KFTC Releases Results of 2022 Survey of Supplier-Distributor Transactions in 18 Industries

On December 29, 2022, the Korea Fair Trade Commission (the “KFTC”) issued a press release announcing the results of its annual supplier-distributor survey conducted in connection with the Fairness in Distributor Transactions Act (“FDTA”). From August to September 2022, questionnaires were sent to 546 suppliers and 50,000 distributors across 18 industries, to which 100% of the suppliers and 38.5% of the distributors surveyed have responded. Unlike previous years where the survey was targeted to a small number of industries, the 2022 survey covered 18 industrial sectors, including food and beverage, clothing, telecommunication, pharmaceutical, automotive retail, auto parts, furniture, home appliances, publishing, boiler/heating products, petroleum products, medical devices, machinery, animal feed, household goods, alcoholic beverages, paint and cosmetic products.

The survey is designed to provide the KFTC with a better understanding of the current status and practices in supplier-distributor transactions, and to assist in the development of new policies, implementation of regulatory changes and planning of ex-officio investigations. In particular, as the KFTC has expressly indicated in its press release that it would closely monitor alleged unfair trade practices and FDTA violations uncovered as part of the survey, we may expect that the KFTC would take steps to review and correct such issues in the future, including through ex-officio investigations of market participants. We note that this would also be consistent with the KFTC’s past practice, as it has conducted a number of on-site investigations based on the results of past surveys.

According to the press release, the KFTC also plans to encourage companies active in certain industries which exhibited a low adoption rate of the KFTC’s model distribution agreement (e.g., alcoholic beverages, petroleum products, automotive retail, telecommunication industries) to adopt the model distribution agreement. While use of the model distribution agreement is not mandatory, the KFTC has strongly encouraged its adoption and use, as it reflects what the KFTC considers to be best practice. As such, we would recommend that companies take into consideration the terms of the model distribution agreement when entering new distribution contracts, or in amending/renewing existing agreements with third-party distributors.

Survey Results: Prevalent Types of Unfair Trade Practices by Industry

The survey included questions to distributors relating to (i) satisfaction with current supplier-distributor arrangements and perceived improvements in trade practices, (ii) satisfaction with the KFTC’s current policies and awareness of newly introduced regulations, (iii) degree of adoption of model distribution agreements, (iv) experience with unfair trade practices, (v) experience with resale price maintenance, (vi) experience with demands for improvements to points of sale and frequency of such requests, (vii) information regarding difference between supply price to distributors and suppliers’ online retail price and (viii) hardships caused by, and relief received with regards to, the COVID-19 pandemic.

According to the 19,252 distributors who responded, the most commonly experienced unfair trade practice was the imposition of forced sales targets (49.2% of automotive retail, 24.2% of boiler/heater products, and 21.4% of machinery industry respondents). The survey also revealed that a non-insignificant number of respondents had indicated that they had received demands to provide business information, experienced unfair disadvantages, been forced to make purchases, and been forced to transact without a written contract. Also notable was the fact that an average 14.3% of the respondents indicated having been forced by suppliers to maintain their retail price above a set level (i.e., retail price maintenance), a practice which was found to be relatively more prevalent in automotive retail (63.3%), paint products (58.7%) and cosmetics products (55%) industries. As the KFTC may well look to proceed with an investigation of such alleged unfair trade practices in the future, companies operating in the affected industries should consider reviewing their current policies and practices.

The following is a summary of some of the key results of the 2022 survey:

Industry	Survey Results
Automotive retail	Forced sales targets: 49.2% of respondents indicated being subject to sales targets (this may be due to the prevalence of exclusive supplier-distributor arrangements in automotive retail, and the inherent difficulty for distributors to display or sell other suppliers’ products, including through online channels, due to the nature of such products). Imposition of disadvantages: Automotive retail had the highest percentage (15.3%) of respondents who indicated that they had been unfairly subject to disadvantages by suppliers. Resale price maintenance: of the industries surveyed, the automotive retail industry also had the highest percentage (63.3%) of respondents who experienced resale price maintenance. Requests to improve points of sale: 63.3% of respondents of the automotive retail industry (which mostly consists of offline sales) indicated that suppliers had demanded improvements to their points of sale.
Cosmetics	Request to provide business information: The cosmetics industry had the highest percentage (9.8%) of respondents who indicated having faced demands by suppliers to provide their business information. Imposition of disadvantages: 12% of respondents said they had been unfairly subject to disadvantages (representing a relatively high percentage of affirmative responses). Resale price maintenance: 55% of respondents indicated having experienced resale price maintenance.
Boiler/heater, machinery	Forced sales targets: 24.2% of the boiler/heater industry and 21.4% of the machinery industry respondents indicated that they were coerced to achieve set sales targets (this may be due to the prevalence of exclusive distributor arrangements in these industries and the need to provide installment and repair services). Coerced purchases: 14.5% of the boiler/heater industry and 6.7% of the machinery industry respondents indicated that they had been coerced to make unwanted purchases.
Household goods	Coerced purchases: 5.3% of the respondents indicated having been coerced to make unwanted purchases.
Furniture	Request to provide business information: 8.9% of the respondents indicated having faced supplier demands for disclosure of their business information. Requests to improve points of sale: 32.1% of respondents in the furniture industry (which is primarily focused on offline sales), indicated that suppliers had demanded improvements to their points of sale.
Alcoholic beverages	Request to provide business information: 8.7% of the respondents indicated having faced supplier demands for disclosure of their business information.
Telecommunication	Imposition of disadvantages: 9.1% of respondents indicated that they had unfairly been subject to disadvantages (representing a relatively high percentage of affirmative responses). Method of selecting interior design companies for points of sale: 67.4% of respondents indicated that the supplier designated the interior design company to be contracted for point of sale improvements by the distributor, although in many such cases, the supplier also bore part of the costs relating to the work performed. Pricing to distributors vs. online retail price: 91.6% of the respondents indicated that the supplier’s online retail price was equal to or lower than the supply price to the responding distributors (regarding such result, the press release also included a comment that perhaps additional efforts should be made by suppliers to ensure the price competitiveness of the distributors).
Clothing	Resale price maintenance: 53.8% of respondents said they had experienced resale price maintenance. Request to improve points of sale and selection of interior design contractor: 37.3% of respondents in the clothing industry (which is primarily focused on offline sales) indicated that suppliers had demanded improvements to the points of sales, and 62.6% indicated that the supplier also designated the interior design company to be contracted by the distributor (although in many such cases the supplier also bore part of the expenses). Pricing to distributors vs. online retail price: 84.2% of respondents said the suppliers’ online retail price was equal to or lower than the supply price to the responding distributors.
Paint	Resale price maintenance: 58.7% of respondents indicated having experienced resale price maintenance.
Home appliance	Method of selecting interior design company for points of sale: 66.4% of respondents indicated that the supplier designated the interior design company to be contracted by the distributor for improvements to points of sale (although in many such cases the supplier also bore part of the related expenses).
Petroleum products	Pricing to distributors vs. online retail price: 100% of respondents in this industry said the suppliers’ online retail price was equal to or lower than their supply price to distributors.

[Korean Version]

Share

Professionals

Professionals