Mei and Mei Foods Co., Ltd.

Case:

Key Words:

false and untrue advertising, franchise, failure to disclose important trading information

Reference:

Fair Trade Commission Decision of August 17, 2011 (the 1032nd Commissioners' Meeting), Disposition Kung Ch'u Tzu No. 100151

Industry:

Restaurants (5610)

Relevant Laws:

Paragraph 3 of Article 21 applies mutatis mutandis Paragraph 1 of the same Article , and Article 24 of Fair Trade Law

Summary:

1. The FTC received complaints from citizens that they attended a franchise presentation held by Mei and Mei Foods Co., Ltd. (hereinafter referred to as Mei and Mei Foods) on March 27, 2010 and were told the profit could be as much as 30% of the total sales. However, as they were not provided with the list of raw material costs before signing the contract with Mei & Mei Foods, they therefore made the wrong assessment. In addition, the business transfer contract they signed indicated that signature of a franchise contract was required before the transfer was made.
2. Findings of the FTC after investigation:
   (1)According to a product analysis dated May 1, 2010 from Mei and Mei Foods, the (gross) profit margin of the Specialty Japanese Burgers was 45% which was inconsistent with the 55% figure that was given during the presentation. In addition, there were over 2,500 franchisees in total, but only the management and sales in three months of one single franchisee were provided as proof. There was no information about the loss and profits of the other franchisees.
   (2)The written information for the franchise recruitment in question did not disclose the "number of franchisees of the chain in each county/city, their locations, and the ratios of contract cancellation and termination in the previous year."
3. Grounds for disposition:
   (1)Using the Specialty Japanese Burgers as an example during the presentation, Mei and Mei Foods claimed the profit (including the franchisee's salary) was 31.6%, which was derived by deducting personnel cost (10%), utilities and miscellaneous expenses (3.4%), and rent (10%) from the 55% gross profit (31.6%=55%-10%-3.4%-10%). However, according to a product analysis dated May 1, 2010 from the company, the (gross) profit margin of the Specialty Japanese Burgers was 45%, inconsistent with the 55% figure that was given in the advertisement. If the personnel cost, utilities and miscellaneous expenses, and rent remained were kept unchanged, after deduction of these expenditures, the net profit would be 21.6% and the 31.6% claimed in the advertisement. Hence, there was no proof to support the claim made by Mei & Mei Food. As for the company's allegation that franchisees could determine their own prices and the gross profit would be different, the investigation showed the breakfast business was a highly competitive market with a large number of suppliers, as well as with the features of high homogeneity and substitutability at the same time. Consumers were extremely sensitive to price difference. When a franchisee raised the prices of its products, it would lose customers quickly to its competitors. Therefore, it was difficult for a single franchisee to ignore market competition from its neighbor competitors and increase the prices of its products. In other words, it was impossible for any franchisee to act as the company alleged and determine its own prices without any consideration about market competition. It would set the prices in accordance with the aforesaid product analysis or the rates recommended in the advertisement and, as a result, its gross or net profit could never reach the level claimed in the advertisement.
   (2)Mei and Mei Foods expressed that all franchisees were financially independent and the mother company had the way of knowing their business condition. Therefore, it provided only the sales records of the franchisee on Xingfu Road in Xinzhuang from February to April 2011 as supporting proof because the shop did achieve the profit as claimed in the advertisement during that period. However, the investigation showed that the company had more than 2,500 franchisees and the recruitment had begun as early as 1988 when the company started. Consequently, it had to have accumulated a considerable amount of statistics on franchisee business incomes and profits over the years. The profit of one single franchisee in three months was far from adequate to represent the sales and profits of over 2,500 shops. Moreover, the figures in the product analysis could not support the profit rate claimed in the advertisement. The sources of the data and the basis of calculation were not clearly indicated by Mei & Mei Foods. The claim had no solid support and the public would find it difficult to accept the difference. The conduct was deemed a false, untrue and misleading representation in violation of Paragraph 3 of Article 21 of the Fair Trade Law (FTL) and Paragraph 1 of the same law could apply mutatis mutandis.
   (3)Mei and Mei Foods failed to disclose the important trading information regarding the "number of franchisees of the chain in each county/city, their locations, and the ratios of contract cancellation and termination in the previous year" within 10 days before establishment of franchise relationship or within a period considered reasonable for each case. According to "Taiwan Chain Store Almanac 2010", there were 27 breakfast business chains with 12,023 shops in total. Mei and Mei foods had 2,509 breakfast places. The entry barrier for the business was low. Competitors on the market were generally concentrated in certain areas, making the regional market of breakfast business a highly competitive market. Therefore, for people considering joining a breakfast business chain, the number of franchisees of the same chain and their locations in the same region would be important factors in their assessment of whether to do so and their choice of franchiser. In addition, the number of franchisees of Mei and Mei Foods decreased by 313 from 2009 (2,822) to 2010 (2,509). The withdrawal rate was 11.09%, indicating rather high percentages of contract cancellation and termination. This information was closely related to the franchiser's management ability and the stability of the franchise label. Without the franchiser's disclosure, its trading counterparts had no way of getting this knowledge. It was important information potential franchisees needed to assess the future business growth under the franchise label, the competitiveness between franchisees in the same chain, and brand stability. When the party with informational advantages exploited the information asymmetry of its trading counterparts and did not disclose the important information it possessed, it could put the trading counterparts in the position of making wrong judgment and signing contracts at risk. This was the obviously unfair conduct stated in Article 24 of the F TL.
   (4)Each franchisee of Mei and Mei Foods was required to pay the company a franchise fee between NT$210,000 and NT$1,080,000. It was not a small investment and the fee could not be used for other purposes. The franchise presentations held in different places in the country had recruited over 2,500 franchisees. Mei and Mei Foods took advantage of its market dominance status and continued to establish contracts with various trading counterparts. Apparently, the company's failure to disclose important franchise information had been a repeated trading pattern. If the said conduct was not stopped, there would be further victims, its competitors would lose their opportunities to sign contracts with new franchisees, and the trading order of the chain store franchise market would be affected. It was in violation of Article 24 of the FTL and the FTC therefore imposed on the company an administrative fine of NT$500,000.

Appendix:
Mei and Mei Foods Co., Ltd.'s Uniform Invoice Number: 22752150

Summarized by: Kuo, An-Chi; Supervised by:Hung, Hsiu-Hsing