[News Space=Reporter seungwon lee] Hanwha Group Vice President Kim Dong-sun is once again at the center of controversy over his management ability as he pushes to sell the Korean business rights to the American premium burger brand Five Guys.

The business rights were put up for sale despite opening its first store in Gangnam in June 2023 and expanding to 7 stores nationwide (5 in Seoul, 2 in Gyeonggi) in just 2 years, and turning a profit last year with sales of 46.5 billion won and operating profit of 3.4 billion won.

The sale target is 100% of FG Korea Inc.'s shares, and it is being discussed that a teaser letter was distributed to PEF through Samil Accounting Corporation, but the specific corporate value and acquisition structure have not yet been determined. Despite the search for a buyer centered around private equity funds in the market, it is expected to be difficult to complete due to the long-term recession in the domestic F&B (food and beverage) industry and the backlog of aging franchises.

Background of sale: Despite turning a profit, ‘profits are falling behind’… US headquarters commission trap

IB industry and distribution/franchise experts point to the enormous ‘royalty burden’ as the reason for Five Guys pulling out the sale card despite its successful turnaround. In fact, there is criticism that the burden of royalties and other fees paid to the US headquarters in FG Korea’s business structure is excessive compared to its performance. Even when profits are generated, the headquarters actually collects most of them, leading to the evaluation that “they pile up performance in the front and the money is left behind.”

Multiple food and beverage industry insiders explained, "It is known in the industry that FG Korea, the Korean operating entity of Five Guys, has signed a contract to pay 40% of sales to the U.S. headquarters as a commission (royalties, etc.)." They added, "As a result, even if actual operating profits are generated, it will be difficult for them to lead to net profits, and it appears that the commission structure was the main reason for pushing for the sale."

The mainstream analysis is that, despite showing improved performance, the company turned to selling to recover its investment as there was no actual business profit left.

Kim Dong-sun, successive failures in new businesses and sluggish performance in main business, ‘minus march’… “All-in on new businesses weakens main business” criticism

In the distribution and food and beverage industry, there is harsh criticism that Vice President Kim Dong-sun’s management history is “a hand of minus.” In fact, in addition to Five Guys, new businesses led by Vice President Kim, such as Hanwha Food Tech, have recorded consecutive deficits. Hanwha Food Tech has also recorded a deficit of 11 billion won since its launch, reaching a state of complete capital erosion. The main business, Hanwha Galleria, is also facing responsibility issues as its performance has plummeted.

Hanwha Galleria recorded an operating profit of KRW 600 million (down 82.9% year-on-year) in the first half of 2024 and an operating loss of KRW 5.3 billion in the second quarter. Last year, it recorded an operating profit of KRW 3.1 billion (down 68% year-on-year) and a net loss of KRW 18.8 billion on a consolidated basis.

F&B Franchise Sales 'Narrow Door', Will Future Growth Spark Be Extinguished?

Given the current state of the F&B business in Korea, the sale is not expected to be easy. This is because the F&B franchise industry as a whole is facing unfavorable conditions such as a long-term recession, a lack of SI (strategic investors), and accelerated changes in consumer trends.

In the market, not only expensive premium burgers like Five Guys but also major mass-market burger brands like McDonald's, Burger King, Mom's Touch, and KFC are up for sale, but they are having a hard time finding owners. The prevailing opinion is that "currently, domestic F&B M&A is a wall in itself in terms of recovering the investment."

In particular, the terms of the contract with the U.S. headquarters regarding brand operation rights and store expansion (number of stores, target sales, etc.) are strict, and the high risk from the perspective of actual investors is also an obstacle to sale.

“Every new business has a deficit, and management responsibility is questionable”… Kim Dong-sun’s ‘management skills’ are on the chopping block

Both management evaluation indicators and public opinion on the ground are overwhelmingly negative about Vice President Kim Dong-sun's business promotion methods and performance. Although he aggressively expanded new businesses, the substance of his main business is deteriorating, and rather than securing profitability through timely restructuring, he is obsessed with 'expansion by following the trend', resulting in criticism that he failed to 'separate the wheat from the chaff'.

Even in the distribution industry and within Hanwha Group, the prevailing assessments are, “They lost sight of their main business and only chased after new businesses, which led to poor overall performance,” “They lack the ability to reflect trends… They built a business model that is out of touch with market trends,” “The timing of the exit and restructuring were both inadequate… Questions are being raised about responsible management,” “They knew they would pay expensive royalties and fees, so they must have had a plan,” and “They seem to have conducted a big, expensive experiment with their dad’s money.”

Five Guys Sale Adds to 'Minus Hand' Stigma

An insider in the distribution and food and beverage industry analyzed, "As a result, Vice President Kim Dong-sun of Hanwha is pushing for the sale of Five Guys just two years after its domestic launch, making it difficult for the company to shake off the industry's stigma of being a 'minus hand' that failed to produce results in any of its existing new businesses." He added, "With each of its new business lineups posting deficits, and with the structural difficulties of the Korean franchise market compounding the situation, it is not easy to recover investments, putting the company in a difficult situation."

The industry's view is even more critical, as it raises fundamental doubts about not only whether this sale will be successful, but also the future vision of Hanwha Distribution and Food & Beverage affiliates.