe Bene serves special blend coffee, Belgian waffles and Italian gelato. Its menu might not seem that different from Starbucks, Coffee Bean, Angel-in-Us and Holly’s, but it has appealed to many customers because of its lower prices, comfortable atmosphere and the fact that it donates a portion of its profits to charity.
To open a Caffe Bene store, one needs to invest at least 215.8 million won, according to the company website. This includes the 10 million won franchise fee, 100 million won for the interior and 78 million won for the supplies.
Caffe Bene’s growth has been attributed to the use of Korean celebrities to promote the brand. “The growth has been so fast. Their rapid growth also has something to do with “star marketing.” They use popular stars to promote the cafe. Star marketing is always effective in Korea,’’ Jun said.
However, its effectiveness has only been proven in Korea. As Caffe Bene looks to the overseas market for future growth, there are doubts whether it can replicate its success. Hallyu or Korean wave remains strong in Asia, but Jun expressed doubts whether Korean celebrity endorsements could help Caffe Bene with its plans to expand into Asian countries.
Tips for franchisees
Before deciding on whether to sign a contract with a franchiser, Jun suggests doing a lot of research and making inquiries about the company first.
“There’s a franchise information disclosure law, so they are required to provide the information. You can check all the information online, to see how many outlets they have and their sales. Also check the credibility and credit standing of the franchisor to make sure it is stable,’’ Jun said.
The franchisors should provide all prospective franchisees with a disclosure document at least 14 days before signing an agreement or payment of the fees. If the disclosure is not made, the franchisee can demand a refund of its payment. Franchisors are also required to register the disclosure statements with the Korea Fair Trade Commission.
“It is also best to consult with a franchise consultant, since it is our job to guide the franchisee through the entire process,’’ Jun added.
Special Report KORUS FTA–An Auto Sector Update
Friday, December 10th, 2010By Don Southerton, Editor
Since 2006, BCW has been following the KORUS FTA discussions. As strong supporters of free trade, globalization, and the Hyundai Kia Motor Group and its US operations, we have provided research, numerous updates, and insights to US and Korean leadership. We have maintained an active role in supporting the treaty and US-Korea relations along with maintaining close ties with Koreans and Americans officials and scholars highly involved in KORUS.
Last week, after months of talks, an agreement was reached ( it still needs to be ratified by the U.S.). We provide the following key points. Part 1 includes general terms of the agreement. Part 2 is related to the auto sector, with Part 3 focuses on auto parts.
Part 1. Pending Congressional Approval
The United States and the Republic of Korea signed the United States-Korea Free Trade Agreement (KORUS FTA) on June 30, 2007. If approved, the Agreement would be the United States’ most commercially significant free trade agreement in more than 16 years.
The U.S. International Trade Commission estimates that the reduction of Korean tariffs and tariff-rate quotas on goods alone would add $10 billion to $12 billion to annual U.S. Gross Domestic Product and around $10 billion to annual merchandise exports to Korea.
Under the FTA, nearly 95 percent of bilateral trade in consumer and industrial products would become duty free within three years of the date the FTA enters into force, and most remaining tariffs would be eliminated within 10 years.
For agricultural products, the FTA would immediately eliminate or phase out tariffs and quotas on a broad range of products, with almost two-thirds (by value) of Korea’s agriculture imports from the United States becoming duty free upon entry into force.
For services, the FTA would provide meaningful market access commitments that extend across virtually all major service sectors, including greater and more secure access for international delivery services and the opening up of the Korean market for foreign legal consulting services.
In the area of financial services, the FTA would increase access to the Korean market and ensure greater transparency and fair treatment for U.S. suppliers of financial services.
The FTA would address non-tariff barriers in a wide range of sectors and includes strong provisions on competition policy, labor and environment, and transparency and regulatory due process.
The KORUS FTA would also provide U.S. suppliers with greater access to the Korean government procurement market. In addition to strengthening our economic partnership, the KORUS FTA would help to solidify the two countries’ long-standing geo-strategic alliance.
As the first U.S. FTA with a North Asian partner, the KORUS FTA could be a model for trade agreements for the rest of the region, and underscore the U.S. commitment to, and engagement in, the Asia-Pacific region.
The Obama Administration will seek to promptly and effectively address the issues surrounding the KORUS FTA, including concerns that have been expressed regarding automotive trade.
Part 2 Auto Sector
The following are the major aspects of the supplementary alterations on auto trade and other issues in the South Korea-U.S. free trade agreement.
1. Automotive safety standards South Korea agreed to soften its auto safety standards for U.S.-made cars. In the previous deal, there was an automatic two-year grace period before U.S. auto manufacturers had to meet any new Korean regulations related to self-certification for safety standards. The supplemental agreement allows for 25,000 cars per U.S. automaker – or almost four times the number allowed in the 2007 agreement — to be imported into Korea if they meet U.S. safety standards.
2. Automotive emission standards South Korea will exempt low-volume importers from its ultra low emissions vehicle (ULEV) standard that is scheduled to take effect from 2015. Under the new standard, South Korea will apply tougher efficiency criteria for vehicles, requiring vehicles to reduce their greenhouse gas emissions to 140 grams per kilometer. Under the supplemental agreement, all U.S. autos will be considered compliant with new Korean environmental standards on fuel economy and greenhouse gas emissions, developed since the 2007 agreement, if they achieve 119 percent of the targets in these regulations.
3. Automotive tariffs elimination Under the 2007 agreement, all tariffs on automotives would have been immediately eliminated gradually within three years after the implementation of the accord. The new agreement allows the U.S. to keep its 2.5 percent tariff on autos in place until the fifth year. At the same time, South Korea will immediately cut its tariff on U.S. auto imports in half (from 8 percent to 4 percent), and fully eliminate the tariff in the fifth year.
4. Tariffs on pick-up trucks In 2007, the U.S. agreed to phase out its 25 percent tariff on South Korean trucks in 10 years. But the new agreement allows the U.S. to maintain its tariff until the eighth year and then phase it out by the tenth year.
5. Tariffs on electric cars Under the 2007 agreement, the U.S. and South Korea would have eliminated tariffs on electric cars and plug-in hybrids by 10 years after the implementation of the accord. The new agreement calls for South Korea to immediately reduce its electric car tariffs from 8 percent to 4 percent, and both countries will then phase out their respective tariffs by the fifth year.
6. Special safeguard for automotive industry The previous agreement had no provision on safeguard measures specific to the auto industry. Under the 2010 supplemental agreement, both sides agreed to introduce safeguard measures for motor vehicles.
Part 3, Regarding Auto Parts
BCW sees no changes from the 2007 agreement, “Tariffs would be immediately reduced to zero in each country for auto parts imported from the other.” That said, there are however a few exceptions regarding tires and some plastics. As soon, as a final agreement is ratified, BCW will provide an itemized list of those items still with tariff restrictions and a timeline for their reduction.
For additional questions, please contact Don Southerton, dsoutherton@bridgingculture.com 1-310-866-3777
Tags: Don Southerton expert witness, Don Southerton Korea consultant, Hyundai Motor Company, Kia Motors, KORUS FTA, KORUS FTA Auto, KORUS FTA Car
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