Franchise industry faces sea changes

By Nam Hyun-woo

A drastic change is coming to Korea’s food and drink franchise industry, with the first-generation brands faltering on disappointing performances or unexpected owner risks.

According to the Korea Exchange (KRX) Friday, the stocks of MP Group, the parent company of pizza brand Mr. Pizza, were suspended from trading this week.

The measure came after its former Chairman Jung Woo-hyun went on trial on charges of mistreatment of the franchises, malpractice and embezzlement of 9.9 billion won ($8.8 million).

The amount accounts for 31.63 percent of MP Group’s equity capital of 31.22 billion won. The KRX suspends the trading of a stock if the company’s largest shareholder is tried for embezzling more than 1 billion won. Jung is the largest shareholder of the group.

“The KRX has suspended the shares of MP Group. The measure will continue until the KRX decides whether or not to carry out an eligibility test,” a KRX official said.

An eligibility test is a prior step before a review for delisting.

MP Group’s business has been floundering in recent years. Its sales declined from 176.7 billion won in 2012 to 97.1 billion won last year.

Its share price plunged from the 4,000 won to the 1,000 won level after Jung stirred a public uproar with his assault against a building security guard last year. Its price stood at 1,315 won at the moment of the suspension.

Owner risks are not specific to MP Group.

Hosigi Chicken Chairman Choi Ho-sig is also under investigation for allegedly sexually harassing a female employee.

After the disgraceful behavior made headlines, the chicken brands’ sales dropped up to 40 percent, according to Rep. Kim Young-joo of Democratic Party of Korea.

Collapse of old coffee brands

Other franchises are also facing fast changes.

Earlier this week, Cafe Mango Six CEO Kang Hoon was found dead at his home in southern Seoul after an apparent suicide due to his struggling businesses.

KH Company, which runs Mango Six brand, has posted net losses of 1.3 billion won in 2015 and 1.2 billion won last year.

During the period, the number of Mango Six franchises halved to around 100 and he recently filed for protection with a Seoul court.

Kang earned his reputation as “Coffee King” with his success story of coffee franchises starting from the late 1990s. He was the co-founder of the Hollys Coffee chain and nurtured Cafe Bene as one of the leading homegrown coffee franchises.

Entrepreneurs, who joined Kang for coffee franchises also saw their businesses shrinking.

Tom N Toms, another coffee franchise set up by Hollys co-founder Kim Do-kyun, turned to deficit last year netting a 2.7 billion won loss.

Experts say their businesses collapse because their business models became outdated.

With the first-generation franchises’ success, countless coffee franchises sprouted in the past decade, saturating the market. While many new-born brands adopting new strategies -- such as downsizing the size of cafes, differentiating their brands with distinctive characteristics -- the first-generation coffee houses opted to keep their cafes size large and luxurious.

But they could not compete with foreign franchises such as like Starbucks and newly-emerging homegrown brands.

According to Korea Fair Trade Mediation Agency, the number of franchise brands in Korea stood at 5,273 last year, up from 4,844 a year earlier. The number of affiliated stores was 218,997 at the end of 2015. The agency did not disclose last year’s tally.

The average life span of a franchise was four years and eight months, meaning most of brands close within five years from their opening.