Burger King, Bhc, Mom's Touch, A Twosome Place Face Scrutiny From Korea's Fair Trade Commission

Franchise headquarters under the control of private equity firms (PEFs) are raising concerns about being unfairly targeted by the Korean government. They complain that franchisees are being viewed as victims rather than business partners.

The Korea Fair Trade Commission (FTC) has initiated an investigation into franchises operated by PEFs following claims of exploitative practices highlighted during a National Assembly audit in October, as per The Korea Times.

Regulatory Measures and Response

FTC Chairman Han Ki-jeong has pledged to address the issue of PEFs seeking excessive profits from franchise businesses and to implement corrective actions to rectify the situation.

BKR, managing Burger King's operations in Korea under Affinity Equity Partners, faced scrutiny for allegedly demanding higher royalties compared to the U.S. franchiser, citing global inflation as a reason for adjustments in pricing strategies.

Bhc, overseeing Outback Steakhouse stores in Korea under Global Gourmet Services, faced inquiries about potential profit exploitation from franchisees. Jay H. Bu of the PEF MBK Partners was summoned for questioning.

Business Korea reported that Bhc has also stirred controversy by swapping its boneless chicken offering for cheaper Brazilian chicken while simultaneously hiking prices. Reports indicate the shift to Brazilian sourcing occurred in May 2023, with prices now on par with other Korean chicken brands.

PEF-owned franchise headquarters were accused of transferring costs onto franchisees for short-term gains, prompting the Fair Trade Commission to announce ex-officio investigations and strict enforcement actions for legal violations.

Regulatory Intervention and Industry Response

The Fair Trade Commission's decision to fine Mom's Touch, owned by KL & Partners, for mistreating a franchisee who organized a franchisee council was seen as a cautionary move against PEF-operated franchises.

Mom's Touch expressed discontent with the regulatory decision, hinting at a potential appeal while emphasizing its dedication to maintaining franchisee-friendly policies.

Yook Sung-kwon of the FTC highlighted concerns over PEF-owned franchises abusing their power and assured franchisees of stringent actions against unfair practices to safeguard the industry's integrity.

Anticipated Outcomes and Strategic Adjustments

Facing the FTC's rigorous oversight, PEF-owned franchises are now at a crossroads, necessitating reevaluating their business models and relationship dynamics with franchisees. Industry analysts predict these entities might introduce more transparent and equitable contractual terms to preempt further regulatory scrutiny and rebuild trust among franchise partners.

Additionally, there could be a heightened focus on operational efficiencies and value creation that benefits all stakeholders, ensuring that the growth and profitability of franchises are sustainable and mutually beneficial in the long term.

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