Bhc, Burger King, Mom’s Touch face antitrust scrutiny
FTC zeroes in on F&B franchises under control of PEFs
Tensions are escalating in the Korean food and beverage franchise industry as the nation’s antitrust watchdog has repeatedly warned about its plan to scrutinize restaurant and coffee shop chains owned by private equity firms (PEFs) during the first half of this year, according to industry officials, Tuesday.
Franchisees are ramping up efforts to increase their bargaining power by taking advantage of the planned antitrust probes.
Although PEFs have remained cautious about commenting on this issue, franchise headquarters under their control complain that the government has unreasonably demonized them as it regards franchisees as mere victims.
When the Fair Trade Commission (FTC) imposed a 300 million won ($230,000) fine on KL & Partners-owned Mom’s Touch last month for abusing a franchisee who formed a council of franchisees, the decision was interpreted as a prior warning against PEF-owned franchises.
The chicken sandwich chain expressed its frustration, emphasizing its franchisee-friendly policies.
“We are considering lodging an appeal against the FTC’s decision,” Mom’s Touch said in a statement.
The antitrust regulator began to prepare for its investigation into franchises that are under control of PEFs, after lawmakers pointed out their unfair practices during the National Assembly audit last October.
“We will inspect PEFs seeking excessive profits from their franchise business and come up with countermeasures against the problem,” FTC Chairman Han Ki-jeong said at that time.
Last December, FTC Secretary General Yook Sung-kwon unveiled the commission’s plan to conduct ex-officio investigations into PEFowned franchises in 2024 and take stern measures against any violations of laws.
“We are aware of concerns over PEF-owned franchise headquarters shifting various costs onto franchisees to make short-term profits,” he said during a meeting with franchisees.
An ex-officio investigation refers to an investigation activity started by the commission on its own initiative without a complaints procedure. This is the first time for the FTC to specifically zero in on franchises owned by PEFs.
Affinity, MBK, Carlyle become targets
During the National Assembly audit last year, Rep. Yoon Youngdeok of the main opposition Democratic Party of Korea (DPK) mentioned Burger King and bhc as the examples of PEF-owned franchises that exploited franchisees.
BKR, which manages the Korean operation of Burger King, is owned by Affinity Equity Partners.
In response to a franchisee’s testimony that BKR has asked for larger royalties than the hamburger chain’s U.S. franchiser does, BKR CEO Lee Dong-hyung answered at the parliamentary audit that the company had no choice but to raise ingredient costs and commissions due to global inflation.
Bhc, which also runs Outback Steakhouse’s Korean stores, is under the supervision of its holding firm, Global Gourmet Services, whose largest shareholder is MBK Partners.
Jay H. Bu, a partner of the PEF, who serves on bhc’s board, was summoned to the audit last year to answer questions from lawmakers about whether MBK raked in excessive profits from the fried chicken franchise by exploiting its franchisees.
Before the audit, Yoon also criticized the Carlyle Group for shifting costs onto franchisees of A Twosome Place. Following the criticism, the coffee shop chain and its franchisees signed an agreement to prevent unfair practices, so Twosome CEO Moon Young-joo was able to avoid attending the National Assembly audit last year.
“The main strategy of PEFs is divestment after maximizing shortterm profits,” Rep. Choi Jong-yoon of the DPK said. “They are exploiting franchisees to improve their track records.”
Ryu Su-jung, head of the FTC’s franchise investigation team, told reporters last week that the commission has looked into bhc’s request for its franchisees to open their stores for 12 hours a day from 12 p.m. to 12 a.m.
Her remarks came as the company asked its franchisees recently to sign an agreement including clauses urging them to pay the full commission on online voucher campaigns and open their stores from noon to midnight to ensure customers can place orders in a familiar timeframe.
“The agreement is intended to standardize ambiguous clauses in the basic contract,” a bhc official said as several franchisees complained about the recent agreement.
The FTC plans to assess whether bhc’s franchise headquarters damaged the franchisees by abusing its power.
Growing need for legal advice in industry
Amid the intensifying government pressure, legal experts advised PEFowned franchises to brace for the forthcoming regulations, saying that demand for legal advisory services is rising in the franchise industry.
“The FTC is particularly focusing on PEF-owned franchisors’ practices of transferring various costs to franchisees, with a plan to take strict measures against violations uncovered in its ex-officio investigations this year,” said Kim Hong-ki, a lawyer at Bae, Kim & Lee, who previously worked as an FTC official. “We recommend that franchisors conduct internal compliance reviews.”
A Twosome Place recently appointed Wayne Bannon, a general counsel at Carlyle, as its board member. Orchestra Private Equity, which started transforming the headquarters-managed KFC stores into franchised outlets after its acquisition of the fried chicken chain’s Korean operation last year, also tasked Yoon Sang-woo, a lawyer who previously worked at Kim & Chang, with leading the PEF’s Seoul office.