[Why&Next] Pepero Hits the 'Domestic Wall'... Facing Backlash from 'Price Hikes'?

Lotte Wellfood Faces Earnings Shock in H1... Q3 Operating Profit Expected to Decline
Impact of Soaring Cacao and Sugar Prices Continues, Heavy Reliance on Domestic Market Remains a Burden
Gradual Recovery Anticipated from Q4 as Cost Stabilization an

Lotte Wellfood is expected to continue facing profitability challenges in the third quarter, following its earnings shock in the first half of the year. While sales are showing signs of recovery, the company is still grappling with the impact of rising raw material prices, such as cocoa and sugar, as well as sluggish domestic demand. However, from the fourth quarter onward, the effects of lower costs and price increases are expected to be fully reflected, leading to a gradual recovery in performance.

According to financial information provider FnGuide on the 23rd, Lotte Wellfood’s sales for the third quarter of this year are projected to reach 1.1297 trillion won, up 4.8% from the same period last year. However, operating profit during the same period is expected to decrease by 2.9% to 73.8 billion won.

Domestic Sales and Cost Burden Pressuring Profitability

Lotte Wellfood was launched in 2022 through the merger of Lotte Confectionery and Lotte Foods, joining the “4 trillion won club” the following year with annual sales of 4.0663 trillion won. However, since last year, its performance has declined, falling into negative growth. In the first half of this year, sales increased by 2.2% year-on-year to 2.0394 trillion won, but operating profit was halved compared to the previous year (100.6 billion won), falling to 50.7 billion won.

The main factor was the burden of raw material costs. The unit price of cocoa, a key ingredient in chocolate, reached a peak, increasing cost pressures, and the overall prices of sugar, grains, and dairy products continued to rise. These high costs have been cited as the main reason for Lotte Wellfood’s low profitability. In the first half of the year, the unit prices of key raw materials such as cocoa, sugar, and dairy products surged, pushing Lotte Wellfood’s cost ratio above 70%.

In response, Lotte Wellfood raised the prices of 26 products, including Pepero, by an average of 9.5% in February this year. This followed an average price hike of 12% for 17 products, including Choco Pepero, in June last year, marking another increase just eight months later.

However, it was difficult to offset cost pressures through price hikes alone. The domestic market showed strong price resistance, and the price increases ended up having a negative effect. In the second quarter of this year, Lotte Wellfood’s domestic sales fell to 1.4637 trillion won, down from 1.498 trillion won in the second quarter of last year. Although selling prices rose, product demand declined. Sales of ice cream products were sluggish due to cooler-than-usual weather in the first half, and consumption was further dampened by the domestic economic downturn.

As a result, in April this year, Lotte Wellfood implemented a voluntary retirement program for the first time since its founding, targeting employees aged 45 or older with more than 10 years of service.

High Domestic Dependence... Overseas Strategy Yet to Bear Fruit

However, it is difficult to attribute Lotte Wellfood’s recent struggles solely to rising raw material costs and weak domestic demand. Structural limitations in its business model are also at play. More than 70% of Lotte Wellfood’s sales come from the domestic market. The problem is that the domestic market is deteriorating further. Demand for confectionery, ice cream, and dairy products is declining due to population decrease and changing health trends. In contrast, major competitors such as Orion are diversifying their growth engines by increasing their overseas sales share to more than half.

Cham-Yeop Lee, CEO of Lotte Wellfood

Lotte Wellfood also brought in Cham-Yeop Lee, who previously led Coca-Cola Korea, in 2023 to spearhead its overseas business. Lee, who has built his career at Korea P&G, Coca-Cola Korea, and LG Household & Health Care, is the company’s first CEO from outside the group. The company has set a mid-to-long-term goal of raising its overseas sales ratio, currently at 25%, to over 35% by 2028.

However, as the overseas business is still in the early stages of expansion, costs related to localization and foreign exchange risks are not yet translating into improved profitability. Lotte Wellfood currently operates overseas subsidiaries in seven countries, including China, Singapore, India, Russia, Kazakhstan, and Belgium. The largest market is India. Lotte Wellfood first entered India in 2004 by acquiring local confectionery company Parrys Confectionery (now Lotte India), and expanded into the ice cream market in 2017 by acquiring Havmor. Last year, the two companies recorded sales of 117.6 billion won and 172.8 billion won, respectively.

Lotte Wellfood announced its intention to grow its India market sales to 1 trillion won annually by 2032 and merged the two companies this year. In the first half of this year, their combined sales reached 184.5 billion won, up 15.1% year-on-year. However, net profit during this period was halved, falling from 14.4 billion won to 7.6 billion won. A Lotte Wellfood representative explained, "The burden of raw material costs due to the international increase in cocoa prices was reflected," adding, "In addition, the completion and operation of a new factory in the Pune region this year temporarily increased fixed costs, which also affected profitability."

The new Pune factory is the first production facility expansion since the acquisition of Havmor and is responsible for producing ice cream products. Lotte Wellfood plans to expand the number of production lines at the Pune factory from the current nine to sixteen by 2028, so it is expected that profitability improvement will take some time.

The situation is similar in other regions. Excluding the Russian subsidiary, which achieved sales of 50 billion won in the first half of this year, growth in Kazakhstan (128.2 billion won), Singapore (7.8 billion won), the Netherlands (37.2 billion won), and Myanmar (26.2 billion won) has been slow. However, Lotte Wellfood’s exports in the first half of this year reached approximately 180 billion won, and have been gradually increasing every year.

Cocoa Price Drops... Will There Be a Rebound in Q4?

As short-term pressures such as rising costs and sluggish consumption are significant in the domestic business, resolving domestic issues will be essential for the global expansion strategy to succeed.

In fact, while sales are expected to show signs of recovery in the third quarter of this year, profitability is unlikely to return to normal. Park Sangjun, a researcher at Kiwoom Securities, commented, "Despite price increases for key products, the benefits of government-issued consumption coupons, and the positive impact of holiday timing differences, the burden of higher cocoa input costs and one-off expenses will cause the company’s overall operating profit for the third quarter to decline year-on-year."

However, performance is expected to gradually recover from the third quarter, as a significant improvement in margins driven by lower cocoa costs is anticipated from the fourth quarter onward. Eunji Kang, a researcher at Korea Investment & Securities, said, "Recently, cocoa prices have fallen to the high $5,000 per ton range, and the effects of price increases for chocolate products both domestically and internationally are gradually being reflected," adding, "Starting with a smaller decline in third-quarter operating profit, the company’s performance is expected to improve through next year."