Coupang is asking partner companies every year to raise so-called "margin rates," and small and mid-sized partners say the burden is growing. If partners run promotions with other retailers and the set margin rate falls, Coupang is said to require them to make up the difference with advertising costs and other means.
According to the small and mid-sized business community on the 10th, Coupang operates an "annual negotiation" period with partners every November to December. In this process, they discuss purchase unit prices and other terms and draw up a "product supply contract" under which Coupang buys products from partners and sells them.
Partners complain that the "margin rate" is not written into the contract but decided verbally. Margin rates vary by company, and some are being asked for more than 40%.
Coupang does not officially use the term "margin rate," but each category MD (merchandiser) sets a "gross margin" (GM) at year's end and notifies partners. If this year's GM was 40%, the idea is to raise it to 41% next year. If Coupang sells a product for 10,000 won on its website, it means the company would take 4,100 won.
An official at a small cosmetics company said, "Coupang raises the GM every year, and it has reached 41%," adding, "A competitor, Market Kurly, has never raised the margin rate after we joined the platform."
The person added, "Coupang is asking for a margin rate of about 42% next year," and explained, "For companies where Coupang accounts for more than half of online sales, some choose a strategy of raising the margin rate and selling more."
Coupang manages margin rates under various labels such as growth incentives and advertising costs. Some partners choose not to raise the margin rate and instead pay more in advertising costs or growth incentives. One mid-sized company's advertising costs this year reportedly exceeded 7 billion won.
It also affects Coupang's "lowest price matching" policy. Prices are adjusted automatically based on changes in competing channels. If Market Kurly or Musinsa lowers the price from 10,000 won to 8,000 won through a promotion, the price of the same product also drops on Coupang. At that point, the target margin rate changes, and Coupang asks partners to cover the drop with growth incentives or advertising costs.
The Fair Trade Commission in 2021 found that Coupang's acts of ▲ demanding advertising to make up for margin losses ▲ passing 100% of the expense to suppliers during sales promotions ▲ collecting sales incentives not stipulated in the annual basic transaction contract were illegal, and imposed a penalty surcharge of about 3.3 billion won.
The following year, Coupang filed an administrative suit with the Seoul High Court objecting to the FTC's decision, and the court ruled last year that Coupang could not be held liable, canceling the penalty surcharge. The case is now pending at the Supreme Court after the FTC appealed.
Small and mid-sized partners say they have no choice but to accept the demands because of Coupang's market share. According to Statistics Korea, based on sales last year, Coupang ranked No. 1 with a 22.7% share of the domestic e-commerce market. For small and mid-sized companies, more than 50% of their own online sales sometimes come from Coupang.
An official at a small food company noted, "If we don't spend on search ads at Coupang, our exposure and sales suffer, and even large companies like LG H&H have reported issues such as unwanted advertising costs to the FTC."
The person added, "We do sign contracts with Coupang regarding advertising costs, but in reality, when Coupang asks to make up the margin rate, we have to comply," and said, "Partners are covering the losses arising from lowest price matching."
Industry watchers say the outcome of this issue will change depending on the Supreme Court ruling. An official at a retail platform predicted, "If the FTC's penalty surcharge is ultimately canceled, it will be hard to change the current structure."
Coupang said, "We neither agree to nor force a GM, and all contracts are concluded in writing, not verbally, through consultation with partner companies." The company added, "Forcing advertising costs and incentives is prohibited by internal policy, and we proceed transparently in compliance with relevant laws."