The management environment surrounding the restaurant franchise industry is tough. It is under attack from the administrative, judicial, and political sectors. Criticism is emerging that some restaurant franchise headquarters are imposing excessive burdens on franchise owners to maximize profits. Recently, criticisms of headquarters' practices have also been voiced by franchise owners operating restaurant brands backed by private equity funds.
According to related industry sources on the 15th, the Fair Trade Commission has been steadily securing operational data related to famous restaurant franchise companies since April of last year. The Fair Trade Commission began by sending researchers to the low-cost coffee franchise Mega MGC Coffee to secure related data, starting with the chicken franchise BHC. It is also reported that they are examining the operational status of the coffee franchise Twosome Place and the burger franchise Burger King.
BHC is part of Dining Brands Group, which is owned by the private equity fund MBK Partners. Mega MGC Coffee is backed by private equity funds UYUN and Premier Partners, while Twosome Place and Burger King are owned by Carlyle and Affinity, respectively.
The Fair Trade Commission prioritizing investigations into franchises owned by private equity funds stems from suspicions that these funds impose excessive demands on franchise owners or indiscriminately raise consumer prices to gain short-term profits.
Private equity funds inherently acquire undervalued corporations to enhance their value and generate revenue when liquidating the fund. Because of this, there is a perception that when private equity funds acquire corporations, they initially reduce labor costs to improve performance.
In the case of restaurant franchises, many see that the revenue structure differs from that of general corporations, leading to unreasonable demands on franchise owners. In the franchise industry, general franchise owners learn the brand and various know-how from headquarters, often paying a differential franchise fee based on the products. The differential franchise fee refers to the amount exceeding the fair wholesale price of the goods and raw materials supplied by the franchise headquarters to the franchisees. The differential franchise fee is a major source of income for the Korean-style franchise headquarters.
The franchise industry is also in the midst of legal battles over differential franchise fees. Following a defeat in the second trial related to differential franchise fees, Korea Pizza Hut franchise owners are sequentially suing the headquarters. As of that day, franchise owners of BHC Chicken, Kyochon Chicken, Goobne Chicken, Baskin Robbins, and Twosome Place have filed lawsuits against the headquarters. Franchise owners claim that information regarding differential franchise fees has not been adequately shared.
The political sphere is also aware of these issues. Representative Kim Nam-keun of the Democratic Party is actively addressing this problem. Representative Kim plans to hold a policy forum related to this issue soon and is considering introducing legislation. Discussions are expected to focus on the problems concerning franchise headquarters acquired by private equity funds. There are indications that discussions will arise on whether there is a need to regulate the entry of private equity funds aiming to maximize short-term revenue in vulnerable areas such as franchise locations.
Although they are under administrative, judicial, and political attacks, restaurant franchises owned by private equity funds have recently been continuously raising consumer prices. KFC, a burger franchise owned by private equity fund Orchestra PE, is a representative case. KFC raised prices twice in the past year. In June of last year, KFC raised the price of original chicken, hot crispy chicken, and hot crispy whole leg by 300 won each. The price of the signature menu item, the Zinger Burger set, was also raised by 100 won.
At that time, KFC stated that it would raise prices due to increased prices of raw materials and delivery expenses. However, the Korea Consumer Agency pointed out that "the market price of the main ingredient, chicken, has decreased," arguing that "it is self-serving to raise prices citing the increase in other raw and indirect material costs while the prices of major raw materials have fallen." According to the Korea Consumer Agency, the price of chicken from January to May last year was 3,771 won, which is a decrease of 14.4% compared to the average value of 4,403 won in 2023.
Due to the effects of price increases, KFC recorded its highest performance to date last year. KFC's revenue was approximately 18% higher than the previous year at 292.3 billion won. Operating profit increased 5.7 times compared to the previous year, reaching 16.4 billion won.
KFC also raised the prices of some menu items, including chicken and burgers, by 100 to 300 won in April this year. This was the first price increase in 10 months since June of last year. KFC stated that "due to the rise in raw material prices and various expenses, it became unavoidable to adjust the prices of some menu items," similar to the explanation given during last year's price increase.
The situation is similar for the coffee franchise Twosome Place. In March, Twosome Place raised the prices of 58 items, including cakes, coffee, and beverages by an average of 4.9%. Accordingly, the price of Twosome Place's "Strawberry Chocolate Cream Cake" increased from 37,000 won to 39,000 won, a 5.4% increase, and the prices of 23 regular-sized coffee products increased by 200 won each. Twosome Place's performance last year was its highest ever, with revenue and operating profit reaching 520.1 billion won and 32.7 billion won, respectively. The year-on-year growth rates were 8.3% and 25.2%, respectively.
Burger franchise Mom's Touch recorded the highest revenue and operating profit in its history last year as well. Revenue surpassed 400 billion won for the first time, and operating profit reached the 70 billion won range. Mom's Touch also raised product prices last October, with burgers increasing by 300 won and chicken by 500 won. However, a representative from Mom's Touch stated, "As a brand that emphasizes value for money, we have no plans to increase prices further this year."
Lee Eun-hee, a professor of consumer studies at Inha University, said, "Corporations should not simply pass on cost-saving efforts to consumer prices but should also strive to find ways to obtain raw and indirect materials at better prices."