Minglun Jinshi Pork Ribs, the Fairness Committee Trial Platform… Financial practices of franchise stores have become a focus of controversy

The Korea Fair Trade Commission has officially put the franchise financial and transaction practices of the celebrity barbecue brand “Minglun Jinshi Ribs,” operated by Mingluntang, on the docket for adjudication. The core dispute concerns whether the parent company has effectively bundled franchisees’ funds with engineering transactions in actual operation.

On the 10th, the Fair Trade Commission said that Mingluntang has been referred to a subcommittee for review over suspected violations of the “Act on Fairness in Franchise Business Transactions.” The review officials believe that Mingluntang uses loan companies held by major shareholders to provide store-opening funds to franchisees or prospective entrepreneurs at high interest rates, and, in the process, compels franchisees to bear renovation and equipment costs higher than the actual level. In the franchise industry, if the parent company not only controls brand operations but also controls startup financing and the right to subcontract engineering work, franchisees’ bargaining power will be significantly weakened. This investigation by the Fair Trade Commission is examining the case against the backdrop of such structural problems.

The investigation findings show that the fund-flow structure has been particularly criticized. Based on on-site investigations by the Fair Trade Commission and the Financial Commission, after Mingluntang borrowed hundreds of billions of Korean won at low interest rates of 3–6% from policy financial institutions in South Korea, such as the Korea Development Bank, it re-lent about KRW 899 billion to 14 loan companies established by major shareholders. It is reported that these loan companies subsequently provided loans to franchisees such as Minglun Jinshi Ribs at annual interest rates of 12–18%, under the guise of renovation expenses and similar charges. Policy financial institutions originally have a strong mandate to support stable business operations and industrial promotion. If these funds are routed through intermediary channels to franchise stores at higher interest rates, they may draw criticism for “deviating from the original policy intent.”

The impact on franchise stores on the ground also appears far from negligible. Minglun Jinshi Ribs currently operates about 530 franchise stores, and it is said that more than 900 stores (including closed stores) obtained loans through this method. The proportion of franchisees who used loans when starting their businesses is also close to 90%. This indicates that a considerable number of store owners may rely on financial structures associated with the parent company starting from the brand-entry stage. In addition, Mingluntang is also suspected of improperly restricting transaction choices during the process of setting up franchise stores—for example, requiring dealings with specific companies for renovation projects or equipment installation. If the startup-finance loans and construction or equipment transactions effectively amount to a bundle, store owners would find it difficult to compare options or choose other suppliers.

Whether the information disclosure obligations have been fulfilled properly is also within the scope of review. The Fair Trade Commission suspects that although Mingluntang directly provides credit support to franchisees or helps financial institutions with lending, the “Franchise Business Information Disclosure Statement” instead fills in “no relevant matters,” concealing or omitting key information such as the loan transaction terms and amounts, and whether the loans involve special related persons. The information disclosure statement is a basic reference document for prospective entrepreneurs to judge a brand’s profitability, risks, and contract conditions; therefore, if these facts are determined to be true, the conduct may be viewed as more than a mere record-keeping mistake—conduct sufficient to distort entrepreneurial judgment. The review officials proposed recommendations including a corrective order, the imposition of administrative fines, and the filing of a lawsuit against Mingluntang’s legal representative and co-representative director Lee Jong-geun.

However, at the current stage, only the review report containing the review officials’ findings has been submitted to the Fair Trade Commission, and a final determination of illegal conduct has not yet been made. After carrying out an investigation for about 8 months from last September to the previous month, the Fair Trade Commission sent the review report to the Mingluntang side and the Commission on the 8th of this month. After that, the Mingluntang side will go through procedures such as submitting written opinions, viewing and copying evidence, and holding oral deliberations, before arriving at a final conclusion. This development could become an opportunity to re-examine, in the future, the franchise industry’s methods of providing funding and its information disclosure practices. In particular, regarding cases in which the parent company bundles startup financing, engineering subcontracting, and transactions involving special related persons, regulators are expected to further strengthen their oversight.