The franchise craze seems to be headed for an ignoble end as the identikit outlets shut down left, right and center amid intense competition. According to the Fair Trade Commission, 41,699 franchise stores opened last year but 24,059 or the equivalent of more than half closed down. That boils down to 114 franchise outlets opening and 66 closing every day.
The Chosun Ilbo tabulated the losses from store closures based on FTC data and found that more than W2 trillion is lost every year (US$1=W1,125).
The FTC estimates the total cost of opening a single outlet at W126.9 million. That includes royalty payments to the franchise, training costs, the premium and interior decoration. A coffee shop costs an average of W121 million to open, and a fried-chicken restaurant W61.5 million.
Park Jae-hwan at Chungang University said, “If franchise stores close down shortly after opening due to snowballing losses, 80 to 90 percent of the money that went into opening them has to be written off”.
Restaurant owners say consumers are keeping their wallets shut, and the situation is especially bad in the oversaturated coffee shop business, which has smaller start-up expenses.
According to the Small and Medium Business Administration there were a whopping 88,500 coffee shops in Korea as of March this year, compared to 59,000 fried-chicken restaurants, the favorite start-up among laid-off workers and retirees. The number of coffee shops soars to more than 100,000 if those selling desserts on top of coffee are included. The result is an overcrowded market and razor-thin margins.
Start-ups that rely too heavily on the latest trends are also extremely risky because they lead to a raft of copycats and knockoff brands and products. And once the trend loses its appeal, the entire bubble deflates. Experts say some sort of market regulation is probably needed to avoid an industrywide crisis.
“We are seeing a rapid growth in the number of retirees due to the aging population, but there aren’t enough jobs for these people, so many have no choice but to open franchise stores even though they are fully aware of the risks”, said Sung Tae-yoon at Yonsei University. “To prevent mass closures of small restaurants and other mom-and-pop stores, economic revitalization is of course the ultimate answer, but potential entrepreneurs need to be educated about the risks”.