Costco Korea defies gov't order, faces punitive fine

Costco Korea website

By Nam Hyun-woo

Costco Wholesale Korea is under fire for snubbing the government's recommendation that it suspend the opening of its new outlet in Hanam, Gyeonggi Province, ignoring a 50 million won ($42,800) fine scheduled to be imposed on the membership wholesaler, according to government and industry officials, Wednesday.

According to the Ministry of Small- and Midsized- Enterprises (SMEs) and Startups, it will issue an order against Costco Hanam to suspend its operation and will impose the fine if the outlet does not follow the order.

This came after the company ignored the government's April 25 recommendation that Costco postpone the opening of its Hanam outlet by opening the store on Tuesday.

On April 25, the government advised Costco Korea to halt the opening of the store until the company can reach an agreement with nearby small shop owners who are opposing the store ― or until the government can arbitrate in the event the two parties fail to find an amicable solution.

According to the ministry, six small shop owners' federations near the Hanam outlet filed for an arbitration between them and Costco Korea to the Korea Federation of SMEs (K-Biz) and demanded the company halt the opening, saying their businesses would be jeopardized.

The Act on Cooperation between Large Enterprises and SMEs allows small shop owners to request a negotiation with large enterprises opening a supermarket or a massive discount store in a region, in a bid to prevent small shop owners from sustaining excessive damage.

After K-Biz's review on the issue, the ministry advised Costco Korea to postpone the opening and continue arbitration. However, the membership wholesaler did not follow the recommendation, apparently because there are no effective penalties or regulations available from the state after imposing a fine that is a relatively small amount compared to the company's revenue in Korea.

If the arbitration between the small shop owners and Costco Korea fails, the government can issue additional recommendations, such as postponing the store's opening for up to three years, restricting some products' sales or downsizing the store. If the company ignores the government's suggestion again, it will become a binding order and its violation can be punished with up to two years in prison for company officials.

However, industry officials expect this will not likely happen given the firm's previous case in Songdo, Incheon.

A Costco store in Incheon / Courtesy of Incheon Free Economic Zone

In 2017, when Costco Korea was opening its Songdo outlet despite local shop owners' opposition, the government advised Costco to postpone the opening, but it ignored the recommendation, opened the store and paid a 50 million won fine.

The government then issued a recommendation that the company refrain from selling cigarettes and garbage bags for three years and restrict the sales of several other products, but the government drew criticism over the measure's effectiveness.

“After paying the fine, Costco Songdo is following the government's recommendations,” a ministry official said.

According to its regulatory filing, Costco Korea logged 3.92 trillion won in sales in 2017, up from 3.8 trillion won from a year earlier. It is yet to disclose its 2018 earnings.

While the company is emulating similar practices in Korea, Hanam small shop owners are crying foul over the company's “audacious” stance.

“We, small shop owners in Hanam, had several meetings with Costco Korea to find a middle ground and ways for coexistence,” the small shop owners' federations said in a joint statement. “However, we never had a meaningful meeting because Costco continues to insist on its own rationale without listening to our demands.”

The federations stressed that Hanam, with a population of a little over 260,000, already has five large discount stores run by big firms, while nearby Seongnam has only four despite its population surpassing 950,000. The federations staged a rally in front of Costco Hanam on March 29.

“It seems that Costco Korea believes in the power of the investor-state dispute settlement stated in the Korea-U.S. free trade agreement and is snubbing the cooperation act,” the statement read.

Costco Korea was unavailable for comment.