Significant Reduction in Food Company Inventory Assets... Will Pressure for 'Price Cuts' Intensify?

CJ CheilJedang, Daesang Inventory Down Over 20%
Impact of Price Drops in Wheat, Corn, Palm Oil
Processed Food Prices Rising... Food Industry with Strong Performance on Alert

Last year, the inventory assets of major food companies such as CJ CheilJedang sharply decreased by more than 20%. This was due to the decline in prices of flour, corn, and palm oil, which had been soaring, leading to reduced raw material purchase costs. Pressure to lower prices targeting the food industry, which had raised product prices citing cost increases in recent years, is expected to intensify.

On the 21st, Asia Economy analyzed the business reports of major food companies from last year and found that the inventory assets of major food companies such as CJ CheilJedang, Daesang, and Lotte Wellfood decreased by more than 20% compared to the previous year. Inventory assets include assets stored in warehouses, such as finished products made for sale, semi-finished products that have undergone some processing, and raw materials, with finished products and raw materials accounting for a large proportion.

Citizens are shopping at a large supermarket in downtown Seoul.

Raw material prices such as flour, corn, and palm oil consecutively decline

The company with the steepest decline in inventory assets was Daesang. Last year, Daesang's inventory assets on a consolidated basis were 540.44511 billion KRW, down 24% from 706.51628 billion KRW the previous year. Next, Lotte Wellfood's consolidated inventory assets decreased by 23%, from 623.44288 billion KRW to 481.11519 billion KRW. In the case of CJ CheilJedang, the separate basis inventory assets excluding Korea Express were 930.32120 billion KRW, down 22% from 1.1962023 trillion KRW the previous year.

Food companies manage finished product inventory levels stably considering expiration dates. Therefore, the scale of inventory assets often changes depending on fluctuations in raw material prices. The decrease in inventory assets last year is interpreted as a result of reduced costs spent by food companies purchasing raw materials due to the continued decline in prices of grains such as flour and corn, and palm oil, as well as a decrease in the valuation of raw materials. In 2022, when Russia invaded Ukraine, major raw material prices surged sharply, causing food companies' inventory assets to increase significantly.

In fact, the import price of wheat flour (per 1kg), a raw material for flour, peaked at 623.2 KRW in the third quarter of 2022, then began to decline significantly from the first quarter of last year, falling 31.0% to 435.1 KRW in the fourth quarter.

In the case of Daesang, the valuation of raw materials within inventory assets decreased by nearly 40%. It fell 39% from 261.082 billion KRW in 2022 to 159.662 billion KRW last year. The price decline of corn, a major raw material, had a significant impact. Corn is mainly used in Daesang's material business. CJ CheilJedang's raw materials amounted to 217.0706 billion KRW, down 23% from 282.3186 billion KRW the previous year. Prices of main raw materials such as wheat, soybeans, and corn fell last year.

For Lotte Wellfood, the raw material decrease rate was about 17%. The decline in prices for securing oil raw materials such as soybean oil, palm oil, and palm kernel oil had an effect. A food industry insider said, "The quantity of finished products or raw material inventory remains roughly the same every year, so the scale of inventory assets changes due to fluctuations in raw material prices," adding, "In 2022, when raw material prices surged, some food companies saw inventory assets increase by more than 50%."

However, some food companies argued that the decrease in inventory assets was more due to reduced purchase volumes than the decline in raw material prices. Another food industry insider explained, "In 2022, raw material prices were rising sharply, so companies increased their advance purchases, but conversely, last year, as prices fell, purchase volumes were reduced, resulting in decreased inventory assets."

Processed food prices rising... Government pressure on price cuts puts food industry on edge

Citizens are shopping at a large supermarket in downtown Seoul.

Although major raw material prices are declining, processed food prices are still rising. According to Statistics Korea, among 73 detailed items that make up processed foods in last month's Consumer Price Index, 49 items showed positive inflation rates, more than double the 23 items with negative rates.

As the burden of raw material costs has eased due to the decrease in inventory assets last year, pressure from the government and consumers for price reductions targeting major food companies is expected to intensify. Earlier, on the 18th, President Yoon Suk-yeol visited the Nonghyup Hanaro Mart Yangjae branch in Seocho-gu, Seoul, to check prices and warned, "We will respond strictly to excessive price hikes, market disruption acts such as collusion, and unfair practices that seek excessive profits."

However, food companies are struggling internally. Most food companies recorded good performance last year due to price increases and export growth, but the government is again pressuring price stabilization. The food industry had already lowered prices of ramen and snacks in June last year when inflation was steep.

The food industry maintains that there is no room for further price cuts. A food industry insider said, "Many raw materials such as sugar continue to rise in price, and with increasing costs such as labor and transportation, further price reductions are impossible," adding, "The recent sharp rise in grocery prices is largely due to agricultural products like apples, but processed foods seem to be unfairly bearing the burden."

Meanwhile, Nongshim's inventory assets last year increased by 7% to 318.23427 billion KRW compared to the previous year. A Nongshim official explained, "This was due to increased raw material purchases and finished product inventory as overseas export volumes grew."