Soju goes down smooth. So smooth that the clear alcoholic beverage distilled from rice and other starches has transcended its 700-year-old Korean roots to become the best-selling spirit in the world.
But you wouldn’t know that in the United States, where the light, slightly sweet drink remains a novelty. In fact, the world’s leading producer, Hite Jinro Co. of Seoul, sold only 5 percent of its soju in America last year.
There might be a reason for those sobering sales numbers: The company says its U.S. distributor has exclusive rights but isn’t doing much. What’s more, Hite Jinro claims, that distributorship is headed by one of its former executives who got the deal through self-dealing, bribery and fraud. Ousting him could be prohibitively expensive.
Hite USA Inc., a South L.A. beverage distribution business that is separate from Hite Jinro, has held the exclusive right to distribute Hite Jinro products in the United States since 2007. It is headed by Deuk Lee, who worked for a predecessor company in Seoul in 1988 and was sent here in the late 1990s to open its local beachhead. He was later named president of the brewery’s North American operation, Jinro America Inc., in the Koreatown area of Los Angeles.
State records show that Lee formed Hite USA in February 2003. That meant Lee was president of both the parent company’s North American operations and of his own beverage business. Far from home and in charge of a foreign market, the company alleges in court filings, Lee moved distribution rights of his employer’s products to his own businesses. The company claims he later arranged to get regular payments from the brewing company and worked it out so that it would be difficult to oust him as exclusive distributor.
Lee, who has not yet responded to the allegations, did not respond to calls to his home and office seeking comment.
Kevin Kang, general manager and director at Jinro America, referred calls to the company’s attorney at downtown L.A.’s Quinn Emanuel Urquhart & Sullivan. The lawyer declined to comment.
Mass appeal
Soju dates to the 1300s, when the Mongols invaded the Korean Peninsula and brought with them Central Asian distilling techniques. It was for hundreds of years fermented from rice, until shortages in the middle of the 20th century forced manufacturers to switch to sweet potatoes and tapioca. Though restrictions on rice fermentation were later lifted as the shortages abated, soju continued to be made from sweet potatoes and other sources as well as rice. In the end, soju is somewhat like sake or even vodka.
The alcohol content of soju varies, from less than 19 percent to as much as 45 percent, but it is the lower count that has helped the drink gain what traction it has in the United States.
Greg Seares, co-owner of Bodega Wine Bar in Santa Monica, is one of a handful of non-Koreatown vendors to carry soju. The soju he sells, because it is less than 20 percent alcohol, allows him to carry only a state beer and wine permit rather than a more costly distilled spirits license. Yet soju is suitable for mixing as a cocktail.
Seares said Bodega offers soju because it allows bartenders to mix up any cocktail that would typically be made with vodka without the need for a full liquor license.
“I wouldn’t say our customers are asking for Jinro by name; people aren’t really familiar with it,” he said. “I think people would rather have vodka if they had a choice.”
That lackluster interest, however, hasn’t been due to lack of effort by Jinro America. In recent years, the company has sponsored a number of Korean festivals in Los Angeles and New York. Also, the company teamed up with the Los Angeles Dodgers to sell Hite beer and Jinro soju cocktails at Dodger Stadium.
Still, Jinro’s sales in the United States hovered around $2 million last year, according to Danny Brager, senior vice president of beverage alcohol practice in research firm Nielsen’s Mission Viejo office. That figure, however, tracks sales through liquor stores and does not include sales to restaurants and bars.
Sales year over year were relatively flat, Brager said, likely because of fierce competition in the broader liquor industry.
“In that very competitive marketplace, with a lot of very big companies competing for both shelf space and consumer attention, educating the American consumer about something relatively new like soju will likely take time and patience,” he said.
Locked in
Deuk Lee joined Hite Brewery Co. in Seoul in 1988 and was sent to Los Angeles to open its local outpost nine years later. Hite Brewery acquired soju maker Jinro Co. in 2005, and Lee was made president of the joined U.S. operation, Jinro America, the following year.
Two years prior to the merger, as Hite Brewery’s exclusive license with its local beer distribution vendor was about to come up for renewal, Jinro America claims Lee began laying the groundwork for the alleged scheme by forming his company, Hite USA.
Jinro America claims that Lee, as president of the parent company’s North American operations, moved distribution rights of his employer’s products to his own businesses.
When the merger between Hite and Jinro was completed, the newly formed company began an audit of its operations. In 2007, it turned its attention to Jinro America and, it says, discovered the deal Lee had struck.
When the deal came to light, the company said in a court filing, it negotiated a separation agreement that would have Lee leave Jinro America. The distribution contract with Hite USA would be terminated as part of that agreement, only to be replaced with a new deal giving Lee and his company two four-year contracts to distribute Hite Jinro beverages.
But the problems didn’t stop there. Those deals are now in dispute, with Jinro America filing suit in Los Angeles Superior Court alleging Lee and his company entered into subsequent “sham agreements” with one of his successors at the helm of the U.S. operation.
As the second of the two four-year contracts was kicking in in 2011, Hite Jinro says it sent Byung Kyu Min from Korea to Los Angeles to head up its operations here. Min, it claims, knew Lee from their days at the home office, and with the distribution deal already in place, the two reconnected.
That connection, the company alleges, took the form of a $50,000 loan from Lee to Min to help with his down payment on a house, “even though B.K. Min received a housing allowance from Hite Jinro,” according to the complaint.
That loan was followed by Lee “delivering, in person, a cash payment of $2,000 every month to B.K. Min,” it says.
In return, Jinro America claims, Min entered into a “sham” consulting agreement with Lee, paying him between $6,000 and $9,000 a month – roughly equal to his former salary – as well as covering Lee’s health insurance and car lease. But Jinro America claims no consulting was provided.
It is unclear if Lee is still receiving payments from Jinro America.
What’s more, the alcohol importer alleges Lee also bribed his successor to amend Jinro America’s distribution contracts with Hite USA to require it to automatically renew the agreements every four years. The amendment mandates Jinro America to pay Hite USA for lost profits if it should ever terminate, modify or opt not to renew the agreement. That makes it very expensive to oust Lee.
Of course, the success of a beverage company depends in large part on who distributes its products to restaurants and retailers, said Sean Andrade, a corporate litigator at downtown L.A. law firm Andrade Gonzalez, who is not involved in the Jinro America matter and who reviewed the case for the Business Journal. He said distribution rights are likely Jinro America’s most valuable asset. The way the deal is structured, Andrade said, Lee has virtually all the power to direct where the Jinro and Hite brands go in the future.
“That’s huge,” Andrade said. “He could run those brands into the ground.”
As for the language that makes it difficult to oust Lee, the lawyer said, “That is a very different provision than you would see in any other contract.
“The agreement the defendant was able to work out was a really good one and really lucrative. They can’t go and hire another distributor.”
