The contract for the consignment sale of Kwangdong Pharmaceutical's bottled water, Samdasu, is set to end this year. Kwangdong Pharmaceutical has generated over 300 billion won in annual sales by distributing Samdasu, the top product in the bottled water market. If the company fails to renew the distribution rights for Samdasu, it could face a crisis with a 33% drop in sales, drawing attention from the industry.
According to the industry on the 25th, the consignment sale contract for Samdasu between Kwangdong Pharmaceutical and the Jeju Development Corporation will expire this December. Until 2012, Samdasu was distributed by Nongshim, and since 2013, Kwangdong Pharmaceutical has handled its consignment sales. Jeju Development Corporation directly distributes to three large supermarkets (Emart, Homeplus, and Lotte Mart) and has left the distribution to Kwangdong Pharmaceutical outside of Jeju Island.
The distribution rights for Samdasu are referred to as the 'goose that lays the golden eggs.' With a market share of 40.4% in the domestic bottled water market as of the first quarter, distributing Samdasu can quickly elevate a company to the top of the bottled water industry. Since Samdasu is produced by Jeju Development Corporation, having a distribution network allows easy sales. This also provides an opportunity to expand sales of other Kwangdong Pharmaceutical products while distributing Samdasu to convenience stores and supermarkets.
The contract period for Samdasu between Kwangdong Pharmaceutical and Jeju Development Corporation is a basic four years. If both parties agree, it can be extended for one more year. Kwangdong Pharmaceutical has entered into two four-year contracts along with the 'four-year contract + one-year extension' since 2013. A Jeju Development Corporation official noted, 'It has not yet been decided whether Kwangdong Pharmaceutical will sign another consignment sale contract for Samdasu.'
It is uncertain whether Kwangdong Pharmaceutical will continue to distribute Samdasu. This is due to the formidable challenges posed by competitors looking to enter the bottled water market. If Kwangdong Pharmaceutical fails to extend the contract, Jeju Development Corporation will issue a bid announcement in the second half of this year and select a preferred negotiator to finalize the main contract.
A Jeju Development Corporation official stated, 'We evaluate how much social contribution the bidding companies have made in Jeju Island.' Generally, pharmaceutical companies engage in nationwide social contribution activities targeting patients, but Kwangdong Pharmaceutical has notably focused on Jeju Island for this reason.
Kwangdong Pharmaceutical is anxious about the expiration of the Samdasu contract. The company's sales last year were 974.8 billion won, with Samdasu sales contributing 319.7 billion won, accounting for 33% of total sales. Samdasu's sales have increased by 154%, from 125.7 billion won in the first year of the contract in 2013 to 319.7 billion won last year.
Despite having 'pharmaceutical' in its name, Kwangdong Pharmaceutical generates 54.6% (532.2 billion won) of its sales from food and beverages. This includes Samdasu (319.7 billion won), Vita500 (91.7 billion won), corn silk tea (40.4 billion won), and Hangover tea (39.6 billion won).
The company is also not very active in drug development. Last year, Kwangdong Pharmaceutical's research and development (R&D) expenses amounted to 15.7 billion won, just 1.6% of total sales. Instead, since last year, Kwangdong Pharmaceutical has been distributing the human papillomavirus (HPV) vaccine 'Gardasil' by the U.S. pharmaceutical company MSD domestically. Last year's sales of Gardasil reached 115.75 billion won, accounting for 12% of total sales.
An official from the Korea Pharmaceutical and Bio-Pharma Manufacturers Association stated, 'Pharmaceutical companies can allocate as much as 20% of their total sales to R&D expenses,' adding, 'A rate in the 1% range indicates a low level of investment in research.' An industry insider noted, 'While Kwangdong Pharmaceutical is generating sales by distributing other companies' products in the country, it seems to be reluctant to invest in the development of its own products, signaling a need for more effort towards product development.'