LG Household & Health Care Bears Only Half of Promised Costs
Imposed Fine of 307 Million KRW, Prohibition Order, and Notification Order
[Sejong=Asia Economy Reporter Joo Sang-don] LG Household & Health Care was sanctioned by the Fair Trade Commission for forcing franchisees to bear more than half of the promotional costs during The Face Shop's cosmetics discount events, contrary to their agreement.
LG Household & Health Care absorbed its subsidiary (100% stake), The Face Shop, which was the party involved in the legal violation, through a merger on November 30, 2020. At the time of the violation in late 2015, The Face Shop had 576 franchise stores and sales of 540.3 billion KRW, making it the second-largest single-brand cosmetics franchise business in South Korea.
According to the Fair Trade Commission, around February 2012, LG Household & Health Care agreed with The Face Shop franchisees on the cost-sharing ratio for upcoming cosmetics discount events. However, from March 2012 to March 2016, during 405 days of discount events, LG Household & Health Care paid only half of the costs it had agreed to bear to the franchisees. Initially, for 50% price discount events, a side agreement was made to share costs at 70% (LG Household & Health Care) to 30% (franchisees), and for discounts under 50% and gift events, a 50%-50% split was agreed. In reality, for 50% discount events, the cost burden was 35% (LG Household & Health Care) to 65% (franchisees), and for others, 25% to 75%.
A Fair Trade Commission official explained, "As a result, The Face Shop franchisees had to bear not only their agreed discount costs but also half of the discount costs that LG Household & Health Care was supposed to cover for each discount event, causing them disadvantage." The official added, "It is estimated that the additional amount borne by The Face Shop franchisees over four years reached approximately 49.5 billion KRW."
Accordingly, the Fair Trade Commission imposed a prohibition order to prevent recurrence of the same legal violation, a notification order requiring all franchisees to be informed that the Fair Trade Commission issued a corrective order, and a fine of 307 million KRW.
A Fair Trade Commission representative stated, "This corrective action is significant in that it strictly penalizes franchisors who conduct various and frequent promotional events based on their own sales strategies and unjustly shift the costs they agreed to bear onto franchisees." The representative added, "Going forward, the Fair Trade Commission will actively investigate unfair trade practices where franchisors abuse their transactional position to impose unjust disadvantages on franchisees and will strictly sanction them according to law and principles."
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