3 Korean retail giants put in hot water; Lotte, Shinsegae, CJ under scrutiny for unfair practices in abusing their dominant market position, a business practice against President Park Geun-hye’s drive for “economic democratization

2013-07-18 17:14

3 retail giants put in hot water

Lotte, Shinsegae, CJ under scrutiny for unfair practices
By Kim Tae-jong
Tensions are high in the retail industry because the nation’s leading retail companies have become the target of intensive probes by multiple government agencies in recent months. Market insiders believe that the government is investigating retail giants because they have often been criticized for abusing their dominant market position, a business practice against President Park Geun-hye’s drive for “economic democratization.”Tensions are high in the retail industry because the nation’s leading retail companies have become the target of intensive probes by multiple government agencies in recent months.The prosecution, tax agency, anti-trust watchdog and even the labor administration are now mobilizing forces to scrutinize retail giants, seeking sanctions against their unfair practices.
The National Tax Service (NTS) Tuesday launched a tax audit against Lotte Shopping, one of the three major retail conglomerates in Korea.
The company downplayed the purpose of the probe, saying it is a regular audit which came in four years after 2009. The tax agency has not yet officially revealed its intention.
But market insiders allege that the NTS will examine whether some of the Lotte business units dodged due tax payments or engaged in irregular practices during deals with subcontractors.
The tax agency dispatched some 150 inspectors into the headquarters of the firm’s four business units ㅡ Lotte Department Store, Lotte Mart, Lotte Super and Lotte Cinema in Seoul. This unusually-large scale of investigation team has obtained a wide range of data and documents including internal financial and accounting statements.
Market insiders say there is a possibility that the government can also expand the scale of the probe to entire Lotte Group, because Lotte Shopping is a de facto holding company of the group and ultimately target the owner family of the group including Chairman Shin Dong-bin.
“We all knew this would come sooner or later,” an industry source said. “We thought the government would target Lotte, especially because it grew significantly in the last few years, receiving favors from the previous government.”
The probe also drew much attention because the government has already looked into two other retail giants ㅡ Shinsegae and CJ ㅡ and their chairmen, brewing the suspicions that the government has a certain political intention in a series of probes against them.
In fact, the move is in line with President Park’s “economic democratization” pledge that is aimed at correcting unfair business practices by family-run conglomerates.
“I think the government first picked up on retail giants because it wants to maximize the impact of such moves, as they tend to be closely related to the life of ordinary people and they have been criticized for abusing their dominant market position over smaller stores,” an analyst said. “This can obviously be a good example for other conglomerates.”
Right before the probe into Lotte, the prosecution investigated CJ Group Chairman Lee Jay-hyun, questioning over the allegations of tax evasion and slush fund creation.
Wrapping up the nearly two-month-long probe, the prosecution Thursday indicted him on charges of dodging some 54.6 billion won in taxes through stashing secret funds, misappropriating 96.3 billion won of corporate money at home and abroad. He was also accused of causing 56.9 billion won in financial losses to the group by fraudulently purchasing two buildings in Tokyo.
In January, the prosecution also probed Shinsegae Group over allegations that the group engaged in unfair inter-affiliate trading. They also questioned the group chairman vice chairman Chung Yong-jin over allegations that he ordered Shinsegae affiliates to charge their sister bakery firm Shinsegae SVN cheaper commissions to help turn it around.
In March, the Seoul Regional Labor Administration raided Shinsegae E-Mart headquarters and several E-Mart stores to search for evidence that the company had spied on its employees in an effort to stop them from joining the union.
The Fair Trade Commission (FTC) has also been closely looking at the business practices of the three retail giants to see whether they are engaged in unfair business practices.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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