Liquor Maker Faces Sobering Distribution Reality

0

For Yonghan Sa, the decision to offer soju at his small Korean restaurant in Rowland Heights was a no-brainer. The clear, vodkalike spirit is a staple in his home country.

“Everyone drinks soju in Korea,” said Sa, who owns Gam Ja Gol. “It’s like beer there.”

That’s why Sa stocks up every other week, buying about 240 bottles from Hite USA Inc., a South L.A. beverage distributor that sells the liquor to retailers throughout California, Nevada, Oregon and Washington state.

But Sa said he was told Hite USA is unloading its inventory in anticipation of the end of its lucrative distribution contract with Koreatown’s Jinro America Inc., the U.S. subsidiary of soju maker Hite Jinro Co. of Seoul, South Korea.

“It’s kind of different right now,” Sa said. “They used to sell me boxes (of 24 bottles) but now they’re giving me six-packs. … They said some other company is going to take over.”

Actually, it is an open question whether some other company takes over the distribution rights. That’s because the whole matter is in court.

Jinro America’s desire to swap out its regional distributor is part of a heated dispute in which it claims Hite USA, headed by one of its former executives, got the distribution contract through self-dealing, bribery and fraud. The liquor maker took its claim to Los Angeles Superior Court late last year, seeking to find a way out of the contract that is set to end this December but is designed to renew automatically for four more years.

Deuk Lee, president of Hite USA and former president of Jinro America, has denied the allegations, arguing that the brewer is trying to oust him out of greed.

“Hite USA’s U.S. distributorship rights had become incredibly valuable – due to Deuk Lee and Hite USA’s efforts – and Hite Jinro now wanted to reclaim these rights despite the contractual provisions that protect Deuk Lee and Hite USA from such an outcome,” attorneys for Lee wrote in an April cross-complaint.

Trouble brewing

Soju, fermented mainly from rice, has a clean taste that somewhat resembles vodka. It’s particularly popular in the Korean community.

Hite Jinro sold 71 million 9-liter cases of soju around the world last year, up 7 percent from the previous year, making it – again – the best-selling spirit in the world, according to United Kingdom trade publication Drinks International’s annual list, published last month.

But in the United States, soju remains a boutique drink. U.S. sales hovered only around $2 million for the 12 months ended June 20, according to market research firm Nielsen Co. That figure, however, tracks only sales through liquor stores, not sales to restaurants and bars. Still, soju sales here are not even 1 percent of U.S. tequila sales, for example.

Marco Costales, head of the alcoholic beverage licensing and regulation practice group in the downtown L.A. law offices of Nossaman, said Jinro America is likely to face hefty challenges as it searches for a new distribution partner.

“Their challenge is really going to be that soju, frankly, has not taken off the way a lot of folks thought it might,” said Costales, who’s not involved in the dispute. “Outside of the Korean community, it’s not as popular as the manufacturers thought it might be.”

At the same time, he added, the L.A. beverage distribution industry has seen tremendous consolidation over the past couple of decades, which means Jinro America now has only a handful of potential partners.

“The challenge for them, in addition to the popularity aspect, is to try and convince these big distributors to include their product as part of their portfolios,” he said. “There might be a few smaller distributors these guys could approach, but they won’t have the same bargaining power.”

Jinro America has nevertheless not been deterred from searching for a new partner. It has placed ads in local publications, including the Business Journal, asking local distributors with at least five years of experience to apply through its website for a nonexclusive partnership.

Tae Kim, sales and marketing manager at Jinro America, referred calls to the company’s attorney at Quinn Emanuel Urquhart & Sullivan, who declined to comment.

Locked in

Jinro America is, for the time being, locked into a contract with Lee’s Hite USA. Lee, who joined one of Hite Jinro’s predecessor companies in Seoul in 1988, was sent to Los Angeles in 1997 to head its U.S. operations. He resigned as president of Jinro America in 2010.

The Korean beverage company claims that while he was working for Jinro America, Lee formed Hite USA and struck a distribution deal between his employer and his business.

After his departure from Jinro America, the company alleges that Lee bribed his successor, Byung Kyu Min, to amend the deal to require it to automatically renew every four years. That amendment requires Jinro America to pay Hite USA for lost profits if it should ever terminate, modify or opt not to renew the agreement, thus making it very expensive to break with Lee.

A lawyer representing Lee, who has denied wrongdoing in court filings, declined to comment about the dispute.

For now, Hite USA is slated to continue distributing soju and Hite Jinro beer until at least the end of this year, when its contract is set to expire. But if Lee has his way, the deal will once again be renewed this December.

The next hearing is scheduled for later this month and a trial is tentatively planned for March.

No posts to display