Better have long

First of all, it is indeed a great pleasure for me to participate in today’s discussions along with the world’s women leaders. I am currently working as the CEO of Nolboo, a leading restaurant franchise in Korea.

Nolboo was established in 1987, and we have developed our business into a franchise by standardizing and specializing in traditional Korean food throughout our 17-year history. We are currently operating some 380 mid-to-large-sized outlet restaurants focusing on five major business items including Nolboo Bossam and Nolboo Boodaechigae, and employing some 3,500 people.

I would like to share with you, in short, the dos and don’ts of a franchise business based on my experiences in managing a restaurant franchise.

The concept of franchising was first introduced in Korea in the late 1970s. During the last 23 years, the franchise industry has developed into one with about 1,600 companies in about 250 types of businesses operating some 120,000 outlets. The franchise industry employs 560,000 people and makes up 7.6% of Korea’s GDP with a revenue of about 45 trillion won, and has developed into an important industry for the growth of the Korean economy. As can be seen in Table 1, the Korean franchise industry is still in its elementary stages of growth, therefore, is a promising industry for the future with a large potential for growth.

2002

2005

2007

2010

Revenue

(Unit: 10 billion won)

Percentage of GDP

Number of Outlets

4,169

7.6%

120,000

6,063

8.7%

160,000

7,783

9.6%

180,000

11,319

11.0%

210,000

Nolboo, which developed into the largest franchise business in Korea by standardizing Korean food

Korean food is generally served in a soup or includes various types of soup. It is often said to be made from the taste that comes off the cook’s fingertips, referred to as the “hand taste.” Therefore, maintaining the same taste in a large number of restaurants has been thought to be difficult, in turn making the operation of a large number of outlet restaurants difficult. However, in 1987 when there were no franchise restaurants in Korea, Nolboo developed, standardized and documented a manual for bossam, a popular Korean dish, making inroads into the franchise industry. Nolboo Bossam, which started its business in the late 1980s when the franchise market was yet to begin, was operated in the form of receiving fees in return for providing the know-how for the items on the menu. However, the tremendous success of the outlet restaurants led to increased inquiries about opening outlets, thus leading to the full-fledged launch of a franchise business in 1989. Cooking manuals were documented along with the systematic establishment of franchise management and training manuals in the early stages.

At first, a distribution system providing outlet restaurants with key know-how products manufactured at the headquarters was used, but with the increase in the number of outlets, a need for mass production and distribution arose, leading to the construction of a CK(Central Kitchen) factory for the first time in Korea in 1991. With the increase in the number of outlets, the CK factory, which allowed the central production and distribution of key know-how products for maintaining uniform quality, produced and provided standardized products which made up over 70% of the materials used in the outlet restaurants. The factory enabled the delivery of fresh materials to the outlet restaurants within one to two days through the nation-wide distribution system.

With Nolboo Bossam as a start in 1987, Nolboo continued to invest in new businesses, resulting in the creation of a new hit item every three years through the development of Nolboo Boodaechigae, pork belly, sulfur duck restaurants and Nolboo’s House. Nolboo has developed into a company unrivaled in the Korean food franchise industry through the systematic accumulation of know-how and establishment of a management system for a Korean food franchise by concentrating our key capabilities in specific items within the framework of Korean food.

A specialized franchise system extends the life cycle of both the headquarters and the outlets. The life cycle of a Korean franchise business is said to be about 4.5 years on the average. However, Bossam and Boodaechigae, both a part of Nolboo, have been in business for more than 15 years and are still continuing their trend of growth. However high the revenues of an outlet may be, it cannot be said to be a sound franchise if it has a short life cycle. The secret behind Nolboo’s long life cycles is as follows. First, when launching a newly developed item, two to three trial restaurants are operated for about three to six months each. During this period, all factors that may pose risks to future outlet restaurants are eliminated to perfect the systems and establish a successful model before opening outlets. Second, new items to be added to the menus are continuously developed to meet the needs of our customers and systems for existing outlets, including the interior decoration and service, are renewed to maintain their competitive edge.

Standardization and strong leadership of the headquarters to establish brand power

A unique feature in franchising is enabling the customers to enjoy uniform taste, atmosphere and service whichever outlet they may visit. Many franchises allow the independent management of outlets without standardizing the menus or interior decorations. However, Nolboo headquarters shares a common management goal and vision with the outlet restaurants, and operates a strong franchise system led by the headquarters to standardize menus, interior decoration, service and management system among all outlet restaurants regardless of area. A franchise business operates outlets in many areas, therefore, if there is a lack of unity, it may confuse the customers and cause an erosion of the brand power, ultimately resulting in the loss of management capacity of not only the headquarters but also the outlets. In order to create a synergy effect among the outlet restaurants, Nolboo exercises strong leadership. To maintain the unity of all outlet restaurants, such strong leadership of the headquarters is exercised through providing a competitive system by securing the revenue of the outlet restaurants, providing the outlet restaurants with key know-how, strengthening supervision through fostering talented workers and thoroughly protecting the outlet restaurants’ commercial rights.

Maintaining a partnership which puts the highest priority on the profits of the outlets

Over 90% of Nolboo’s revenues come from the distribution margin created by providing the outlet restaurants with key know-how products that are produced in the CK factory. Therefore, most of the revenue of the headquarters is fundamentally affected by the sales revenue of the outlet restaurants. Furthermore, outlet restaurants create revenues by selling products made with the key know-how products provided by the headquarters. The headquarters supports the success of the outlet restaurants with the highest priority, and provide the best products and marketing tools to enable the outlet restaurants to continuously create revenues. The outlet restaurants, in return, create sales revenues through the utilization of the products and systems provided by the headquarters. As can be seen, the headquarters and the outlet restaurants all create profits by maintaining a partnership against the backdrop of mutual trust.

Through the example of Nolboo, a leading Korean food franchise, the dos and don’ts of a franchise business can be summarized as the following.

One, a franchise business should start its operations after establishing a perfected franchise system.

Two, a franchise business should put the highest priority on the profits of the outlets which is the fundamental source of revenues for the headquarters.

Three, a franchise business should concentrate on key capabilities based on the principle of concentrating on the main business.

Four, a franchise business should continue to invest in research and development as a business that sells knowledge.

One, a franchise business should not conduct business by attracting outlets through excessive advertising before obtaining the know-how for business.

Two, a franchise business should not diversify its business excessively in areas outside the main business, for such activities may inflict serious losses to the outlets.

Three, a franchise business should not indiscreetly copy or plagiarize other franchises and should aim for coexistence through abiding by corporate ethics.

In conclusion, despite the difficult economic conditions, Korean franchises have continued to achieve a growth of over 10%, becoming a promising industry for the future. The Korean franchise industry is expected to achieve a total sales of 113 trillion won by 2010, making up 11% of the GDP, operating 21,000 outlets and employing about one million people. The scope of business for the franchise industry has expanded, creating employment and providing business opportunities. Accordingly, the social role and responsibilities of the franchise industry are also increasing.

Therefore, the Korean franchise industry needs to expand its scope of business to overseas markets in the long term. To achieve this, the franchise industry should be fostered by the government as an exporting industry for the future and policies to discover and foster strong brands in Korea should be implemented.