How to Check Store Numbers and Reasons for Closure Before Joining a Franchise in Japan

When choosing a franchise brand, the claim that its store network is growing can seem reassuring. Yet if enough new stores open, the total can rise even while many others leave the network. Before deciding to join, you need to look beyond the network’s size and examine what lies behind the figures. This article explains how to investigate changes in store numbers and the reasons stores leave, and use those findings to inform your decision.

1. Understand which store figures must be disclosed by law

Japan has no single, comprehensive franchise-specific law governing all franchise agreements. However, Article 11 of the Small and Medium-sized Retail Business Promotion Act requires franchisors operating a ‘specified chain business’ under the Act to provide prospective franchisees with written disclosures and an explanation before they sign an agreement.

Whether this requirement applies depends on whether the business and agreement meet the statutory criteria, not on how the brand describes itself. Even retail and restaurant chains may fall outside its scope if, for example, the agreement does not require the supply of goods.

The statutory disclosures include information on changes in franchised store numbers over the three most recent financial years. Checking year-end franchised store totals, alongside new openings, contract terminations, renewals and non-renewals, provides a starting point for assessing a brand. This does not, however, mean that every reason for each individual store’s departure must automatically be disclosed.

You can request information covering the same points from franchisors outside the Act’s scope. The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act state that sufficient disclosure to help prospective franchisees make sound decisions is desirable. This should be distinguished from the statutory obligation to provide written disclosures under the Small and Medium-sized Retail Business Promotion Act. The Antimonopoly Act applies to dealings between franchisors and franchisees, while the Civil Code also governs general contractual matters.

2. Break down total store numbers into comparable figures

First, establish what the ‘store count’ in the franchisor’s recruitment materials actually includes. If it combines domestic and overseas outlets, company-owned and franchised stores, or trading and planned locations, you could misread the business you are considering joining. Even within one brand, permanent stores and temporary outlets may be counted together, so check the scope of the figures.

When requesting information from the franchisor, ask for the following on a consistent basis for each financial year:

• The brands, geographical areas and store formats covered
• The number of franchised and company-owned stores trading at year-end
• The number of newly opened franchised stores
• The number of contract terminations, non-renewals and other contract endings
• Changes in classification resulting from conversion to company ownership or franchising, relocation or business transfers

Keep information subject to statutory disclosure separate from additional information you request. Also remember that the number of agreements, franchisees and stores are not the same thing. If one franchisee operates several outlets, the end of a single agreement may affect multiple stores.

If the figures do not reconcile, do not immediately assume wrongdoing. Ask whether definitions or reporting dates differ. If the previous year-end total plus openings minus closures does not match the current year-end total, ask the franchisor to explain adjustments such as conversions to company ownership or relocations.

3. Do not treat every departure as the same event

The end of a franchise agreement does not necessarily mean that a store has stopped trading. A franchisee may retire and hand the business over to another operator, or a store may remain open under the franchisor’s direct ownership. Conversely, a store might be closed for an extended period even though its franchise agreement remains in force.

Ask the franchisor to explain, in categories and as far as it can reasonably disclose, the reasons for contract endings and changes in store status. Useful distinctions include:

• Whether trading ended because of poor profitability or the owner’s retirement
• Whether staffing shortages or premises-related issues caused the closure
• Whether the agreement was not renewed when its term expired
• Whether the franchisor terminated the agreement or the franchisee requested its end
• Whether the business continued through relocation, transfer or conversion to company ownership

Privacy and confidentiality obligations may prevent the franchisor from naming individual stores or providing full details. In that case, discuss alternatives such as anonymised categories, regional breakdowns or the length of time between opening and leaving the network.

A blanket explanation that ‘all departures were due to owners’ personal circumstances’ is not enough to inform a business decision. If staffing shortages were the reason, for example, the issues to examine differ depending on whether the operator could not recruit enough people or could recruit them but could not afford the wage bill. Also ask the franchisor to distinguish facts it has established from its own assessments or assumptions.

4. Look for patterns among stores similar to your planned outlet

Once you understand the chain-wide figures, focus on stores with conditions close to those of your proposed outlet. A store beside a city railway station will face different rents, customers and recruitment conditions from one in a residential area outside a major city. Growth across the network does not necessarily mean you can expect the same results from your chosen format.

Useful points of comparison include region, location, store size, opening date and the franchisee’s management and staffing arrangements. In particular, distinguish stores that leave soon after opening from those that leave after many years of trading. Tracking whether groups of recently opened stores remain in business gives you a comparison more relevant to a new franchisee.

If you calculate your own percentages, state clearly what the numerator and denominator represent. A figure obtained by dividing contract endings by store numbers, or one that ignores a large number of openings part-way through the year, should not simply be labelled a ‘failure rate’. Where a category contains only a few stores, a change involving just one outlet can have a large effect on the percentage.

Official store directories and shopping centre listings can help corroborate trading status. However, disappearance from a list alone does not establish that a store has closed or that its business has failed. If public information differs from the franchisor’s records, ask the franchisor to explain why.

5. Turn the findings into criteria for your decision

Finally, summarise the information on one page under three headings: ‘confirmed facts’, ‘unanswered questions’ and ‘implications for my plan’. Record document titles, the periods covered and the dates on which explanations were given, so that you do not confuse information from different points in time.

For example, if stores in your preferred format have repeatedly closed because of staffing shortages, you should review the staffing levels and labour costs in your opening plan. If departures are particularly common among recently opened stores, request further explanation of start-up costs and operational difficulties. The aim is to use the reasons for departure to identify specific aspects of your own plan that need testing.

If information is not provided, do not assume that this alone indicates illegality or an unsafe investment. Distinguish between information subject to statutory disclosure and additional requests that the franchisor may find difficult to fulfil. However, if important figures remain undefined or conflicting explanations remain unresolved, it is sensible not to rush your decision. Where necessary, have a lawyer or tax accountant review the documents.

Key practical point: Look beyond the total store count. Establish which types of stores are opening, which are leaving and why. Before deciding to join, make sure you can explain what has happened to stores operating under conditions similar to those you expect to face.