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.
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.