Lotte Mart’s distribution fees scrutinized

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Lotte Mart’s distribution fees scrutinized

Korea’s antitrust body is examining the practice of retailers unfairly shifting distribution costs to their suppliers.

The Fair Trade Commission (FTC) has started evaluation proceedings against Lotte Mart for transferring this burden and charging an onward transportation fee after a product has been delivered.

The regulator could fine the retailer 400 billion won ($353.92 million) if it is found to have violated the law. It has the authority to prosecute and punish companies that contravene the Fair Trade Act and other statutes related to anti-competitive practices.

The FTC’s Distribution Division, which monitors the activities of retailers, submitted an evaluation report, equivalent to a prosecutor’s indictment, to the commission early last month. The document outlined Lotte Mart’s infractions over five years.

Lotte Mart has until early February to respond.

This will be the first time the FTC has taken action against a company for shifting distribution costs to suppliers. Lotte Mart’s practice of transferring the costs, commonly known as post-distribution costs, is widespread.

The action comes amid FTC Chairman Kim Sang-jo’s drive to root out unfair practices in the retail industry.

Lotte Mart’s shifting of post-distribution cost to suppliers is likely to have far-reaching implications in the industry as the practice is common.

“When signing a contract, there are requests to supply products at a price three to five percent lower than the actual price to account for the post-distribution costs,” explained Mr. Lee, who operates a company that supplies to retail stores. “It’s not just Lotte. It is common for large retail stores such as Emart, Homeplus, department stores, convenience stores and even e-commerce companies, such as Coupang.”

The 400 billion won fine, if charged, would be an unprecedented amount. If other companies are fined, the total sum could rise to the trillions.

“Unlike sales promotion fees, distribution costs have to be paid,” said Mr. Kim, the president of a large food company. “We struggled as it’s impossible to know the exact figure, but the FTC took on this matter for the first time.”

From the FTC’s perspective, large retail stores use distribution centers for their own benefit, and it is unfair to force suppliers to take on costs incurred after products are delivered to the centers.

“Suppliers that just want to deliver to distribution centers are forced to deliver to branches,” explained a senior FTC official. “If the final delivery destination is a branch store, the supplier should be able to manage their products as they want at the distribution center, but that is not the case.”

“From a common-sense perspective, distribution costs apply only until the delivery location, not costs after the delivery,” the official added.

Other experts disagree with the FTC’s assessment.

“If the retailer and supplier haven’t agreed on the location of the delivery, the supplier burdening the delivery cost abides by civil law,” said Lee Ho-young, a law professor who specializes antitrust law at Hanyang University.

Lotte is going all out on its defense, hiring Kim & Chang’s fair-trade team to represent it.

“In the past, when there weren’t distribution centers, suppliers used to be burdened with the distribution costs,” said a Lotte Mart official. “Post-distribution costs are paid after distribution centers were established.”

The FTC is looking into other cases.

“The retail business cannot work if post-distribution costs are shifted to retailers,” said an executive at a large retail company who is in charge of fair trade matters.

The FTC could make a final decision as early as March.

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