By Lee Hyo-sik
Nongshim, Lotte, Orion and other food and beverage makers are grappling with falling sales as consumers reduce spending on non-essential items amid the prolonged economic downturn.
Intensifying competition in the snack and beverage market has also chipped away at the firms’ profitability as they lower prices to woo buyers, many of whom are only seeking goods at bargain prices.
According to Lotte Confectionery, Korea’s largest snack maker, Thursday, its sales dropped 2.5 percent to 549.5 billion won ($499.5 million) in the second quarter, down 1.95 percent from a year earlier. The confectionery unit of Lotte Group also saw its operating profit fall 19 percent to 29.2 billion won over the one-year period.
To bolster profitability, Lotte raised the prices of snack and ice cream products by an average of 8.4 percent in March, but it didn’t work.
Another major snack maker, Crown, which also raised the prices of its products in early June, suffered a 28.4 percent drop in operating profit during the April to June period because it had to spend more on marketing and sales. Its revenue fell 1.54 percent to 310.7 billion won.
Nongshim’s second-quarter operating profit plunged 48.7 percent to 12.4 billion won from the previous year, with sales inching down 0.4 percent to 527.2 billion won.
The country’s largest instant noodle maker sustained a huge drop in domestic sales of high-priced, premium ramyeon products.
Orion also saw its second-quarter sales and operating profit decline 3.2 percent and 41.2 percent, respectively. The situation is much the same for Haitai Confectionery, Lotte Chilsung, Binggrae and other beverage and snack makers.
“Both sales and operating profits of most ramyeon, snack and beverage producers have been declining this year due to rising operating costs amid fiercer competition,” said an official at one of the confectionery companies, who declined to be named. “The prolonged sluggish consumption has also been bad news for food companies. With consumer spending likely to remain in the doldrums, companies should put forth more effort to bolster their sales in foreign markets.”
In line with the food firms’ sluggish performances, securities firms have been rushing to downgrade their outlook.
NH Investment Securities changed its recommendation for the food and beverage sector from “buy” to “neutral,” saying it will take considerable time for them to turn around due to falling margins amid intensifying competition.
“Food and beverage companies have failed to meet market expectations in the second quarter,” NH analyst Han Kook-hee said. “Shares of food companies have become less attractive on growing marketing expenses, in line with increasing competition and sluggish domestic demand. They won’t likely make a turnaround any time soon.”
Shares of Nongshim fell 1.97 percent, or 6,500 won, to 323,500 won Thursday, from previous trading, while Lotte Confectionery dropped 1.64 percent, or 3,000 won, to 180,000 won.