Stop Pressuring Franchises to Disclose Cost Structures

It is problematic that the Fair Trade Commission is forcing the franchise industry to disclose information at an excessive level. Government authorities had notified 5,700 franchise headquarters to submit business data, including franchise margin revenues, by April 30. There is concern that if this information is made public, the companies involved and related businesses could suffer significant managerial damage.

The costs and prices involved in raw materials and business distribution processes constitute “trade secrets” held by firms in the industry. As private companies, they have no reason to disclose their costs. Even so, it is not desirable for the government to make such disclosure mandatory. Even public enterprises funded by taxpayers do not disclose such information.

What would happen if the costs or distribution margins of major items were disclosed? First, it would likely damage the industry’s image and provoke conflict among companies. Cost disclosure could unnecessarily cause consumer distrust and dissatisfaction, and even trigger backlash. As a result, the industry as a whole could be harmed. In addition, franchise headquarters and franchisees could become embroiled in disputes over cost issues. If mishandled, this could even lead to widespread financial deterioration across the industry.

Such unnecessary government interference and control could also distort the franchise business model. By spreading negative perceptions of the franchise format, it could produce the unintended side effect of pressuring businesses to switch to directly operated stores. The franchise model is an order and business method created through voluntary contracts between business owners. Each side has its own strengths, and it is also a system that benefits consumers. Viewing such corporate cooperation through a negative lens and inducing conflict among businesses helps no one.

Even now, the government needs to give serious thought to how companies create price and quality competitiveness. Above all, it must move away from the habit of linking costs directly to prices. It should recognize that the management structure of modern firms is not so simple. It is problematic to remain stuck in the equation that “cost equals price.”

Companies build their competitiveness through a variety of business methods. If the government questions how much each stage costs and then demands disclosure, it will only create a situation in which companies cannot be properly managed. What the government should do is not interfere in and control every detail of corporate cooperation and management. Rather, it should create a free business environment and support companies so they can compete vigorously.

Consumers always want products of good quality at low prices. If the government becomes fixated on cost disclosure and tries to regulate the process by which products become more competitive, that will undermine the industry’s competitiveness. Ultimately, it will reduce consumer welfare.

Companies achieve innovation and improve product quality through voluntary cooperation. Rather than interfering with the peculiar yardstick of “transparency,” the government should first work to expand a free business environment so that greater flexibility and diversity in business can flourish.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: 프랜차이즈 원가 공개 압박 그만

Author: Sung-no Choi

Date: 2019-05-09

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=25&idx=20165