The revenue of Shinsegae Food is expected to decrease for the first time in five years this year. However, this is evaluated to be due to the withdrawal from low-revenue businesses while strengthening profitability. Since taking office in October last year, CEO Kang Seung-hyup of Shinsegae Food has been accelerating efforts to enhance business efficiency.
According to FnGuide, a financial and securities information provider, four brokerages analyzing Shinsegae Food estimate that the company's revenue will reach an average of 1.49 trillion won this year. If this is realized, Shinsegae Food's scale will decline for the first time in five years.
Until now, brokerages had projected revenue growth for Shinsegae Food, as there was a strong revenue source in Emart. Shinsegae Food operates E-bakery and Brasserie, which are available in most of the approximately 150 Emart stores nationwide.
Shinsegae Food is also engaged in a business of supplying bread and desserts to Starbucks, operated by Emart subsidiary SCK Company (Starbucks Korea). The revenue from related parties amounts to approximately 568.2 billion won, accounting for about 37.1% of total revenue based on last year's Shinsegae Food business report. Emart, along with Chosun Hotel, is a related party holding more than 51% of Shinsegae Food's equity.
However, since CEO Kang Seung-hyup took office, brokerages have been revising their forecasts due to the withdrawal from unprofitable businesses. A representative example is Smoothie King Korea, a beverage franchise subsidiary. In September last year, Smoothie King Korea sent a notice of business closure to franchisees.
There are also movements seeking growth engines outside Emart. This is partly because there is a need to reduce the proportion of internal transactions, but it is also calculated that Shinsegae Food must establish its own competitiveness. While Shinsegae Food needs Emart for business, Emart does not face significant issues without Shinsegae Food.
In particular, there is an active move to expand outside opportunities in the bakery and meal service sectors. In the bakery sector, Shinsegae Food is focusing on expanding external distribution channels by increasing supplies to non-affiliated channels such as café franchises and convenience stores.
An analyst from a securities firm noted, "If the performance of the discount store Emart deteriorates, the performance of Shinsegae Food's bakery within Emart will inevitably decline, so it was necessary to turn eyes outside." Lee Kyung-shin, an analyst at IM Securities, also said, "By optimizing the business structure in the bakery sector and expanding beyond bakeries in large discount stores, we might mitigate the risks associated with a decrease in store traffic."
Shinsegae Food is also targeting the niche market of meal service. As of the first quarter of this year, Shinsegae Food has signed new meal service contracts with SK Keyfoundry, Gongju University Bloom House, Banpo One Valley, and Banpo One Pentas. The large apartment community meal service market is one that existing large meal service companies have not paid much attention to.
According to a meal service industry official, "Even though Banpo One Pentas imposes mandatory meals at five meals (55,000 won) per month on residents, it has been reported that there is a deficit of over 50 million won per month just in restaurant operations. It is also said that if Banpo One Valley does not raise the meal-related operation costs by 10,000 won per household, it will be difficult to continue the business, leading to re-bidding." He added, "Since it is difficult to guarantee profitability or sustainability, existing meal service companies are being passive, but it seems that Shinsegae Food believes it can overcome this challenge."
The retail industry is closely watching the business performance of Shinsegae Food. While consolidating inefficient businesses and strengthening revenue, the approach of operating in a way that does not rely on its parent company makes M&A easier. Even if it does not enter the M&A market, external expansion is also necessary to become a mainstream affiliate from a non-mainstream one. An official familiar with the business areas of Shinsegae Food stated, "We believe that constantly attempting to expand into areas such as burgers, home meal replacements (HMR), meal service, and baking is essential for creating business opportunities. This remains a major challenge for this year and next."
In the securities industry, there is an assessment that even if the operating profit remains at around 30 billion won this year, answers to long-term growth engines need to be provided for the operating profits to reach the 40 billion won level in the following year.
Sim Eun-joo, an analyst at Hana Securities, said, "With the efficiency efforts for strengthening revenue becoming fully operational, it seems that the operating profit of 30 billion won will be restored this year." However, she added, "Considering the past performance, which reached 40 billion won annually, it is time to find answers regarding long-term growth engines outside the No Brand Burger (NBB) franchise business." No Brand Burger is expanding its franchise business by introducing a 'compact store' model with lowered franchise fees. CEO Kang attended the 'No Brand Burger Vision Announcement' in May to unveil the new franchise model.