[Why&Next] LG Household & Health Care Holding 1 Trillion Won in Cash... Why Decide to Part Ways with Its Prime Beverage Business?

Abandoning Beverages, Going All-In on Cosmetics...
Lee Jungae's Rebalancing Strategy
Left Out of the K-Beauty Boom...
Beverage Division Expected to Account for 60% of Operating Profit
Erasing Cha Sukyong? ...
Will Coca-Cola Beverage Be Sold

LG Household & Health Care has begun restructuring its beverage business division. The company plans to scale down its beverage business, which has a high domestic market share, and instead focus on 'K-Beauty', which has recently gained recognition in the global market. However, the market's response has been negative as the company moves to sell off its beverage business, which has served as a 'cash cow'.

LG Household & Health Care Headquarters.

According to industry sources on September 5, LG Household & Health Care has appointed Samjong KPMG as its lead advisor and is currently working to streamline its beverage business division. The top candidate for sale is Haitai htb. The market estimates Haitai htb's value at 250 billion won.

Haitai htb is a subsidiary acquired by LG Household & Health Care in 2011 from Asahi Breweries and others, and has introduced fruit and vegetable beverages such as Sunkist, Cocopalm, and Galamandeunbae. While LG Household & Health Care has traditionally focused on cosmetics and household goods, it sought to increase its share in the beverage market beyond Coca-Cola, which it had operated since 2007. Last year, Haitai htb posted sales of 414 billion won and an operating profit of 3.6 billion won, representing a decline of 1.3% and 74%, respectively, compared to the previous year.

Abandoning Beverages, Going All-In on Cosmetics... Lee Jungae's Rebalancing Strategy

This sale of the beverage subsidiary is part of CEO Lee Jungae's rebalancing initiative. After former Vice Chairman Cha Sukyong stepped down in 2022 and Lee Jungae took office, the company has been pursuing a strategy focused on cosmetics and healthcare. However, as the slump in the cosmetics business has persisted, the company now appears to be prioritizing portfolio restructuring and efficiency over expansion.

CEO Lee is expected to use the funds raised from this beverage business sale to actively invest in cosmetics mergers and acquisitions (M&A) and overseas expansion. When she unveiled this year's business strategy, she declared an aggressive M&A approach. In her New Year's address, she stated, "We plan to pursue brand M&A based on Millennials & Gen Z and Alpha generation customers," adding, "For businesses with insufficient future growth potential and profit contribution, we will strengthen efficiency to solidify our business fundamentals."

In fact, it is understood that several indie cosmetics brands, which have been highly valued in the M&A market, proposed acquisition by LG Household & Health Care, but deals fell through due to high prices and insufficient production capacity.

LG Household & Health Care holds more than 1 trillion won in cash-equivalent assets. Although operating cash flow slowed from 497.3 billion won in 2022 to 659.1 billion won in 2023, and 527.6 billion won last year, the company's cash holdings actually increased. As of the end of last year, LG Household & Health Care's cash-equivalent assets amounted to 1.2535 trillion won, a 37.7% increase from 2023.

This raises questions about why a company with ample cash reserves is selling its highly profitable beverage business, which accounts for about half of its operating profit. In the second quarter of this year, the beverage division generated 42.5 billion won (about 78%) of the company's 54.8 billion won operating profit, supporting overall earnings. According to Samsung Securities, nearly 60% of this year's operating profit is expected to come from the beverage business. This is why there is significant internal resistance to the sale of the beverage business. Within and outside the company, there are growing complaints that "the business responsible for profits has been branded as 'non-core.'"

Left Out Despite K-Beauty Boom... Beverage Division Expected to Account for 60% of Operating Profit

There is also a pessimistic outlook regarding the recovery potential of the cosmetics business. Just four years ago, LG Household & Health Care was considered the number one domestic household goods and cosmetics company, but it is now seen as being left behind in the K-Beauty trend. After suffering setbacks from the COVID-19 pandemic and a slump in the duty-free sector, the company focused on rebranding its flagship brand 'The History of Whoo' and cutting costs, but failed to reduce its excessive dependence on China, resulting in continued weakness in overseas business.

An industry insider explained, "The recent cosmetics trend is about value for money and innovation, but LG Household & Health Care, which focused only on China, failed to respond to this. While the entire industry is growing, only LG Household & Health Care is declining."

Due to the poor performance of its core business, LG Household & Health Care's results have been deteriorating. The company's consolidated sales shrank from 8 trillion won in 2021 to the 6 trillion won range for two consecutive years since 2023. Last year, sales reached 681.19 billion won, marking only 0.1% growth, and this year's consensus forecasts sales of 655.95 billion won and operating profit of 320.3 billion won, representing declines of 3.71% and 30.22%, respectively.

Erasing Cha Sukyong's Legacy? ... Will Coca-Cola Beverage Also Be Sold?

The sale of the beverage business directly contradicts the strategy of former Vice Chairman Cha. The beverage division has strong symbolic significance as it was developed under his leadership. After acquiring Korea Coca-Cola Bottling in 2007, Cha went on to acquire Diamond Saemmul in 2009, Korea Beverage in 2010, and Haitai htb in 2011, making beverages, along with cosmetics and household goods, one of the company's three core pillars.

In particular, the company established a structure where the off-season for cosmetics and the peak season for beverages would offset each other's seasonal risks. It is said that LG Household & Health Care's growth from 1 trillion won in sales in 2004 to 8 trillion won in sales and 1 trillion won in operating profit in 2021 was made possible by building these three pillars.

The industry expects that CEO Lee will sequentially sell off the entire beverage business. In particular, Coca-Cola Beverage, which holds exclusive rights to manufacture, sell, and distribute domestically and accounts for more than half of the beverage division's sales, is expected to be sold after Haitai htb. Coca-Cola Beverage alone accounts for 50-60% of the beverage division's sales as a single brand.

Another industry insider explained, "Even selling only Coca-Cola would generate about 600 billion won in liquid assets. Given its size, it is likely that Haitai will be sold first, with subsequent sales considered afterward."

However, LG Household & Health Care maintains its official position that "Coca-Cola Beverage has never been considered for sale." The company stated, "We are reviewing various options to strengthen business competitiveness, but nothing has been specifically decided."