Criminal Trial for Subcontracting Law Violation
Appeal Against Largest Fine Imposed
Profit Controversy at Jamboree Damages Image
Competitors Thrive Amid Convenience Store Business Slump
GS Retail, which operates the convenience store GS25, has been engulfed in simultaneous adverse events including legal risks and brand image deterioration. With the top spot in convenience store industry sales at risk, the company is facing a complex crisis amid both internal and external controversies.
GS Retail, which operates the convenience store GS25, is said to be facing a complex crisis as industry downturns coincide with internal and external troubles. The photo shows a GS25 store in downtown Seoul.
From Lawsuits to Criminal Trials... Emerging Legal Risks
According to related industries on the 8th, the GS Retail case, indicted for violating the Subcontracting Act, was recently assigned to the Criminal Division 5 of the Seoul Central District Court. The Criminal Division 5, which will hear the GS Retail subcontracting law violation case, is a specialized court for economic and intellectual property cases, presided over by Judge Park Byung-gon. The first trial is scheduled for the 7th of next month, and GS Retail is preparing for the trial by reorganizing its legal team after some of the lawyers who handled the defense during the prosecution investigation stage submitted their resignations. A GS Retail official stated, "Since this is an ongoing case, it is difficult to provide detailed explanations."
GS Retail is accused of unfairly gaining 35.56 billion KRW in profits under the name of performance incentives from nine fresh food manufacturers producing lunch boxes and other products from 2016 to April last year. Previously, the Fair Trade Commission reported that GS Retail gained unfair profits totaling about 22.2 billion KRW from November 2016 to April 2021 and filed a complaint, but the prosecution confirmed additional illegal activities through investigation and referred the case to trial last month.
This subcontracting law violation case has also expanded into an administrative lawsuit. In August last year, the Fair Trade Commission imposed a fine of 24.368 billion KRW and corrective orders for extracting performance incentives from subcontractors, but GS Retail filed a lawsuit disputing this disposition. The fine imposed by the Fair Trade Commission is the largest ever related to subcontracting law violations. The case is scheduled for its second hearing on the 24th of this month under the jurisdiction of the Administrative Division 7 of the Seoul High Court (Presiding Judges Kim Dae-woong, Kim Sang-cheol, Bae Sang-won).
GS25, a convenience store operated by GS Retail, has been embroiled in controversy for pricing its products higher than regular stores at the Jamboree. The photo shows a GS25 store at the Jamboree site. [Photo by GS Retail]
Overcharging at Jamboree... Image Damage
Separately from legal risks, GS Retail recently damaged its brand image by being named a company involved in poor management at the '25th World Scout Jamboree' held in Saemangeum, Jeonbuk. GS25, the convenience store operated by GS Retail, was embroiled in controversy for pricing products higher than regular stores at the Jamboree. The core of the controversy is that Coca-Cola (500mL), which costs 2,300 KRW in the market, was sold for 2,500 KRW, and ice priced at 700 KRW was sold for 1,500 KRW, indicating profiteering.
GS Retail explained, "Although some products were sold at about a 10% increased price, since the 6th, all products have been sold at market prices with the hope for the successful hosting of the event." However, criticism that the only convenience store participating in the event contributed to the 'Jamboree site damage' due to overcharging has not subsided.
In response to such criticism, GS Retail restored prices to their original levels and, in consultation with the Jamboree Organizing Committee, provided 450,000 bottles of water free of charge and began various support roles such as establishing free mobile phone charging infrastructure. However, as Typhoon Khanun approached, causing Jamboree scouts and participants to disperse to the metropolitan area, efforts to restore the image became even more difficult.
GS Tower located in Gangnam-gu, Seoul, where GS Retail headquarters is situated. (Photo by GS Tower website)
Q2 Earnings Announcement Amid Various Controversies
GS Retail announced its second-quarter earnings amid external adversities. The industry consensus is that the outlook is not very bright. According to major securities firms' earnings forecasts, operating profit in the core convenience store sector is expected to decrease by about 5% compared to the same period last year. The rising performance of BGF Retail, which operates the rival convenience store CU, is also a burden. BGF Retail announced on the 4th that its second-quarter sales increased by 9.4% year-on-year to 2.0982 trillion KRW. If this momentum continues, there is already speculation in the industry that GS25 may fall behind CU in operating profit again this year, following last year.
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