Lotte Hi-Mart Held a Company Dinner Using Unfairly Obtained Sales Incentives from Suppliers

Fair Trade Commission imposes corrective order and 1 billion KRW in fines

Forcing dispatched employees of suppliers to sell other products,
also mobilizing them for store cleaning, parking management, and inventory checks,
and passing increased logistics costs onto suppliers

[Sejong=Asia Economy Reporter Joo Sang-don] Lotte Hi-Mart, the largest electronics retailer in South Korea, was found to have unfairly collected sales incentives from suppliers that were not included in the basic contract and used them for branch company dinners and sales staff awards.

On the 2nd, the Fair Trade Commission announced that it decided to impose corrective orders and a fine of 1 billion KRW on Lotte Hi-Mart for such violations of the Large-scale Distribution Business Act.

According to the Fair Trade Commission, from January 2015 to June 2018, Hi-Mart received a total of 14,540 dispatched employees from 31 suppliers under the condition that the suppliers bear the full labor costs for products directly purchased by Hi-Mart. According to relevant laws, direct purchase is a transaction type where the retailer directly purchases (transfers ownership of) products from suppliers, and the responsibility for sales and inventory burden lies with the large-scale retailer, Hi-Mart.

Hi-Mart required the dispatched employees from suppliers to sell not only their own company's products but also products from other suppliers without distinction. For example, employees from Cuchen sold products from Samsung Electronics, LG Electronics, SK Magic, Cuckoo Electronics, and others. Hi-Mart even managed sales targets and performance for each dispatched employee. Through this method, dispatched employees from suppliers sold products from other suppliers amounting to approximately 5.5 trillion KRW, about 50.7% of Hi-Mart's total sales of 11 trillion KRW.

In addition, Hi-Mart had dispatched employees from suppliers engage in issuing about 100 affiliated cards under partnership contracts, subscribing to about 99,000 mobile communication services, and about 220,000 funeral service subscriptions. They were also frequently mobilized for store cleaning, parking lot management, inventory checks, promotional material attachment, and personnel assistance tasks.

This violates the Large-scale Distribution Business Act, which stipulates that even when a large-scale retailer exceptionally receives dispatched employees from suppliers, those employees must only be used for sales and management of the supplied products and not for other tasks.

From January 2015 to June 2017, Hi-Mart also unfairly collected approximately 18.3 billion KRW in sales incentives from 80 suppliers despite these not being included in the basic contract. Among these, from 65 suppliers, about 16 billion KRW was collected under the names of 'sales special' or 'awards' and used for branch company dinners and awards for outstanding employees as sales management expenses.

Hi-Mart also passed increased logistics costs onto suppliers. When its then affiliate Lotte Logistics (now Lotte Global Logistics) raised logistics fees from January to March 2015, Hi-Mart unfairly collected about 11 million KRW from 46 suppliers by retroactively applying the increased logistics agency fee for up to six months to compensate its own costs. In February of the following year, it similarly unfairly collected about 2 million KRW from 71 suppliers by retroactively applying the increased logistics agency fee for up to five months.

A Fair Trade Commission official said, "This is a case where the number one home appliance retailer has long unfairly used dispatched employees from suppliers on a large scale and even collected sales management expenses such as branch company dinners without a basic contract," adding, "We plan to thoroughly monitor the implementation of corrective orders to prevent recurrence of the same violations."