Coupang’s Rocket Delivery faces antitrust fine

South Korean e-commerce giant Coupang is in trouble, as the nation’s antitrust watchdog has flagged the company for allegedly promoting its own private label products -- particularly those eligible for its signature Rocket Delivery service -- on its platform’s algorithm-driven ranking system.

On Thursday, the Korea Fair Trade Commission issued a fine of 140 billion won ($102 million) along with prosecution against Coupang, arguing that the company engaged in "consumer deception" by promoting its own private label products and electronics giants' products it directly purchased for sale, such as Apple’s iPhone series and Samsung’s Galaxy series, over other products.

In a statement on its website, the antitrust watchdog explained, “From February 2019 until recently, Coupang artificially boosted its private label products to the top of search rankings and used internal employee reviews to elevate private label products.”

It also added that, contrary to the "objective search indicators" like consumer preferences and sales volume stated in the "Coupang Ranking," the company manipulated the rankings to place those products higher for profitability reasons.

In response, Coupang criticized the decision as "an anachronistic and anti-innovation measure" that disregards consumer choice.

"Claiming that Coupang's Rocket Delivery, which has been a staple choice for many consumers due to its low prices and convenient delivery, constitutes consumer deception is unacceptable," Coupang said in a press release later that day. "The Coupang ranking is simply 'product placement,' and it is unprecedented for any government to take issue with this." It added that it plans to file an administrative lawsuit against the KFTC.

In its Coupang Ranking, the company primarily recommends private label products, most of which are eligible for its signature Rocket Delivery service. It also recommends the products of small and medium-sized enterprises if they tout high quality or competitive pricing, even if their sales volumes are lower.

When it comes to employee reviews, Coupang said it was unavoidable, citing the limited environment to gather public reviewers because private label products are relatively unfamiliar to consumers, and consumers require at least minimal information.

“The mere fact that these reviews were written by employees cannot be grounds for sanctions. Employee reviews are explicitly permitted under the Fair Trade Commission’s review guidelines,” the company stated in the press release. Given the concerns over potential market disruption, Coupang said it is currently prohibiting suppliers from writing reviews.

Meanwhile, the focal point of the argument between the KFTC and Coupang seems to revolve around whether the authority to recommend products through the platform's algorithm-driven ranking system should be at the company's own discretion or based on market-driven free competition, which would likely result in recommending primarily products from large corporations.

For instance, if Coupang adheres to market-driven free competition, it would primarily recommend products from large corporations that have a longer sales history, increasing their likelihood of appearing higher in the rankings. Even if a small or medium-sized enterprise's product has superior quality and pricing, it may struggle to achieve a higher ranking, leading to inconvenience for consumers who may miss out on better options

Lee Sang-gu, a professor of computer science at Seoul National University, supported Coupang’s view, highlighting the importance of e-commerce platforms providing a satisfying experience to customers by offering personalized options rather than just making simple recommendations based on statistics.

"On e-commerce sites, understanding customer intent accurately and proposing suitable products and services to increase purchase likelihood is a key competitive technology,” Lee said. “In this context, it is crucial to recommend products that match the needs expressed by customers through their search terms."

The proportion of Coupang’s private label products is just 5 percent of total sales, which is lower compared to other domestic offline retailers where the figures range between 20 and 30 percent. Major convenience stores and discount retailers here typically place their private label products in high-traffic zones where consumer purchases are frequent.

Other platforms such as those for E-mart, Baemin, SSG.com and Kurly also recommend private label or popular electronics brand products both online and offline.

The retail industry is seen as perceiving the government’s move as de facto regulation on product placement and recommendations, potentially curbing the Rocket Delivery service and impacting customer numbers and investments.

The KFTC stated it will continue to monitor the online shopping market and investigate any potential violations of fair competition by companies abusing their dual role as both marketplace and retailer, like Coupang.