[Exclusive] Nonghyup Distribution Ultimately Fails in Affiliate Integration

Nonghyup Distribution Experienced Partial Capital Impairment Last Year
Capital Stock 303.4 Billion KRW > Total Equity 274.2 Billion KRW
Accumulated Losses Since 2021 Nonghyup Distribution Affiliates Integration

Nonghyup Distribution fell into capital impairment last year. Capital impairment refers to a situation where total equity is less than capital stock, meaning a company’s accumulated losses have eroded its original equity. Although Nonghyup Economic Holdings, which owns 100% of Nonghyup Distribution, injected funds by contributing real estate assets worth 180 billion KRW last year, the company failed to prevent capital impairment as its losses deepened.

According to Nonghyup Distribution’s audit report released on May 20, the company’s total equity last year stood at 274.2 billion KRW, about 30 billion KRW less than its capital stock of 304.3 billion KRW, resulting in partial capital impairment. This indicates that as the company’s losses increased, its retained earnings were depleted and its capital stock began to be eroded. If the losses continue to grow and completely erode the capital stock, resulting in negative total equity, the company will be classified as fully capital impaired and considered financially distressed from an accounting perspective.

Nonghyup Distribution’s capital impairment began after losses accumulated following the 2021 merger of four affiliated distribution companies. The company recorded a net loss of 28.7 billion KRW last year, with the deficit widening by more than 10 billion KRW from a loss of 18.3 billion KRW in 2022. After the government’s separation of business structures in 2012, Nonghyup divided its economic and credit sectors, with Nonghyup Financial Holdings overseeing finance and Nonghyup Economic Holdings becoming the holding company for the economic sector. In November 2021, Nonghyup Economic Holdings merged four distribution subsidiaries (Nonghyup Distribution, Nonghyup Chungbuk Distribution, Nonghyup Daejeon Distribution, and Nonghyup Busan Gyeongnam Distribution) to launch an integrated entity, at which point profitability sharply deteriorated.

Just before the merger in 2020, operating profit stood at 11 billion KRW, but the following year it shrank to just over 1 billion KRW, and in 2022 the company posted its first operating loss of 21.3 billion KRW. Last year, the operating loss widened to 28.3 billion KRW. During this period, sales grew only slightly from 1.2375 trillion KRW in 2020 to 1.358 trillion KRW in 2023, while labor costs surged after the merger, further increasing operating losses. In fact, the company’s selling and administrative expenses rose from 174.7 billion KRW in 2020 to 272.9 billion KRW last year, an increase of nearly 100 billion KRW. The number of employees also increased from about 1,600 in 2020 to about 2,300 last year.

As Nonghyup Distribution faced the risk of capital impairment due to accumulated losses, Nonghyup Economic Holdings injected additional capital twice. In 2021, when the integrated entity was launched and Nonghyup Chungbuk Distribution, Nonghyup Daejeon Distribution, and Nonghyup Busan Gyeongnam Distribution were merged, 13.36 million new shares were issued, increasing capital stock from 57 billion KRW to 123.8 billion KRW. Then, in February this year, Nonghyup Economic Holdings contributed six real estate assets as in-kind investments, issuing an additional 36.09 million new shares and further increasing capital stock by 180.5 billion KRW, bringing the total to 304.3 billion KRW.

However, during last year’s capital increase through new share issuance, the company recognized a capital surplus of 7.3 billion KRW and an accumulated deficit of 49.7 billion KRW, which, combined with the net loss for the year, expanded the net loss to 28.7 billion KRW.

Amid these financial difficulties, Nonghyup Distribution also sharply increased its borrowings from its affiliate, NH Nonghyup Bank, for operating funds. In 2022, short-term borrowings from Nonghyup Bank amounted to only 10 billion KRW, but last year the company repeatedly expanded its borrowing limits and renewed its agreements, resulting in total borrowings from Nonghyup Bank reaching 70 billion KRW as of this month.

This deteriorating financial structure was anticipated from the time of the merger. Nonghyup Economic Holdings integrated four of its five distribution subsidiaries, excluding Hanaro Distribution, assigning procurement to Nonghyup Economic Holdings and sales to the integrated entity. This led to criticism of an "incomplete integration," as procurement and sales organizations remained separate. At the time, the Nonghyup Distribution labor union warned that transferring the wholesale business would result in operating losses and that capital impairment would begin from 2023.

Meanwhile, Nonghyup Distribution became embroiled in political controversy after selling a bunch of green onions for 875 KRW at the Hanaro Mart Yangjae branch from March 18, 2024, following a visit by President Yoon Suk-yeol, who checked prices ahead of the April 10 parliamentary election. President Yoon called the price "reasonable," prompting criticism of a "showy price inspection." Afterward, Nonghyup Distribution continued to sell green onions at 875 KRW per bunch?about 70% cheaper than the average retail price?for over a month until after the election, raising concerns that this would further undermine the company’s profitability this year.