By Kim Tong-hyung
The most glittering brands of the luxury industry are being investigated by Korea’s fair trade watchdog over the sway they hold on department stores here.
The Fair Trade Commission (FTC)’s swipe at the likes of Louis Vuitton and Prada comes at a time when it’s starting to function less like an anti-trust commission and more like an unorthodox tool in the government’s anti-inflation efforts.
Although consumer price inflation reached a three-year high at 5.3 percent in August, monetary-policy options are non-existent as higher prices are coupled with subduing economic activity.
Thus, the country’s fight against inflation depends on the government’s ability to bully companies and prevent them from raising the prices of their products and services. And the European makers of precious bags and shoes are the latest firms to be shoved into the FTC’s doghouse.
The FTC has successfully pressured department stores and other retailers to shave their sales commissions imposed on small vendors by up to 7 percentage points, which it says will help make prices cheaper, not to mention making the Lee Myung-bak government’s “shared growth” corporate campaign look good.
Small-to-mid-sized consumer brands conventionally pay 30 to 40 percent of their sales revenue as commission to department stores, depending on the size and location of their shops and exposure in promotional activities.
But, despite usually hogging the best space in the house, the foreign luxury brands pay a much smaller proportion of their sales in commissions as department stores compete to massage their egos and host more of their outlets, FTC officials said.
These high-end fashion houses have ruffled the feathers of government authorities in recent months by raising the prices of their premium products faster than the rate of increase in costs. This didn’t keep the companies from posting lucrative sales as their goods continue to defy the sluggish economy.
Following its investigation, the FTC will publically reveal next month the level of commissions the country’s three leading department store chains — Lotte, Shinsegae and Hyundai — are imposing on foreign luxury brands.
“Sales commission rates the three department store chains receive from their vendors will be unveiled and luxury brands will be included on the list. By announcing this information, we hope to help customers make wiser decisions when they consider buying products from luxury brands,” an FTC official told reporters.
“We have no intention to say this or that about how department stores generate their profit. What we are trying to say is that the department stores should raise the commission they charge foreign luxury brands and major domestic brands,” he continued.
“The level of commission between department stores and vendors should be decided by the principles of competition. But the department stores have been raising commissions for smaller vendors every year, and consistently lowering those for luxury brands while always offering them the most prominent space.
“It seems that many of the luxury brands are paying just a single-digit proportion of their revenue as commission while some department stores in provincial cities aren’t charging them any at all as they compete to host their presence.”
According to data from the Financial Supervisory Commission (FSS), Louis Vuitton, the favorite brand of Korean luxury buyers, paid 41 billion won in department-store commission last year, which accounted for around 9.6 percent of its 427.3 billion won (about $384 million) revenue. Prada spent 19.2 billion won on commission last year, which was equivalent to nearly 11 percent of its 175.6 billion won revenue. Gucci paid out 33.8 billion won, which was 12.4 percent of its 273 billion won revenue.
It’s hard to imagine department stores pressing luxury brands for higher commission payments when they are so desperate to add more of their shops.
The battle between Hotel Shilla and Lotte Duty Free to host the new Louis Vuitton outlet at Incheon International Airport even turned into a legal dispute, although a Seoul court earlier this year dismissed Lotte’s demand for an injunction against its rival’s deal with the French fashion house.