As a slowdown in domestic consumption due to high inflation continues, first-quarter report cards for Korea's beverage industry were mixed. Corporations with a high share of global business benefited from improved overseas results, while companies heavily reliant on domestic demand struggled to defend profitability amid cost pressures and weaker consumption.
On May 8, according to the Financial Supervisory Service's electronic disclosure system, Lotte Chilsung Beverage posted first-quarter consolidation sales of 952.5 billion won and operating profit of 47.8 billion won. The figures rose 4.6% and 91% year over year, respectively. The operating margin also climbed to 5.0% this year from 2.7% in the first quarter of last year.
Higher sales of carbonated, energy, and sports drinks and a recovery in global business contributed to the improved results. In particular, operating profit in the global institutional sector surged 2,123% to 14.3 billion won from 600 million won in the first quarter of last year. The turnaround was largely driven by Philippine Pepsi (PCPPI), a key overseas subsidiary, which recorded operating profit of 5.4 billion won, swinging to the black from a 3.3 billion won loss a year earlier. Philippine Pepsi returned to profit in the second quarter of last year and has stayed in the black for three consecutive quarters.
By contrast, companies with domestically focused business structures posted relatively weak results. LG H&H's refreshment institutional sector recorded first-quarter sales of 407.6 billion won and operating profit of 43.8 billion won, down 2.2% and 6.8% year over year, respectively. Rising prices of raw and subsidiary materials and sluggish sales in offline channels such as big-box retailers had a major impact. LG H&H plans to leverage global sporting events such as the North and Central American World Cup in the second half to strengthen marketing centered on Coca-Cola and Powerade.
Dong-A Otsuka saw profitability deteriorate due to cost pressures. Dong-A Otsuka is an affiliate of Dong-A Socio Holdings. On a consolidation basis, Dong-A Socio Holdings' first-quarter operating profit was 19.1 billion won, down 6% from a year earlier. Dong-A Otsuka also saw profitability deteriorate due to cost pressures.
Industry officials expect the burden of rising prices for raw materials such as aluminum packaging and concentrates to persist for the time being. There are also concerns that cost pressures will intensify in the second quarter due to geopolitical risks in the Middle East.
Park Sang-jun, head of corporations analysis at Kiwoom Securities, said, "Uncertainty over profitability due to higher can and PET unit costs still exists," adding, "With cost increases from the impact of the Middle East war likely to be reflected in earnest from the second quarter, it is difficult to be optimistic about companywide performance improvement."
A food and beverage industry official said, "Although efforts have been made to improve costs, the industry itself remains in poor shape as a weak won and falling demand overlap."
Still, the industry is pinning hopes on the growth potential of certain categories such as zero-calorie drinks, energy drinks, and sports drinks. Lotte Chilsung Beverage's first-quarter energy drink sales rose 8.7% year over year, while sports drink sales increased 11.5%. Dong-A Otsuka also reintroduced the energy drink "Cocas" in March after 15 years as consumers continued to call for its return.
Another factor cited for market growth is expanding demand for energy drinks, especially among younger consumers. A food and beverage industry official said, "In the past, people replenished caffeine with coffee, but recently there has been growing demand to recharge with energy drinks," adding, "As the market itself expands, the industry as a whole is moving to strengthen related product lineups and marketing."