[Why&Next] Musinsa Faces Fair Trade Commission Over 'Power Abuse' Against Partner Stores

Competition authorities are investigating allegations of abuse of power by Musinsa, the largest online fashion platform in South Korea. Musinsa, which has established itself as the most powerful shopping channel among the MZ generation with significant consumer power and grown into the undisputed number one online fashion platform in the country, is suspected of abusing its dominant position by coercing tenant brands into exclusive transactions and other unfair practices.

According to related industry sources on the 23rd, the Korea Fair Trade Commission (KFTC) dispatched investigators to Musinsa’s headquarters located in Seongdong-gu, Seoul, and conducted an on-site investigation for four days starting from the 26th of last month. The KFTC believes that Musinsa violated Article 45 (Prohibition of Unfair Trade Practices) of the Monopoly Regulation and Fair Trade Act by exerting undue influence over tenant brands. The commission is currently reviewing whether the collected and submitted materials during the on-site investigation (such as tenant brand contracts and email records of responsible personnel) constitute legal violations.

The KFTC is directly targeting Musinsa’s overall abusive practices against tenant brands. It is reported that Musinsa has continuously engaged in unfair practices such as blocking brands from entering other platforms without written agreements when signing contracts with some brands, or setting conditions on pricing and inventory management to concentrate sales on Musinsa. These business practices are believed to have continued for several years since the rapid expansion period starting in 2019. The KFTC is examining whether these business methods constitute abuse of market dominance under the Fair Trade Act, specifically restrictions on multi-homing (using multiple platforms by one company) or demands for most-favored-nation treatment (requiring more favorable terms than other platforms).

Musinsa, a startup that began as a fashion community in 2003, has become the most powerful distribution channel among the MZ generation. As offline shopping districts represented by Dongdaemun fashion collapsed and domestic fashion distribution channels remained centered on department stores without diversification, Musinsa precisely exploited the gap where there was no suitable shopping channel for the 10s and 20s age group. Since then, it has rapidly expanded its main target and categories, broadening its scope, and has aggressively invested in its private brand (PB) 'Musinsa Standard' to improve overall profitability.

As a result, as of last month, Musinsa had a total of 8,500 tenant brands and surpassed 15 million cumulative members. The total transaction amount doubled from 450 billion KRW in 2018 to 900 billion KRW in 2019, and exceeded 4 trillion KRW last year, showing an ultra-fast average annual growth rate of 58%. When Musinsa attracted a large-scale investment from Sequoia Capital, the world’s largest venture capital firm, in 2019, its valuation was 2.2 trillion KRW, which has recently grown to around 3 to 4 trillion KRW.

Musinsa is reportedly denying all allegations. Regarding the suspicion that it forced some tenant brands into exclusive contracts by leveraging its market influence, Musinsa countered that it is an effort to protect the value of small and medium-sized brands and promote mutual growth. Musinsa claims that providing benefits such as external publicity and promotional participation opportunities in exchange for not trading with other platforms under the name of 'partnership agreements' is intended to protect the value of the brands and foster coexistence, and that such business practices are unilateral industry customs. However, the business practice of restricting tenant brands from expanding to other platforms by treating it as a contract violation, thereby shackling their growth, is difficult to avoid criticism as an abusive practice traditionally seen in subcontracting and distribution sectors.

The key issue in this case is expected to be the market definition. Musinsa (including its affiliate 29CM) is the overwhelming number one player in markets where it directly competes with major brands like Matin Kim, with combined transaction amounts of other platforms around 600 billion KRW, showing a large gap with the second to fourth largest operators. However, if the market is expanded to include platforms that simply mediate sales such as Coupang, Naver, Kakao, and China’s Temu, Musinsa’s market share significantly decreases. According to last year’s Statistics Korea data, the fashion transaction amount within online shopping was 53.9 trillion KRW, with Musinsa’s share at about 7.4%.

Musinsa is expected to respond to the KFTC investigation using this logic. A representative from a major domestic law firm said, "Whether Musinsa’s market is viewed as the online fashion platform market or the entire e-commerce market could determine whether it holds a dominant market position." The KFTC is currently pushing for amendments to the Fair Trade Act to regulate abuse of power in the platform sector, but Musinsa is excluded from regulation as it falls short of the 4 trillion KRW sales threshold.