Lost Profits Grocer - Korean Supermarket
07 October, 2021
Jerome McDonagh, Handong Lee
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Background
This incident involved the Seoul (Korean) operations of a multinational supermarket chain (“Supermarket Co”), with various sizes of stores from mid-scale supermarkets to smaller, more locally-based convenience stores. Supermarket Co purchases its products from multiple suppliers and sends them to distribution centres run by third-party logistics companies. While Supermarket Co charges their suppliers a fee for the distribution service from the centres to the stores, the distribution centres charge Supermarket Co a fee for the use of its facilities, which are typically lower than the income Supermarket Co receives from its suppliers.
Key Questions
- Was the loss period for the claim accurate?
- Were the third-party logistics costs reasonable?
- Were the mitigating factors employed effective at reducing the loss of sales?
Situation
A fire occurred at one of the larger distribution centres (“Distribution Co”), which handled the supply of goods to most Supermarket Co stores in Seoul’s metropolitan areas. This resulted in many stores suffering from inventory shortages and reduced sales. The fire occurred just a few days before Chuseok, a major public holiday in Korea (similar to the USA’s Thanksgiving) which Supermarket Co claimed increased the loss. The claimant noted a boost in sales from customers who stocked up on provisions in preparation for the holiday in previous years.
Supermarket Co attempted to mitigate the loss by relying on multiple temporary distribution centres. However, this approach resulted in higher costs as the temporary centres charged higher fees for short-term logistics. The additional administration of these multiple centres also resulted in higher payroll and overtime costs. Supermarket Co also launched additional marketing campaigns to increase sales and mitigate the loss of profits.
After nine months, Supermarket Co shifted their distribution operations to a long-term solution, though they claimed the long-term replacement centre still had higher costs than Distribution Co.
Supermarket Co launched a claim against Distribution Co., which had a general liability policy. They claimed a loss of profits from stores, various mitigation costs, including increased third-party logistics costs, marketing costs, and additional payroll costs from managing the other distribution centres.
How MDD Helped
Distribution Co’s legal team hired MDD to examine Supermarket Co’s claim, assess its reasonableness, and propose alternative calculations where needed.
Our assessment noted that part of Supermarket Co’s claim included a period where local regulations mandated closing their stores, meaning they would not have been able to sell products even if their stores were open. The inclusion of these days overstated the claim.
In addition, we identified discrepancies in the underlying data Supermarket Co relied on to calculate the increased third-party logistics costs. Specifically, we found that the cost data from Supermarket Co’s central accounts did not reconcile with the data from the distribution centres. This issue suggested the data used by Supermarket Co was not reliable and further undermined the claim.
We also conducted a detailed analysis of Supermarket Co’s mitigation costs to determine if these measures indeed reduced the loss of profits. In particular, we carried out various tests to ensure their actions were economical, i.e., by spending $1.00, they reduced the potential loss by more than $1.00. The purpose of this analysis was to highlight un-economical costs for Distribution Co’s legal team as they were preparing their counter offer and negotiating with the claimant.
MDD’s local Korean staff efficiently analysed the information, some of which was entirely in Korean. Our understanding of local regulations helped us properly assess the true extent of Supermarket Co’s loss.
Results
As a result of our findings, Distribution Co’s legal team was able to highlight the deficiencies in Supermarket Co’s claim and settle the loss for a lower amount.
The statements or comments contained within this article are based on the author’s own knowledge and experience and do not necessarily represent those of the firm, other partners, our clients, or other business partners.
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05 August, 2015
