High rents shutter franchises

Left: A franchise restaurant from celebrity chef Baek Jong-won on the first floor of a building in Gangnam District, southern Seoul, in 2013. Right: The same building has been taken over by other businesses today. [THEBORN KOREA]

Franchise restaurants in Gangnam District, southern Seoul, are struggling as rents surge, and some of the industry’s biggest names are giving up on doing business in the wealthy area.

A section of Yeongdong Traditional Market in Gangnam District’s Nonhyeon-dong was once called “Baek Jong-won Lane.”

The celebrity chef once dominated the area with 19 different restaurants from his TheBorn Korea brand. Earlier this year, both of his remaining stores in the market closed.

“We began moving restaurants one by one since two years ago,” explained a TheBorn Korea spokesman. “We recently closed the last two remaining stores, Seong Seong Sikdang [a spicy braised chicken restaurant] and Paik’s Coffee. Though this neighborhood is like home to us, we had to leave due to steep rent hikes.”

Between 2012 and 2017, the rent for one restaurant on Baek Jong-won Lane increased 39 percent, while two others saw increases of 33 percent and 31 percent each, according to TheBorn Korea.

“There were cases where landlords increased the rent by 10 percent every year on Baek Jong-won Lane,” explained Lee In-gu of Haejun Real Estate.

One of the Lane’s stores paid 280,000 won ($257.60) a month for every 3.3 square meters (35.5 square feet) of space in 2016. This year, the space cost 370,000 won.

Many tenant franchisees in Seoul are drowning in costs due to the rising rent and the 16.4 percent minimum wage increase that went into effect earlier this year.

Hourly wages increased from 6,470 won to 7,530 won in January.

Even the golden arches are giving in to the pressure. On March 16, the McDonald’s restaurants in Daechi-dong and Seoul National University in southern Seoul shut down after 20 years of operation. McDonald’s Korea plans to shut down 10 other branches by the end of April.

“Landlords raising the rent is nothing new, but the increase they’re asking for this year is exceptionally large,” explained a McDonald’s PR manager.

“Rents sometimes more than doubled over five years, making closures inevitable,” lamented CEO Kim Do-kyun of the Korean cafe chain Tom N Toms.

The KFC in Myeong-dong, central Seoul, shut down last Monday, and Western buffet chain VIPS closed its Yeouido, western Seoul, restaurant last Tuesday.

The government is trying to assist business operators by rolling out rent control measures.

“The issue with rent is a problem that the whole government should try to ameliorate,” said Kim Sang-jo, chair of the Fair Trade Commission, earlier this month.

This January, the government revised the Commercial Building Lease Protection Act’s enforcement decree to lower the rent increase ceiling from nine to five percent. Only existing tenants renegotiating with their landlords can take advantage of the rent control move. The government also won’t levy any penalties on landlords who raise the rent over five percent.

“Even if the laws are strengthened, the fact that landlords have the upper hand over tenants doesn’t change,” said Doo Sung-kyu, a researcher from the Construction Economy Research Institute of Korea.

BY HAM JONG-SUN [kim.eunjin1@joongang.co.kr]