A week ago a newspaper had an obligatory “gift certificates are hot gifts” story before the traditional Seollal lunar new year holiday. This story in the Korea Times however came with a twist, and perhaps too much information:
A unique niche market is prospering amid the economic slowdown sweeping the country. Sales of luxury gift certificates worth up to 30 million won ($22,350) at two local department stores reached nearly 1.4 billion won in three weeks.
…
All purchases of the certificates were via company credit cards, meaning firms, rather than individuals, were the main customers of the special items, according to the department stores.
High-priced gift certificates selling well? In this economy? Well, it is perhaps true that they are used for what some spokespeople say in the story:
“Companies’ purchase of gifts for their employees is down this season due to the current economic slump, except for those high-priced certificates,” a Lotte spokesman said. “Several kinds of businesses bought them as seollal gifts for their employees.”
…
“Cash-like gifts are gaining popularity these days in reflection of the economic slowdown…” a Shinsegae spokesman said.
If you search “gift certificates” on the Korean news sites you are flooded with stories. I found it interesting a good amount of them were related not to gift giving, but as a means to facilitate some illegal activity, such as bribery or gambling. That however is not the core of my post, just a tangent I thought that needed to be raised, as I am sure somebody would.
I threw this story, and an old story it reminded me of, aside as somewhat trivial. However today’s KT included this:
The Ministry of Knowledge Economy said Thursday that it would officially ask businesses to refrain from paying suppliers with post-dated bills, which are converted to cash after three or six months. …
Statistics show that conglomerates were not better clients for small suppliers. They were making 46 percent of payments with post-dated bills, higher than the average.
That news inspired me to dig an older story out of the archives. As with the high-price gift certificate story, that “post-dated bills” story reminded me of this 2003 JoongAng article:
As odd as it might at first seem, these coupons [i.e. gift certificates] form the basis of a flourishing financial market in Korea. A conservative estimate by the Ministry of Finance and Economy puts the value of the secondary market in the coupons at 1 trillion won annually. The total value of coupons issued directly by retailers yearly has been placed at 5 trillion won. The ministry had banned the resale market until 1999, when the prohibition was lifted as part of the deregulation of the economy.
The coupons in many cases are used to facilitate payments. For example, the large department stores might pay for services such as window cleaning and security with its coupons. The department stores are “trusted” to have the assets guaranteeing the coupons on redemption. Both parties can gain. Often small companies even request payment in coupons to avoid taxes, and the department stores can conserve cash.
The fact these gift certificates are used as payments to suppliers is interesting, especially connecting it with the fact that these high-priced ones, which facilitate “payment” of suppliers better, are being bought on company credit cards. Add this to the fact that many firms are having problems getting paid, not to mention the fact that some chaebols seem to be short of cash, and it makes me wonder if indeed these high-priced certificates are actually being used as gifts as the original KT article assumes.
Furthermore, my search for the old article uncovered an interesting bit from a 2000 article in the JoongAng again. Apparently Korean department stores are known to force suppliers to purchase gift certificates.
What ever is going on with these multi-million won gift certificates, I sincerely wonder if they are all going to end up as innocent traditional Seollal gifts.
{ 30 comments… read them below or add one }
could tell it was Dram-man from the opening gambit, “too much information”
Want a cookie?
To all the Dram haters: come on. I know the man can annoy me from time to time, but this is a good post, bar the typical Drammy spelling mistakes. I was unaware of this whole underground stream of payments being made by gift certificates, and I commend him for pulling all the threads together.
Question: how does one pay money with post-dated bills in Korea? It seems almost like a post-dated cheque/check, but I thought they were rare as hen’s teeth in Korea. Is it something only available to big business?
Dram is our muckraker. He pulls out some good stuff and his economics are sound in this era of wankers screaming for protectionism all over the place.
Given that a Dept Store can print any amount of gift certificates, this becomes a means to book paper profits and use inventory as a way to finance operations. (All numbers purely fabricated on my part).
Say an imported handbag is tagged for retail sale at W500,000, and that Lotte paid Luis Vuiton US$150 for it (about KRW 200,000). When that bag is purchased with a W500,000 gift certificate, the store books W300,000 in Gross Profit. Let’s say Lotte’s typical ratio of SG&A (Sales, General and Administrative expenses) is about 20% of sales. That makes this handbag’s share of SG&A another W100,000; so the bag books an Operating Income of W200,000.
Let’s say a window washer sends a bill to Lotte for W400,000. Lotte pays them with W500,000 worth of gift certificates. This works pretty well at this time of year, because for Seollal, people need to come up with nice gifts from premium department stores. So the window washer can sell the certificates on the black market for almost W400,000, or give them to staff as bonuses. The staff, in turn, can sell them if they need money. Ultimately, they end up in the hands of someone who wants to buy overpriced gunk at Lotte for Seollal gifts. (Note that the black market value of these certificates will fall after Seollal).
So Lotte has received W400,000 in services and recorded no cash outflow. They have also recorded W250,000 in income and recorded no cash inflow. But they have pleased the financial analysts because (a) they are recording Sales activity; (b) they are recording positive Net Income; (c) their Payables (the SG&A expenses) are not piling up; and (d) they have reduced their inventory by W200,000.
Under the accounting rules of advanced countries, sales of gift certificates have to be recorded as a liability, because the business essentially OWES its inventory to whoever comes in to redeem the certificates. Drammie refers to a Google search that linked gift certificates to gambling and fraud in Korea – I’m sure that’s due to online documents created during the “Sea Story” days, which you can look up yourself if you want. Because of Sea Story, though, I am sure that large Korean retailers do not have to book gift certificates as liabilities, and can therefore print as much as they want, with the churn allowing them to buy SG&A and book profits without any churn of actual cash. This isn’t sustainable of course, but it’s sure one way to get through a slump.
PS – the linked 2003 article is quite high quality for the Joongang. The reporter is still there, so I guess it’s the editors who have let the paper slide so badly in the past couple of years.
hamel, it’s called a ‘note’, and they’re pretty common. The economy here is totally trickle-down, and everyone depends directly or indirectly on the chaebol. When they get tight on money, they pay their suppliers with 3-month or 6-month notes. The supplier can then hold onto the note for 3 months and collect the full face-value cash from the issuing bank, or they can try to find someone to buy the note from them at a discount. Note use decreased in the past few years, but they’re all over the place now, with the liquidity crunch. The term ‘post-dated bill’ is just a bad translation, which is also common in English business reporting here.
As an aside, go check out the shoeshine guy in front of the Lotte Department Store in Sogong-dong to find box upon box upon box upon box of those gift certificates.
While I was having my shoes shined there a few years ago, this regular looking guy drove up on a moped, came in, took off his backpack and proceeded to remove and hand over to the shoeshiner’s assistant stacks (I counted 32) of 1-million won in 10,000 won notes wrapped like they do it at the bank. Said money was placed into a shoebox, and said regular looking guy just left. Not a word was spoken between them the whole time. Makes you wonder sometimes what’s in the backpacks of those regular looking guys on mopeds~~
Wow. Thanks again to Dram man for kicking off a highly educational thread (but do try to get spelling right in your titles at least).
#5 Linkd: thanks for this walk-through. It still spins my head a little, having no more than high school accounting behind me, but I think I have the general principles now. It all seems highly dodgy.
#6 Linkd: thanks for this explanation. Couple of follow-ups: what is a “note” called in Korean? Could you type it out in Korean for me? Are these notes in a little tear-away book, like invoices and receipts? Or do companies just print them up themselves? Do notes also cover VAT for services? When my company has done work for Samsung it always got paid by bank transfer, so I never heard of these notes before. Good to know, though.
#7: what a story! I must go to Sogong-dong (any more specific as to which entrance of Lotte?) and get my shoes shined. I do recall the old “Sea Story” days, seeing little a van outside one that, instead of dispensing hot dogs and ice creams, bought those gift certificates.
Linkd> Run the search yourself. Yes the “Sea Story” days did push up the total count, however many story’s did come out on bribery givers or recipients favoring the gift certificates as well.
Meanwhile…Fun with statistics:
Post on Korea’s underground economy after 6 hours: 7 Comments
Post on a bad joke about “models” after 6 hours: 27 Comments
Which am I to think drives traffic? Just asking.
From Linkd’s otherwise spot-on #5:
There is an ongoing market for gift certificates year-round. They are sold for the reason Linkd described – company paid in certificates but accepts less than face-value for cash – far more often than for any corporate gift-giving purposes (and for another reason which I won’t describe here). They are distributed to shoe and bag repair stalls, which advertise their availability on the stall’s exterior – just look for ‘수표’, or ‘백화점 수표’. They’re also available at places that do nothing but sell gift certificates (because, after all, there really aren’t that many folks who want to stick their hand up someone else’s smelly boot). Heck, they’re even available online – in fact, if you want serious weight, you’ve got to arrange for it first online, or else make two trips to the sales outlet, because it can take a little time sometimes to put it together. For small amounts, there’s usually no wait at all.
You can shave five to eight percent off large quantities – perhaps more, because the larger the amount, the more you can haggle, with some guys. But even for small amounts, you can pick up a nice discount, and for that reason, there is always a demand. Many a shopper finds the department-store item they’d like to buy, presses for what discount they can, then heads outside to pick up the gift certificates from their favorite vendor to purchase it. And that goes on year-round. The market for 수표 remain stable and constant.
That, my friends, is why so many shoe vendors proliferate around department stores here. Next question: so just how much do vendors have to cough up to get those prime sales spots, and to whom do they pay?
hamel, in Korean they’re called, unsurprisingly, 노트, just like a laptop computer.
The chaebol have their banks issue them, and the supplier receives an official-looking piece of paper on bank letterhead. It obligates the bank to pay the face amount on the due date, pretty much like a bearer bond (the supplier can sign the note over to someone else). Chaebol always pay VAT. I don’t think notes are used for amounts less than several tens of millions of won.
gbnhj – wicked underworld cred you got, dude.
Sorry, Linkd, company promissory notes (distinguishable from department-store gift certificates) are not called “노트”, except perhaps by kyopo who don’t know the Korean word. The correct term for a promissory note is, unsurprisingly, “약속어음”. Do a Google search and check it out for yourself.
The absolute worst gift certificate to receive is one issued by the shoe manufacturer Kumgang. I never found a pair of Esquire shoes I’d want to wear…and I’m tall enough that I don’t require the only reason to buy them. Recall selling a 100,000 certificate to a granny outside for 70,000 won.
It totally blows my mind how Koreans excel at doing things crookedly. The lengths that they have been known to go to, the thought required for such schemes, and the methodical execution of said schemes boggles the mind. Honestly, Koreans should market this ability world-wide, maybe by opening a “Cheaters University” or put out a 6-DVD series set: “How Not to Do Things By the Rules.”
Say what you want about Koreans, but I do think they have their shiit totally together when it comes to being crooked. It really is amazing!
thanks, counselor. realized later he probably wants the formal name, not what they use in conversation.
I’d rather not.
Distill the bullshit. Bribery rules.
Your disgust with Koreans may be a tad too narrowly placed, exit86.
What I described in comment 5 is a business that basically prints money out of thin air and distributes it to suppliers, who in turn, feed that “money” back into the business, resulting in a type of balance sheet magic that causes the business to appear to be operating profitably.
This is pretty much what the Federal Reserve does, and basically how American consumption powers the world economy.
It’s nothing like that. I’m simply married to a Korean who points stuff out on occasion.
Only Hallowed American Consumption?
…speaking of consumption…take a tylenol BEFORE you go to bed. It’ll help with the hangover.
It totally blows my mind how Koreans excel at doing things crookedly.
In the US, pre-paid gift cards are ubiquitous. Nowadays, these cards are equipped with a magnetic strip that must be activated when purchased.
In the early days, however, these gift cards did not have a magnetic strip, but simply a UPC bar code. They were pre-credited, no electronic activation required.
All you had to do was memorize the serial number underneath the bar code. Later, at home, you could download a free bar code program, punch in the serial number, generate the bar code, and print it on a laser printer.
You carry that around with you in your wallet and the next time you visit the store, you pick up what you want, and pay for it by scanning your bar code at a self-serve station.
Not that I’ve ever tried this, of course, but it did occur to me that this was theoretically possible at the time.
Hey Netizen Kim,
Why in the world would you go through all that hassle!? Hmmnn, ok I guess smart people like to extract some pleasure out of knowing that doing something devious couldn’t have been *that* easy, but for the lot of us average teenagers in America, all we had to do was download a credit card generator and voila, shopping for unnecessary stuff suddenly became our favorite hobby.
Things were just ridiculously easy back then. (Maybe it’s almost as easy even now, I have no idea) But there was absolutely no need for exercising your brain to come up with brilliantly crooked plans.
Are you trying to kill us? Tylenol plus alcohol is a disastrous combination.
sheesh…Americans and their paranoia about every little thing….
I blame the lawyers.
Stange indeed that Linkd, a Canadian, would push the idea of consuming Tylenol™ – a medicine of American origin – before a large quantity of alcohol. Why not something more familiar to him, like Canadian-made 222™. Could it be that there is something more behind his ‘off-hand’ suggestion?
‘Marmot’s Hole’ readers reside all over the world, with little beside an interest in Kora to connect them. After the bodies start stacking up like cordwood, it seems doubtful that authorities will look to the victims’ browser histories to start piecing things together. Rather, Tylenol™ will look like the only common element between apparently otherwise-unconnected individuals. The trail will bring investigators to consumer-care product behemoth Johnson & Johnson, of course, but it will not lead them back to this thread.
We all know that Linkd regularly offers up harsh criticism for American business. Is that his real target here, with Marmot’s Hole readers simply collateral damage in his war on corporate America?
Linked: It is in no way “disgust” but admiration for this wonderful talent.
Netizen Kim: Dude, you just totally provided me with a great example with #22. Cheers!
I think such craftiness is one of the things which has made Korea the great nation that it is.
I think it is truly amazing–all the schemes folks in Korea have dreamed up without having gone to one of the prestigious K. universities.
Ok this is a site about Korea so maybe I’m completely off, but I still find it perplexing how anyone would even want to talk about financial malfeasance among Koreans at this record breaking point in history where the greatest financial racket in the history of man — Wall Street — has brought the entire world economy down with it.
I just don’t understand how some people *still* can’t put things in context when we have all this this incredible amount of information at our fingertips.
@28
While I may get lots of comments on this, I think its unfair liken Wall Street with a “racket”. Such unfairly maligns many of the good things that happen on Wall Street as a whole (raising investment capital to grow the economy, provide income for widows and orphans, etc.).
Second, while the end result was negative, few of the investment choices in question were corrupt or done in bad-faith. Blind-deaf-and-dumb-faith maybe, but not bad-faith.
Meanwhile, I fail to see what these two things have to do with each other. Are you suggesting that what ever goes on in Korea is not worth considering, or perhaps even justified, in light of what is going on in the US? (Or more precisely what what you perceive is going on in the US).
If that, how does that relate back to my post, the actual liquidity of Korean businesses, and the possible use of high denomination gift certificates as a grey market for liquidity? How do you go between Wall Street is a “racket”, and either Korean firms are more liquid than reported or such gift certificates are being used for the means their name implies?
Hey Dram_man,
Check out the following article. I thought it was really good.
http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom?print=true
No, I’m not saying you absolutely shouldn’t mention financial stuff about Korea. Just that it should be understood in light of the historical moment we are witnessing in terms of how one screwed up financial market can effectively bring down the entire world economy to a crawl. So it’s not something that’s *just* going on in the U.S.
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