Wall Street Journal
November 27, 1998

 
 

Following Wendy's Exit,
Koreans Munch on Winner's

By MICHAEL SCHUMAN and RICHARD GIBSON
Staff Reporters of THE WALL STREET JOURNAL

SEOUL, South Korea -- A popular Wendy's hamburger outlet once stood here, just steps away from the ancient palace of the last Korean dynasty. But this year, the Wendy's sign with the well-known logo of a pigtailed girl was taken down and replaced with another name: Winner's.

Inside the joint, not much else has changed. The menu's featured item is still a square burger on a soft, round roll -- once called a Wendy's, now renamed a Winner's. The American colonial-style tables and chairs remain. The Winner's sign even mimics the red and yellow colors of Wendy's.

After 14 years, the once-thriving business of Wendy's International Inc. is history in this country. The former franchisee, Kim Young Il, is running the fast-food restaurants under the Winner's name instead.

Wendy's aborted foray into the Korean market is a tale of a how a global marketing relationship can go awry in a volatile economic era. The final nail in the coffin was the debt crisis that struck this former Asian tiger economy last year. As the 63-year-old Mr. Kim saw it, divorcing the Dublin, Ohio, firm was the only way for his restaurant chain, which now has 15 stores, to survive. Wendy's, frustrated at the difficulties in lining up deep-pocket support for its South Korean franchisee, reluctantly decided on a strategic retreat.

Mr. Kim had been an enthusiastic recruit to the burger business. A former oil-company executive, he got the idea while studying and teaching in the U.S. in the 1960s. His kids got hooked on burgers, but upon returning to South Korea in 1974, they could only find them at expensive hotel restaurants. So he used his retirement funds and some inherited money to win the exclusive right to open Wendy's restaurants in South Korea.

"I saw fast food as a future business in Korea," says Mr. Kim, who opened the first Korean Wendy's in 1984.

Bad Relations

But relations began to sour long before the current economic crisis. As early as 1993, Wendy's grew concerned that Mr. Kim lacked the resources to compete with rival restaurants run by McDonald's Corp. and Burger King, a unit of Diageo PLC. "He was undercapitalized and needed financial assistance," says Denny Lynch, a Wendy's spokesman.

Mr. Kim wanted Wendy's to invest more of its own money in his operations or expand through subfranchising. But Wendy's decided Mr. Kim needed one of the country's mammoth business groups to provide fresh funds for expansion, and in 1994, Mr. Kim and Wendy's began to search for a new partner.

During the same period, Wendy's also tried to make some changes to Mr. Kim's operations. Mr. Kim says Wendy's demanded more than one supplier be allowed to sell food to his restaurants. Until then, the restaurants purchased some of the key ingredients, such as the beef patties, from a distributor controlled by Mr. Kim. Wendy's hoped the competition between distributors would cut food prices for the shops. Of course, a competitor would cut into his distributorship's profits.

The two sides had other squabbles. They disagreed over whether Mr. Kim's agreement allowed him to subfranchise in South Korea, and whether he was improperly engaged in that activity or not. They also quarreled over the royalty Mr. Kim paid and what Wendy's was obligated to provide in return.

The biggest problem area remained getting increased financial backing. McDonald's, which currently has 130 restaurants in South Korea, directly owns 70% of its two franchisees there. The country's 49 Burger King outlets recently were purchased by Doosan Corp., an affiliate of a large food and beverage conglomerate. But efforts to find a well-heeled backer for Mr. Kim repeatedly failed. Wendy's finally told Mr. Kim that his contract would be terminated if a new partner wasn't found by the end of 1997.

Then the financial crisis hit, and most Korean companies stopped taking on new ventures. To make matters worse, banks stopped providing Mr. Kim and many other businessmen with credit to import food. Mr. Kim says he imported much of his restaurants' fare -- including the hamburger meat and French fries -- from U.S. suppliers in order to meet quality standards under his contract with Wendy's.

Rising Costs

Lacking trade finance, Mr. Kim had to put up tens of thousands of dollars at a time to pay for the food. With the value of the local currency plummeting daily, the cost of importing rose to dangerous levels. Mr. Kim says he tried to get Wendy's to accept locally produced food to replace imports, but says he was turned down. Wendy's says its only concern was to have provisions that met specifications, and that the contract didn't require imported food.

The atmosphere for foreign enterprises, meanwhile, became ugly during South Korea's debt crisis. Foreign restaurants came under attack as symbols of excess. In local television shows early this year, journalists tried to determine how much hard currency left the country every time a Korean ate a McDonald's Big Mac. Bennigan's posted signs in every restaurant in March stating that the Korean operation was no longer paying royalties to the foreign company. (A spokeswoman for Metromedia Restaurant Group, which owns Bennigan's, notes that Korean franchises have resumed paying royalties.)

Mr. Kim also stopped paying royalties to Wendy's as the South Korean currency weakened, though he says he later paid back all he owed. Wendy's extended his contract until this past June, but by that point, relations reached a breaking point.

"I had to be independent," Mr. Kim says. He bought a local fast-food chain called Winner's, and gave its name to each of his Wendy's outlets. Wendy's decided to withdraw from South Korea altogether, and the company recently told analysts it is reassessing its operations in a number of foreign countries.

These days, Mr. Kim doesn't appear to miss his U.S. bosses very much. Every morning, he inspects one or two restaurants, checking to see if the kitchen is clean and the freezer stocked. He now sources all of his food locally, and insists his burgers and other items are "99%" up to Wendy's standards. Business, he says, is down about 25%, but he blames the contracting economy, not the loss of the Wendy's name.

Wendy's departure has also appealed to the nationalistic pride of many of Mr. Kim's patrons. "I think [the change] is good, because we don't have to pay royalties to a foreign company," says C.H. Ahn, a 28-year-old office worker, while munching a cheeseburger at the Winner's outlet near the dynastic palace. "Koreans have a fixed thinking that hamburgers have to be made by a foreigner. But we can make hamburgers just like the foreigners."

Mr. Kim looks fondly back at his relationship with Wendy's. "I really like Wendy's," he says. "If they decide to come back to Korea, we can join."