hankyoreh

“If the minimum wage goes up, of course it’s going to hurt,” said Kim Min-cheol (49, pseudonym) on July 18. For the past eight years, Kim has been running a convenience store in the Gangbuk area of Seoul, north of the Han River.

“The real problem, though, is the structure of exploitation in the convenience store franchise industry, which keeps convenience store owners from making money no matter how hard they try,” Kim added.

Curious about what Kim meant by a “structure of exploitation,” I followed Kim into an office barely big enough for one person, where he printed out the franchise’s statement of accounts for this past May. Sales vary considerably between the cold winter months and the summer months when lots of frozen treats and cold drinks are sold, but May is just about average, Kim explained. “There are so many categories on the statement that even I don’t know how much I make each month,” Kim said.

Looking over the statement of accounts, I could see that Kim wasn’t exaggerating. There were over 70 categories just for income and expenditures. At the very top, the document listed 31 million won (US$27,415) in “total sales.” “Now look closely,” Kim said as he explained the items one by one. Of the 31 million won (US$27,420) in sales, 24 million won (US$21,217) went to cover the “purchase of commodities to sell” – or in layman’s terms, the actual cost of the products. When inventory cost and other costs are added in, the final profit adds up to 6.7 million won (US$5,923). There’s a note here that says “GP 21.53%,” with GP meaning “gross profit,” or margin.

Kim has his doubts about the wholesale price listed for his sales and points out that the pricing scheme is not transparent. “Given the incredible purchasing power of the franchise headquarters, it wouldn’t hurt the franchise owners for them to lower the wholesale price a bit,” he said.

The margin is trimmed further by the franchise fee, called the royalty. This varies from outlet to outlet, but at Kim’s shop, the royalty is 35 percent. When a royalty of about 2.4 million won (US$2,121) is subtracted from 6.7 million won (US$5,923), that leaves 4.32 million won (US$3,817), the money actually paid to Kim. Kim describes this as “double exploitation.”

Considering that the convenience store headquarters already collects a huge distribution margin for supplying the products, it shouldn’t need to take a royalty on top of that, he says. And in fact, small and medium-sized franchises in the fried chicken industry and others only take a margin on distribution, without receiving any extra royalties.

“It’s safe to say there are no franchise headquarters that collect separate royalties at the moment,” said Park Ho-jin, who works for the Korea Franchise Association.

Even so, 4.32 million won a month is more than 3.29 million won (US$2,907), the average monthly income of wage workers in South Korea. The problem is that things don’t end here. On the second page, there are more categories of costs that the franchise owner must pay. The list runs through 19 expenses, including expendables (88,000 won [US$77.76]), store maintenance and repairs (12,000 won [US$10.60]), computer network maintenance and repairs (51,000 won [US445.06]), electricity (340,000 won [US$300.42]), packaging and plastic bag deposit (9,700 won [US$8.57]) and credit card processing fee (260,000 won [US$229.73]). One of the bigger expenses here is “product disposal,” adding up to 700,000 won (US$618.51).

This is the loss incurred when products are thrown away after their expiration date. Kim explains that this cost has gone up because of the recent popularity of boxed meals and “triangle gimbap,” or rice wrapped in seaweed. These products are only good for a single day. Kim would like to minimize the volume he orders, but he’s required to order a surplus because leaving the shelf empty isn’t good for marketing.

On top of the costs that the store owner must cover, there are also “miscellaneous deductions.” Two of the more striking deductions are labeled as “unremitted” (1.32 million won [US$1,166]) and “inventory shrinkage” (400,000 won [US$353.40]). “Unremitted” refers to the amount omitted from the daily cash sales that are supposed to be wired to headquarters. Kim even has to pay an “unremitted penalty” of 7,000 won (US$6.18), which is interest by any other name. “Inventory shrinkage” occurs when the amount sold does not line up with the change in inventory because of shoplifting or other reasons. This also has to be covered by the shop owner.

On the other hand, Kim does receive some financial help from headquarters, including a sales bonus (1 million won [US$883.50]), a subsidy for the electric bill (170,000 won [US$150.20]) and a subsidy for credit card fees (90,000 won [US$79.42]). That amounts to 1.85 million won (US$1,634).

The final entry on the final page of the statement of accounts states the “real amount of franchise settlement” after everything has been tallied up – 2.78 million won (US$2.457). That’s the portion of the 31 million won (US$27,402) in monthly sales that Kim is actually paid. But Kim’s expenses don’t end there: he also has to pay 2.5 million (US$2,210) in wages to his two part-time employees and 1 million won in rent (US$883.94). That leaves him 720,000 won (US$636.50) in the red. While Kim’s convenience store doesn’t represent the norm – his yearly sales of 300 million won (US$265,209) fall short of convenience store’s average sales of about 600 million won (US$510,418)– his situation does show that small-time convenience store owners are in a great deal of pain.

The reason convenience store owners are so sensitive to payroll costs is that they’re the final thing deducted from a margin that’s already been whittled away to nearly nothing. To be sure, the owners pay much more to the franchise’s headquarters, but since payroll costs come directly out of their profits, they tend to look disproportionately large.

“A convenience store isn’t a place where you make money but a place where you have to struggle just to survive. For now, I’ve just got to hold on as long as I can. That’s the only way I’ll have a chance,” Kim said. The chance he’s talking about is a convenience store in the area going out of business.

There are eight convenience stores within a five-minute walk of Kim’s store, and there’s no way to regulate this under the current law. When the explosive growth of convenience stores became a social problem – with two shops sometimes operating in a single building – the Free Trade Commission created a “model business” standard in 2012 that prevented new convenience stores from opening within 250 meters of an existing store.

But that standard was quietly canned in 2014, as public opinion turned toward relaxing regulations that were thought to place excessive restrictions on business activity. Since then, it has been possible for any number of convenience stores to open in the same area, provided that they’re not from the same brand.

After launching his business in 2010, Kim ran two convenience stores for some time. At one point, he was even making 8 million won (US$7,070) in profit each month. But after the regulation banning convenience stores from opening in the same area was rescinded, his profit began to plummet. That’s largely because of institutional changes that have nothing to do with the rising cost of wages.

It’s true that rising wages will tighten the screws. Kim will have to keep paying the same fees to headquarters while his payroll cost goes up. Kim has always done his best to respect the legal minimum wage, and last year he paid an average of 2.2 million won (US$1,944) a month to his employees. This year that increased to 2.5 million won (US$2,209), and next year it’s expected to go up to 2.7 million won (US$2,387)

But even more important than his payroll costs, Kim says, is making institutional reforms and tackling the unfairly asymmetric relationship between headquarters and its franchises. “No matter how much wages go up, it’s just a few thousand won an hour. But the convenience store main offices have raked in hundreds of billions of won since they were allowed to open an unlimited number of convenience stores. That profit has been squeezed out of convenience store owners,” Kim said. Under the current arrangement, increasing the number of franchises means that the main office can pocket more in its distribution margin and royalties, regardless of what that means for individual owners.

In Kim’s view, headquarters needs to lower their royalty fees or abolish them altogether, and the government should make regulations that prevent convenience stores from being opened so close to each other. “Franchise owners should also have the right to engage in collective negotiations with the main office,” Kim added.

Kim likened small-time convenience stores to a “shipwreck”: “There are the lifeboats of the main office and the government nearby, but no one is coming to the rescue.”

When I asked Kim what I ought to do if someone says they want to open a convenience store, he offered the following answer: “If you want to see someone die right next to you, tell them to go ahead.”

By Lee Jung-gook, staff reporter

Please direct comments or questions to [english@hani.co.kr]