Fair Trade Commission: "Lotte Chilsung Provided Unfair Support to Save Wine Sales Subsidiary... Prosecutor Referral and 1.1 Billion KRW Fine Imposed"

Supplying Wine at Low Prices and Bearing Promotion Staff Dispatch Costs Instead
Fair Trade Commission: "Unfair Provision of Economic Benefits Worth a Total of 3.5 Billion KRW... Without Support, MJA Would Have Been Forced Out of the Market"
Lotte Chilsung: "We Will Review the Sanction Details and Explain Any Controversial Points"

[Asia Economy Reporter Joo Sang-don] The Fair Trade Commission (FTC) has decided to refer Lotte Chilsung Beverage, which unfairly supported its wine sales affiliate, to the prosecution. This decision was made on the grounds that Lotte Chilsung provided an excessive economic benefit totaling 3.5 billion KRW to its affiliate with a clear intent to support by supplying wine at low prices and bearing the costs of dispatching promotion staff.

On the 6th, the FTC announced that it imposed corrective orders and a fine of about 1.1 billion KRW on Lotte Chilsung for unfairly supporting MJA Wine, a department store wine retailer. It also decided to refer Lotte Chilsung to the prosecution. MJA is a wholly owned subsidiary of Lotte Chilsung.

At the time when retail sales of alcoholic beverages were prohibited under the exclusive business regulation, Lotte Chilsung could not sell wine directly through retail channels such as department stores. Therefore, the retail corporation MJA was necessary to sell wine to consumers. Although the exclusive business regulation was abolished in February 2012, allowing Lotte Chilsung to engage directly in wine retail, the FTC judged that MJA continued to operate the wine retail business due to concerns about public opinion against large corporations entering retail.

However, MJA fell into complete capital erosion just one year after starting wine retail in department stores, in July 2009. Its financial condition continued to deteriorate, falling into complete capital erosion again in 2013.

Yook Sung-kwon, Director of the Corporate Group Division at the FTC, said, "Lotte Chilsung executed a series of support actions to improve MJA's profitability and maintain the department store sales channel. Due to these support actions, MJA was able to escape complete capital erosion in September 2009, and its operating profit turned positive in 2016, resolving three consecutive years of operating losses from 2013 to 2015."

According to the FTC, to improve MJA's profitability, Lotte Chilsung set annual cost rate targets for MJA after 2012 and traded with MJA at higher discount rates than other clients to achieve these targets. Through these high discount rates, Lotte Chilsung supplied wine to MJA at prices lower than those offered to other clients.

The FTC judged that as a result of Lotte Chilsung's actions, MJA's cost rate improved from about 77.7% in 2012 to about 66% in 2019, and gross profit (sales revenue minus cost of sales) increased approximately 3.5 times from 1.123 billion KRW in 2012 to 5.097 billion KRW in 2019 due to increased sales.

Additionally, Lotte Chilsung bore the costs of promotion staff required for MJA's wine sales. Director Yook pointed out, "Lotte Chilsung was aware that these support actions likely violated the Fair Trade Act but did not stop them." Lotte Chilsung began bearing promotion staff costs (service fees to service providers) from September 2009 to improve MJA's profitability. Although this was pointed out as 'unfair support to subsidiaries' in Lotte Chilsung's internal audit in July 2012, the company continued to bear these costs until September 2013. After a brief suspension, the support resumed from March 2016 to December 2017 to improve MJA's profitability.

Director Yook explained, "Lotte Chilsung provided excessive economic benefits totaling 3.5 billion KRW to MJA by executing these three support actions over a long period with the clear intent and purpose of improving the financial condition of its financially weak subsidiary MJA. Without Lotte Chilsung's support, MJA would likely have been unable to escape capital erosion in 2009 and naturally exited the market."

Accordingly, the FTC imposed corrective orders including future prohibition orders on support actions and suspension orders on personnel provision, and levied fines totaling 1.185 billion KRW (770 million KRW on Lotte Chilsung and 478 million KRW on MJA). Lotte Chilsung, the party responsible for unfair support, will be referred to the prosecution.

In response, Lotte Chilsung stated, "We have sincerely cooperated with the FTC investigation and will review the final opinion letter. If there are any controversial points, we will provide explanations. We will also review and respond to the prosecution referral after receiving the notification."

This content was produced with the assistance of AI translation services.