[The Crisis of e-Commerce] ① 100 Days Since the Timeff Incident... Regulatory Tsunami Hits the Distribution Industry

Political Sphere Flooded with Electronic Commerce Act Amendments
E-commerce Platform Settlement Cycle Shortened from 60 to 3-20 Days
Offline Stores Over 100 Billion Won Also Included
Continuous Restructuring of E-commerce Platforms

#July 8, 2024. Sellers on Wemakeprice, an e-commerce platform under the Qoo10 group, were anxiously pacing as their sales proceeds were not deposited. The company did not send any notice, and the seller call center was unreachable. As anxiety among sellers spread and rumors of bankruptcy circulated, Wemakeprice finally issued an official statement citing a "settlement delay due to a settlement system error." Less than ten days later, Qoo10’s affiliate TMON also officially announced a settlement delay. Both the sellers who were not paid and consumers who purchased products but did not receive them fell into panic.

On the 15th, the TMON-Wemakeprice (TMEP) incident marked its 100th day. The number of creditors affected by the large-scale settlement delay reached approximately 48,000, with claims exceeding 1.2 trillion KRW. This amount approaches the damage caused by the Lime Asset Management fund redemption suspension, considered the largest financial fraud since the founding of Korea, which amounted to 1.6 trillion KRW. This unprecedented event in the history of domestic e-commerce is shaking the online market ecosystem. Amid fierce competition from Chinese e-commerce (C-commerce) platforms collectively known as 'Ali-Temu-Shein' since the beginning of the year, the domestic e-commerce market, standing at a crossroads for survival, has begun a full-scale 'sorting out.' The political sphere has initiated legislation to introduce various regulations to prevent a recurrence of the TMEP incident, including plans to extend these regulations to large offline stores.

"Preventing TMEP Recurrence"…Settlement Cycle Shortened from 3 to 20 Days

According to the National Assembly Legislative Information System, since July, 16 amendment bills to the 'Act on Consumer Protection in Electronic Commerce, etc. (E-Commerce Act)' have been proposed to prevent a recurrence of the TMEP incident by accelerating the settlement cycle of sales proceeds on e-commerce platforms.

Most of these amendments include provisions to shorten the long settlement cycles that exacerbated the damage in the TMEP incident. In particular, legislation is also being pursued to shorten the settlement cycle for offline retailers subject to the Large-Scale Distribution Business Act, which currently has a 60-day settlement cycle.

For example, Rep. Im Mi-ae of the Democratic Party has introduced a representative amendment to the E-Commerce Act requiring e-commerce companies (telecommunication sales intermediaries) to pay sellers within 7 days from the date the consumer confirms the purchase. Alongside this, Rep. Im also submitted an amendment to the Large-Scale Distribution Business Act last month, mandating that stores with annual sales exceeding 100 billion KRW (large-scale distributors) pay suppliers within 10 days from the monthly sales closing date.

The amendment also includes provisions to shorten the settlement cycle to within 7 days for direct purchase sales, such as those by large supermarkets, and to 5 days for fresh agricultural, fishery, and livestock products.

Rep. Lee Kang-il of the Democratic Party also introduced an amendment to the E-Commerce Act last month, requiring e-commerce sales proceeds to be settled within 3 business days from the date of purchase confirmation or the completion of returns and exchanges, marking the end of the consumer order.

Additionally, the proposed amendments submitted to the National Assembly include provisions setting the minimum settlement cycle for e-commerce platforms between 3 and 20 days.

TMEP Incident Chills... E-Commerce Market Growth 'Stalled'

The impact of the TMEP incident on the e-commerce market is reflected in official statistics. According to the 'August 2024 Online Shopping Trends' released by Statistics Korea earlier this month, the total online shopping transaction amount in August was 19.558 trillion KRW, an increase of only 1.9% (365.9 billion KRW) compared to the same month last year. This is the lowest growth rate since statistics began in January 2017. Following the record low growth rate of 5.4% in July when the TMEP incident broke out, August saw a further decline. Transactions in products such as telecommunications devices and e-coupon services notably decreased, with e-coupon service transactions plunging 48.6% to 426.2 billion KRW.

However, as Wemakeprice and TMON, which are undergoing corporate rehabilitation procedures, suspended sales, the number of users on major e-commerce platforms has increased since August. Coupang’s users rose from approximately 30.99 million in June to 31.25 million last month, and Gmarket saw an increase of about 360,000 users during the same period. Auction, affiliated with Shinsegae, and Lotte On, affiliated with Lotte Shopping, also showed growth. However, 11st and SSG.com experienced slight decreases in user numbers.

The same trend applies to C-commerce. AliExpress had 6.25 million users in June, trailing Temu’s 6.6 million, but increased to 6.65 million last month. During this period, Temu’s user count sharply dropped by 1 million. Shein also shrank from 630,000 to 520,000 users.

Given that trust is fundamental to e-commerce due to its non-face-to-face nature, the TMEP incident is interpreted as consumers distrusting small and medium-sized e-commerce platforms with weak financial power.

E-Commerce Faces 'Harsh Layoffs'

Except for Coupang, which turned a profit last year, most domestic e-commerce companies continue to operate at a loss. This is due to fierce market competition, where companies have been aggressively issuing coupons and promotions to grow their size, resulting in cutthroat competition. However, since last year, the atmosphere has changed as C-commerce’s full-scale assault, led by 'ultra-low price cost-effective' products, intensified. Consumers, exhausted by prolonged high inflation, flocked to C-commerce. Some settled for the convenience of Rocket Delivery and stopped price comparisons altogether.

As a result, small e-commerce companies that grew rapidly during the COVID-19 pandemic now face management difficulties due to sluggish sales and accumulated losses. Companies that raised external operating funds aiming for IPOs are also under pressure to recover investments.

Therefore, the e-commerce industry has seen a series of restructuring measures this year, including layoffs and cost reductions. Gmarket, acquired by E-Mart, began accepting voluntary retirements this month targeting regular employees with more than 2 years of service (those hired before October 31, 2022). Similarly, SSG.com, another Shinsegae Group e-commerce platform, conducted voluntary retirements in July for headquarters employees with over 2 years of service. This was the first such move since the corporation’s establishment in March 2019. Earlier, Shinsegae Group replaced the CEOs of both Gmarket and SSG.com and reorganized their organizations.

11st also conducted two rounds of voluntary retirements last November and earlier this year and relocated its headquarters from Seoul Square near Seoul Station to U Planet Tower in Gwangmyeong, Gyeonggi Province. As an SK affiliate, 11st is undergoing forced sale procedures led by financial investors due to accumulated losses and failed IPO attempts, making cost reduction and profitability improvement critical.

Earlier, Lotte On, the e-commerce division of Lotte Shopping, accepted voluntary retirements targeting employees with over 3 years of service along with recommended resignations. Its headquarters also moved from Lotte World Tower in Jamsil, Seoul, to WeWork in Gangnam.

However, despite these intense restructuring efforts, the e-commerce market is expected to be reorganized around large companies. The TMEP incident dealt a direct blow to small and medium-sized e-commerce platforms with the weakest financial structures. Online shopping malls such as 'Allets,' which sells home appliances, '1300K,' a design stationery and household goods mall, and the group-buying platform 'Saja Market' have already announced service terminations.