As the slump in domestic demand drags on, the food industry is accelerating efforts to foster the ingredients business as a new growth engine. Companies are expanding high value-added, business-to-business (B2B) businesses such as lysine, starch sweeteners, functional raw materials, fermentation ingredients, and probiotics to find a breakthrough for growth. However, for now, it is still weighing on results.
Unlike finished goods food, the ingredients business is a B2B business that supplies raw materials to food, pharmaceutical, and feed companies rather than selling directly to consumers. The market is large, and securing global clients can build a stable sales base, but generic ingredients that are hard to differentiate are easily exposed to price competition. That is why Korean food companies have recently been trying to shift from simple raw materials to functional, high value-added ingredients.
According to the food industry on the 15th, this year's finished goods food businesses at major food companies are delivering relatively stable results on the back of export expansion and brand competitiveness. By contrast, the ingredients business is seeing profitability deteriorate as it is directly affected by global oversupply, low-price offensives by Chinese companies, and declines in selling prices.
Target continued solid results in its food business, including kimchi and sauces, thanks to expanded overseas sales and improved manufacturing efficiency, but the ingredients business was sluggish. The food division recorded first-quarter sales of 965.1 billion won and operating profit of 41.2 billion won. Compared with a year earlier, sales rose 3.6% and operating profit 11.4%. In contrast, the ingredients division posted sales of 379.6 billion won and operating profit of 12.5 billion won, down 11.3% and 53%, respectively.
CJ CheilJedang(097950) saw first-quarter food business sales rise 3.9% on-year to 3.0384 trillion won, with operating profit up 4.3% to 143 billion won. In the bio division, which includes specialty ingredients and lysine, sales (988.7 billion won) increased 5.7% from a year earlier, but operating profit (5.5 billion won) fell 92.4%. In response, CJ CheilJedang reorganized from the third quarter into a "lifestyle foods, technology ingredients, and core ingredients" structure to improve profitability in the ingredients business.
However, both companies view the recent slump as stemming from industry conditions rather than weakened business competitiveness. A CJ CheilJedang official said, "Green bio is an industry with cycles depending on market conditions, like semiconductors," and noted, "Conditions are not good now, but there were times in the past when we recorded high profits." The official added, "Both feed amino acids and food ingredients are fields where future demand is expected, backed by sustainability and health trends, so we plan to continue investment and research and development."
A Daesang official also said, "The ingredients business is heavily influenced by international market conditions, but as it is a high value-added business, profitability can improve quickly when the market recovers," adding, "Recently, we have been shifting our business structure to focus on high value-added products such as pharmaceutical-grade amino acids."
Other food corporations are also ramping up investment in the ingredients business to secure long-term growth engines. hy is expanding its probiotics raw materials business, and Samyang Corporation is fostering allulose and dietary fiber as next-generation specialty food ingredients businesses. Daesang is also expanding the development of functional ingredients such as fermented seasoning ingredients and alternative sweeteners as it targets the global B2B market.
◇ Food industry, expanding investment on faith in long-term growth
Industry officials see expansion of the ingredients business as an inevitable choice as growth limits in the domestic market become clearer. A food industry official said, "With growth limited by the domestic market alone, we are expanding investment in functional ingredients and bio," adding, "Because research and development and facility investments take time, and we have to build separate organizations for ingredient sales, it is hard to link to results in the short term, but it is largely a long-term investment to secure competitiveness in the global B2B market."
However, some note that for the ingredients business to establish itself as a new growth pillar for the food industry, the key is to break away from price competition centered on generic ingredients. If companies fail to secure differentiated technology and clients in high value-added ingredients beyond price competition with Chinese firms, it will be hard for large-scale investment to translate into improved profitability.
Lee Jong-u, a professor in the distribution and marketing department at Namseoul University, said, "The food ingredients business is a high value-added field, but global market competition is fierce, and it is somewhat different in character from the areas where domestic food corporations have had strengths," adding, "If they fail to secure differentiated competitiveness in high value-added ingredients, it will not easily lead to improved profitability."