[비즈한국] Companies sometimes make decisions that are difficult to explain solely in terms of money. Understanding the underlying laws or regulations allows for a deeper insight into the inner workings. 'Useful Business Tips (Al-Ssul-Bi-Beop)' introduces clues that help in understanding business trends.
A franchise business refers to a continuous trading relationship where the franchisor allows a franchisee (store owner) to sell goods or services under certain quality standards or operational methods using their trademarks, provides support, training, and control over management and business activities, and the franchisee pays franchise fees in exchange for using the business marks and receiving such support and training.
As previously mentioned, the essence of the franchise business involves the franchisor controlling the franchisee's business activities according to specific operational standards. Business activities include advertising and promotional events. In the past, there were instances where franchisors conducted advertising and promotional events without the franchisee's consent and forced them to bear all or part of the costs.
Looking at the actual operations of franchise businesses, the points of conflict between franchisors and franchisees are consistently found. A prime area is advertising and promotional events. Franchisors tend to guard against the stagnation and obsolescence of their brand, aiming to enhance brand awareness and attract new franchisees through active advertising and promotions.
On the other hand, franchisees often prefer more conservative operations, considering the burden directly linked to the profitability and livelihood of individual stores. They are particularly likely to oppose if they perceive that the effects of advertising and promotions do not translate into increased sales or if they deem the short-term cost burden excessive. Because this is an area where the interests of both sides structurally conflict, disputes have long and repeatedly occurred in the industry regarding whether to conduct such events, their specific details, and cost-sharing conditions.
Another issue that is hard to overlook in the franchise business is when the franchisor loses the motivation for brand management. In the actual market, it is not difficult to find cases where brand competitiveness declines due to weakened support and management from the franchisor.
In this respect, one must be cautious about adopting a method of uniformly and strictly regulating advertising and promotional events. This is because excessive regulation can discourage the franchisor's active brand management, and consequently, it is difficult to rule out the possibility that the burden will be shifted back to the franchisees. In general, franchisors who show an active attitude toward advertising and promotion often do so to maintain and expand brand value. This tends to contribute to sales growth in the mid-to-long term. Also, considering that the franchisor directly bears a portion of the costs, it is difficult to conclude that such activities are entirely ineffective.
In the past, the courts have also judged the fairness of advertising and promotional events from this perspective. The Seoul High Court ruling 2017Nu42646 stated that if a discount event was successful in light of market conditions, it could not be considered unfair for the franchisor to have the franchisee share a portion of the discount costs. The details are as follows:
○ It cannot be concluded that the plaintiff conducted the discount event with the intent and purpose of unfairly shifting discount costs to its franchisees to increase its own profits while causing disadvantage to the franchisees.
○ Rather, it appears the plaintiff conducted the discount event as a management strategy to increase total sales and profits for both itself and the franchisees through discount sales in a cosmetics market with fierce price competition. As a result of the plaintiff's sales strategy through discount events, both the plaintiff's total sales and the franchisees' total sales and business profits generally increased from 2012 to 2014.
However, from the perspective of the franchisee, such a judgment may not be satisfactory. Whether a sales strategy is a success or failure is determined years later, but the costs of advertising and promotional events executed every quarter are immediately burdensome. Furthermore, from the perspective of regulatory agencies, such judgment criteria can lead to under-enforcement by substituting the question of whether a law was violated with ex-post results rather than objective standards.
Against this background, the amended Franchise Business Act requires that when conducting advertising or promotional events where the franchisee bears all or part of the cost, consent must be obtained from a certain percentage of franchisees. The enforcement decree of this act sets the ratio at 50% or more of all franchisees for advertisements, and 70% or more for promotional events, and stipulates that consent must be obtained through methods where the timing of consent can be objectively verified, such as △documents △certified mail △e-mail △internet homepage △application △POS, etc.
This shifts the criteria for the legitimacy of advertising and promotional events from ex-post success to pre-approval. Interpreted literally, even if a sales strategy is highly successful, it could be deemed a violation of the law if there is a lack of objective documentation of consent.
Key requirements of the Fair Trade Act, such as unfairness and unreasonableness, are typical indeterminate legal concepts, and their judgment involves various criteria and methods. Theoretically, it can be evaluated from a substantive perspective, focusing on whether a specific act ultimately benefited everyone, or from a procedural perspective, focusing on whether prior consent from stakeholders was legally secured.
The criteria for judging the legitimacy of advertising and promotional events under the Franchise Business Act can be seen as having shifted significantly from substantive criteria to procedural criteria among these two axes. In other words, the core of the judgment is no longer whether there were results after the fact, but whether the collective will of the franchisees was formed and confirmed in a legal manner beforehand.
It is true that such criteria place certain constraints on the franchisor's decision-making. However, it is difficult to conclude that this directly translates into operational difficulties for the franchise business. Rather, it is highly likely that the capability to accurately understand the purpose and structure of the regulation and internalize it into operations will act as a factor that determines competitiveness among franchisors.
Ultimately, high-end brands will likely turn these regulations from a risk into a means of competitive advantage by transparently presenting the necessity and expected effects of advertising and promotions and building a structure that elicits the voluntary consent of franchisees through legal procedures. Conversely, failure to respond to these changes will inevitably lead to a widening gap between them and brands that possess the necessary responsive capabilities.