CU's Mongolian business in danger with franchisee's financial woes

CU's 1st Anniversary Event in Mongolia [BGF RETAIL]

An operator of the CU convenience store franchise is financially struggling with operations in Mongolia after its local business unit there lapsed into complete capital erosion last year.

BGF Retail entered the Mongolian market in 2018 by signing a master franchise agreement with local company Central Express, which is now Premium Nexus JSC.

A master franchise agreement allows the owner of the franchise brand to grant another party the rights to use the brand, open stores and operate the business within a designated territory.

Currently, BGF Retail operates around 390 CU stores across Mongolia to claim a market share of around 70 percent.

However, Premium Nexus JSC has suffered severe financial deterioration, falling into complete capital erosion as its debt tripled to 83.8 billion won ($61.5 million) last year from 28.5 billion won in 2021, exceeding its assets of 81.1 billion won, per a local media report in March.

During the same period, its revenue increased significantly from 37.6 billion won to 156.1 billion won, but the cost of sales — cost involved in directly producing goods — also rose from 40.3 billion won to 157.2 billion won, leading to a net loss that grew to 13 billion won from 7.2 billion won.

BGF Retail had invested 5 billion won in Premium Nexus JSC as of September 2020, and now has approximately 3 billion won remaining.

The Korean firm has secured protective measures including call options, which allows it to purchase its local partner’s stakes at a premium price, and put options that provide BGF the chance to sell its shares of Premium Nexus' stocks at an agreed-upon price.

However, industry experts have expressed concern, saying the financial difficulties of the master franchisee can have a direct and significant impact on the franchisor’s operations as it would be hard to raise capital in the current situation.

"Premium Nexus JSC continued to make investment last year, causing the company fall into a state of capital erosion, but its parent company is supporting it financially, making Premium Nexus JSC’s operations stable,” said BGF Retail’s spokesman.

BY CHOI HAE-JIN [choi.haejin@joongang.co.kr]