Faaez Samadi
Feb 2, 2017

Influence: In Korea, not a Lotte alternatives

With Korea recently rocked by its latest chaebol corruption scandal, we investigate how local consumers express their outrage in the marketplace—or whether they do at all.

Demonstrators in front of Seoul’s Lotte Hotel.
Demonstrators in front of Seoul’s Lotte Hotel.

A sordid affair involving family feuds, embezzlement, and even a mysterious death. These are the central tenets of the astonishing scandal engulfing Korean mega family conglomerate—or chaebol—Lotte.

As a brand, Lotte underpins a huge part of Korean society, with its interests sprawling across confectionery (its origin), to cinemas, amusement parks, cafes, bakeries, supermarkets, shopping malls, hotels, construction, insurance and even chemicals. There are 20 or so such chaebol in Korea—including Samsung, Hyundai and LG.

Thus the news in October that its chairman, founder and 20 other current and former executives had been indicted on corruption charges naturally shocked the Korean public. The family owners stand accused of evading US$76 million in taxes and siphoning off US$46 million from the company accounts. In January, the founder's daughter was sentenced to three years imprisonment in the first conviction related to the scandal.

More disturbingly, the investigation is linked to the apparent suicide of Lotte vice-chairman Lee In-won in August, who was found dead on a hiking trail just hours before he was due to be questioned in relation to the corruption probe.

These shocking details were emblazoned across print and online media, leaving Korean citizens to make their disgust known online and even through public protests against Lotte. With such negative consumer sentiment flooding the brand, and given the size and nature of the crisis, a long, hard battle to regain Lotte’s reputation and trust is only to be expected.

Except Korean consumers don’t work that way, according to observers and industry experts. Were this level of scandal to take place in numerous other markets, a brand would never expect to fully recover. But the distinct conditions of the Korean consumer market mean these chaebol, despite having a long history of corruption scandals, return to the market with little more than a brief dip in consumer sentiment.

It’s not that Korean consumers aren’t vocal, or don’t have high expectations of their brands. Edelman’s Trust Barometer for Korea has shown a resolutely low level of trust in business since it began nine years ago, but in 2016 it was the lowest of all 28 surveyed countries.

A whopping 75 percent of Koreans surveyed said CEOs focused too much on lobbying, compared with the study average of 57 percent, while there was a 24 percent gap between how important CEO integrity is to respondents and how well they think CEOs achieve it.

Market dominance

“The Korean economy is led by chaebols, but even with them trust is very low,” says SB Jang, managing director of Edelman Korea. This is undoubtedly influenced by the litany of chaebol scandals over the past decade; Lotte is far from a one-off.

In 2007, Samsung—the largest chaebol – was embroiled in a huge corruption crisis over a slush fund, resulting in several convictions for executives and the chairman stepping down. In 2013 Hyundai chairman Chung Mong-koo was found guilty of embezzling US$100 million; he was sentenced to three years in jail but was pardoned by the then Korean president Lee Myung-bak.

In 2013, SK Group—Korea’s third-largest chaebol—saw its chairman, Chey Tae-won, jailed for stealing US$44 million in 2008. He had previously been convicted in 2003 for his role in accounting fraud totalling US$1.3 billion.

(Article continues below)

Timeline: Chaebol crimes

2016

  • Lotte Group: Chairman Shin Dong-bin and several family members indicted for allegedly evading US$76 million in taxes and embezzling US$46 million

2013

  • SK Group: Chairman Chey Tae-won sentenced to four years for embezzling US$44 million in 2008—he was pardoned after 31 months

2012

  • Hanwha Group: Chairman Kim Seung-yeon jailed for embezzling US$264 million: fined US$4.5 million and sent to prison for four years

2008

  • Samsung: Chairman Lee Kun-Hee indicted for tax evasion of US$45 million: three-year suspended sentence, fined US$100 million

2007

  • Samsung: Company probed for creating a slush fund, bribing prosecutors and chairman Lee Kun-Hee facilitating an illegal takeover by his son
  • Hanwha Group: Chairman Kim Seung-yeon given suspended sentence for assaulting bar staff, who had attacked his son, with a metal pipe
  • Hyundai: Chairman Chung Mong Koo found guilty of embezzling US$100 million: sentenced to three years in jail but later pardoned
2004
  • Hanwha Group: Chairman Kim Seung-yeon fined after found guilty of bribing a politician

Because of the nature of chaebol, these towering figures come to embody their brand, and so does their downfall.

“There is no clear delineation between ownership and management,” says Jang. “So when a chairman has corruption problems, the public sees that chairman as equalling the business.”

Yet for all this, the brands do not ultimately suffer the sort of crisis that would seem commensurate with their transgressions, even when Korean consumers vent their anger publicly.

Yongtae Park, associate director at Flamingo Tokyo, says protests against big companies tend not to build up much momentum.

“Korean consumers have boycotted brands related to corruption, but it has rarely become a social movement,” Park says. “As the scandals are heavily covered by mass media, most Koreans are outraged by the dishonesty. However, their sentiments toward domestic brands can’t be simplified.”

The simple fact is that outside the chaebol, there is not a lot of choice for Korean consumers who want to take their business elsewhere. It’s hard to put a concrete figure on it, but estimates suggest these conglomerates make up 70 percent to
90 percent Korea’s economy.

Boycotts do occasionally take place, especially regarding food or healthcare products, says Jiyeon Park, managing director at Starcom Korea, but these are few and far between. The reality is that sales are not really affected by the negative PR and consumer sentiment.

Edelman’s Jang says: “Consumers may sometimes not trust or even like the chaebol. But they are in quasi-monopolistic positions. There are no real other options to these brands. Of course competitors exist in the market. But in terms of supply, scale and distribution, while a chaebol might suffer from negative perception after a scandal, there aren’t many alternatives for consumers.”

These crises are occurring regularly and are affecting products consumers use daily which is leading people to divorce the products produced by a chaebol from the scandal that has occurred at its upper echelons, says Park at Starcom.

National pride

The second crucial factor for chaebol surviving in the Korean marketplace is a strong sense of patriotism within Korean consumers, which, as Jang puts it, has led to “a high degree of market protectionism”.

For all their many faults, that have been brutally exposed in the media, the chaebol continue to hold an exalted position in the Korean psyche for their contribution to making it the country it is today.

In the dock: Hyundai Automotive Group chairman Chung Mong-Koo leaves Seoul High Court after his 2007 trial.

“Koreans know the chaebol have driven the country’s rapid economic growth and led the charge to evolve the once small, impoverished nation in East Asia into one of the most prosperous countries in the world,” says Park at Flamingo. “The people are proud of the products and their culture, and these companies are spreading Korean identity across the globe.”

From a purchasing-power standpoint, this means that for all the convictions of corruption, negative sentiment and, at times, even protests against the chaebol, consumers swiftly erase their anger in favour of national pride.

“Although some people use Chinese products in Korea, for example, these companies don’t have enough trust in the market,” says Jang.

“Many people use Apple, but out of a sense of patriotism, consumers will buy a Samsung because it is Korean. The chaebol represent the identity of the Korean people.”

Having been burned in the past with some high-profile cases of foreign investment gone wrong, Korean consumers continue to exhibit a general mistrust of international brands that compete with local ones, Jang explains.

Furthermore, the chaebol generally provide high job security and are sought-after places to work for young people.

There is also a geopolitical undercurrent to the consumer support for the chaebol, Park at Flamingo says. “Having strong national pride as a citizen in a democratic society pursuing capitalism is how Koreans have distinguished themselves from their notorious neighbours in North Korea.”

However, consumers are continuing to voice their disappointment whenever these scandals come around. Park at Starcom says that although some people have become numb to such crises, with social media, the discourse and dissemination of negative sentiment means things could change in future. “There are so many digital spaces now for consumers to share their sentiments, the amount of expressed sentiment is becoming bigger than ever,” Park says.

There is one other factor that may be shielding brands like Lotte from public ire: the lightning rod created by the string of scandals surrounding the country’s impeached president, Park Geun-hye.

While senior executives at several chaebol have been questioned as part of the investigation into the president, public disgust is almost entirely fixated on her.

As Jang summarises: “There’s a sympathetic perspective from the public for these businesses, because it’s not the first time a Korean president has used their power to influence corporates into doing something wrong.”

While the bar is understandably high for a leading public figure, it seems mitigating factors can apply to Korea’s world-leading brands.

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