FTC ruling on Coupang's search manipulation may rock e-commerce

The state watchdog's reasoning behind the record fine for Coupang may affect the search algorithms of other retailers.

Coupang delivery trucks are parked in Seoul on Thursday. Korea's Fair Trade Commission announced its decision to fine Coupang 140 billion won over the e-commerce giant's alleged search manipulation practices on the same day. [YONHAP]

[NEWS IN FOCUS]

The antitrust regulator’s decision to fine Coupang 140 billion won ($102 million) over alleged search manipulation may have ripple effects on Korean retailers that use similar schemes, on top of a potential major reshuffle in the business operations and delivery service for the New York listed e-commerce platform.

The penalty is taking an aim at the practice by online retailers of listing their own products in prominent top places. On major e-commerce platforms such as Market Kurly and SSG.com, tissue or food from the operators' private labels often appear at the top of search results.

Korea's Fair Trade Commission accused Coupang of manipulating search algorithms in favor of those so-called private brand (PB) products.

Some industry watchers, however, believe that the practice should not be deemed illegal, comparing it to the strategy of displaying certain products in prime spots at brick-and-mortar shops and supermarkets.

“The decision is so outdated and out of touch with the reality of platform commerce,” said Kim Min-chen, a spokesperson at Korea Internet Corporations Association that represents the country's tech firms.

“And if they are to enforce such a policy, it should do the same for foreign e-commerce players like AliExpress and Temu,” he said, adding that the amount of the fine is “excessive.”

The 140 billion won fine is the largest levied on a Korean retailer.

Coupang said that it may not be able to maintain its current same-day shipping Rocket Delivery service if it takes a sales hit from not being able to recommend products registered in the Rocket Delivery system, in response to the Fair Trade Commission’s (FTC) decision announced Thursday.

Around 90 percent of Coupang’s sales come from its direct purchase transactions — items that are, for example, contracted with manufacturers to be stocked in their company's storage centers. Such items make up the majority of the products shipped through Coupang's Rocket Delivery service, which also delivers its PB products.

The e-commerce giant immediately canceled the groundbreaking ceremony for the construction of its distribution center in Busan that was set to take place on June 20 on Friday, the day after the FTC’s announcement.

A spokesperson for the company said there is no confirmation on whether the scheduled construction of the firms’ distribution centers in Icheon, Gyeonggi, and Gimcheon, North Gyeongsang, will proceed as planned.

The centers were a part of Coupang’s 3 trillion won investment to build distribution centers nationwide that the company promised would ensure free deliveries regardless of location.

Coupang had said in its Thursday statement that it could call off the 3 trillion won investment for logistics as well as its promised 22 trillion won investment that was earmarked to increase the competitiveness of Korean brands amid growing competition from Chinese suppliers.

“Coupang is facing a sense of crisis as its core business has been shaken,” a retail industry insider said. “It seems that it sees there is no reason for it to proceed with the investment, since sales from its Rocket Delivery system may be affected.”

The statement drew backlash from online critics who accused the e-commerce firm of distorting the FTC's decision and threatening — even deceiving — customers. “Coupang keeps saying that the Rocket Delivery system is 'for public's benefit,' but it's actually Coupang who gets damaged the most if they lose the system,” a comment read. “No one will use Coupang if they don't have the fast delivery system, and other e-commerce platforms are offering similar services as well.” “This way of threatening is no different from deceiving consumers,” another comment read.

In response, the FTC said it was “not banning nor regulating Coupang’s Rocket Delivery system nor from recommending regular products” in a statement on Friday.

“The measure taken was to address Coupang’s manipulation of algorithms for search results and making employees write reviews and give high ratings [to its products].”

“Coupang will be able to continue with advertising its Rocket Delivery service products through search engine advertising, banner advertisements and by placing filters on search results, even without using deceptive methods,” the FTC said.

The FTC is also set to refer the e-commerce giant and its subsidiary Coupang Private Label Brands (CPLB) to the prosecution.

BY PARK EUN-JEE, KIM JU-YEON, SARAH CHEA [park.eunjee@joongang.co.kr]