"Maxim is Unbeatable"... The Humiliation of Nestl?, the World's Largest Food Company [Why&Next]

Lotte Nestle Begins Liquidation After 12 Years of Joint Venture
Korean Coffee Mix Market Share Remains Stuck in the 1% Range
Sales Declined Over 12 Years... Market Share Also Fell

The world's largest food company, Nestl?, is withdrawing from the domestic instant coffee market in South Korea. After partnering with the country's largest distribution group, Lotte, in 2014 to target the Korean market, the joint venture is closing after 12 years due to losing out to local coffee brands. Nestl? is expected to continue part of its business through Nestl? Korea, which operates independently in the domestic market.

According to the food industry on the 20th, Lotte Nestl? Korea, a joint venture equally owned by Lotte Wellfood and Nestl?, will close in the first quarter of next year. The two companies concluded that liquidating the joint venture was better than maintaining it after comprehensively considering global priorities, the domestic market situation, and the shared capabilities of both companies. Lotte Nestl?, headquartered in Switzerland, the world's largest food company, produced and distributed Nescaf? instant coffee, coffee mixes, chocolate powder drinks, fruit powder drinks, pet food, and more.

Launch of Large Corporation Joint Venture... Market Share in the 1% Range

Nestl? entered the Korean market by establishing Korea Nestl? in October 1987. In 1989, it launched the coffee mix brand 'Taster's Choice' and challenged the domestic mix coffee market. When Lotte Group's Lotte Chilsung struggled with a market share stuck in the 1% range despite pushing Cantata in 2013, it is known that Lotte proposed a business partnership to Nestl?.

In 2014, both sides established the joint venture Lotte Nestl? Korea and embarked on aggressive market expansion. Lotte invested a total of 50 billion KRW to establish the joint venture. Nestl? aimed to expand its market share by utilizing Lotte's distribution and sales networks, while Lotte envisioned strengthening the core competitiveness of coffee by leveraging Nestl?'s product capabilities.

However, struggles in the Korean market continued. According to market research firm Nielsen, as of the end of last year, Dongseo Food held a dominant 90.8% market share in the coffee mix market. Namyang Dairy Products followed with 5.6%, while Lotte Nestl? had only 1.5%. In the instant coffee market, the order was Dongseo Food (75%), Nestl? (19.1%), and Namyang Dairy Products (0.1%).

Lotte Nestl? Korea's sales declined from 284.4 billion KRW in 2014 to 240 billion KRW in 2023. Profitability was also poor. After five years of losses following the joint venture's establishment, Lotte Nestl? Korea turned a profit of 3.4 billion KRW in 2019. However, operating profit remained in the tens of billions of KRW annually, such as 4 billion KRW in 2023. The operating profit margin stayed in the 1% range. It is analyzed that Lotte Group's recent strategy to restructure inefficient affiliates and strengthen core businesses influenced this liquidation decision. A Lotte official said, "Since the results were minimal, we have been discussing the termination of the joint venture operation for several years," adding, "We will proceed with the liquidation process over the course of a year."

Nestl? Parts Ways with Lotte, Pursues Independent Strategy in Korean Market

On the 14th, Lotte Nestl? finalized the decision to cease operations at a board meeting. Nestl? Korea, which operated separately from Lotte Nestl?, will take over part of Lotte Nestl?'s business. Nestl? Korea will start the 'Nestl? Purina Petcare' business from the 1st of next month. Nestl? Purina Petcare is currently the pet business division operated by Lotte Nestl? Korea. The business rights will be transferred to Nestl? Korea within this month, and employees will also move to Nestl? Korea. Nestl? Korea is also considering selling some coffee products such as Nescaf?.

Once the shareholders' meeting decides on liquidation, legal procedures begin. After appointing a liquidator, debts and assets are settled. Typically, the liquidator is the existing management (legal representative). Major assets of Lotte Nestl?, including the Cheongju factory and Nestl? Professional B2B equipment, are also up for sale. A Nestl? official explained, "The Cheongju factory was built in the 1980s, so its production facility competitiveness is considered low."

Remaining assets are distributed according to shareholders' equity ratios. As of 2023, Lotte Nestl? Korea has assets of 157.2 billion KRW, including 1.7 billion KRW in cash equivalents, and liabilities of 79.5 billion KRW. After repaying debts, the net assets (77.7 billion KRW) can be distributed to shareholders. However, due to accumulated deficits amounting to 75.2 billion KRW, it is estimated that there will be almost no distributable assets in reality.

With Lotte Nestl? ending its business earlier than expected, attention is also on whether royalty settlements paid to Nestl? headquarters will be made. Lotte Nestl? signed a technology introduction contract with Nestl? in 2014, agreeing to pay technology usage fees for 30 years. According to the contract, a total of 40.8 billion KRW (50% prepaid) in royalties was prepaid, with 1.361 billion KRW recorded annually as accounting expenses. Industry insiders expect that the remaining prepaid amount of 27.2 billion KRW will be difficult for Lotte Nestl? to recover due to the early termination of the royalty contract.

Meanwhile, Lotte Nestl? separately paid 45.5 billion KRW in technology introduction fees to Nestl? headquarters from 2014 to 2023.

The fate of employees is also a challenge to resolve. Nestl? and Lotte plan to prioritize employees and provide necessary support measures. However, with no specific guidelines yet, the internal atmosphere is unsettled. A Lotte Nestl? official said, "After hearing the announcement of business closure, there has been no notice," adding, "Since no prior information was given, employees are in a more anxious situation." About 230 employees work at the Lotte Nestl? Cheongju factory, and about 70 at the headquarters.