COVID-19 Hits Dairy Industry... Maeil Dairies Overcomes Crisis with Diverse Products

Despite Contraction in Milk and Formula Markets, Growth in Cup Coffee and Adult Nutritional Foods
Solid Financial Structure with Essentially Debt-Free Management

[Asia Economy Reporter Hyungsoo Park] Despite the impact of the novel coronavirus infection (COVID-19), Maeil Dairies has proven its performance stability. Sales and operating profit in the first quarter of this year slightly increased compared to the same period last year. This is thanks to continuously launching new products to strengthen survival in a market where the number of newborns has steadily declined since 2013 and competition has intensified. Based on a stable market position, the company is continuously enhancing product competitiveness, and with a solid financial structure, it is highly likely to survive the unprecedented crisis situation of the 'COVID-19 pandemic.'

According to the Financial Supervisory Service on the 18th, Maeil Dairies recorded consolidated sales of 358.2 billion KRW and operating profit of 20.4 billion KRW in the first quarter of this year. These figures represent increases of 6.1% and 3.8%, respectively, compared to the same period last year.

Maeil Dairies produces a wide range of dairy products including infant formula, milk, and cheese. The sales composition by product is 20% milk, 11% formula, 8% fermented milk, 9% coffee, 10% cheese, 5% processed milk, and 38% others. Besides the milk segment, the company focuses on manufacturing and selling various dairy processed products.

Due to the impact of COVID-19, consumers have tightened their wallets, causing difficulties in the domestic dairy market. In particular, the formula and milk markets have been shrinking continuously due to the decline in the number of newborns.

According to Statistics Korea, the number of newborns in South Korea has been decreasing every year since recording 485,000 in 2012. Last year, only 303,054 newborns were born, a 37.5% decrease over seven years. The total fertility rate last year was 0.98, the lowest level since birth statistics began in 1970. The total fertility rate is the average number of children a woman is expected to have in her lifetime. While demand is decreasing, imported formula is encroaching on the market as overseas direct purchases and online shopping culture expand.

Maeil Dairies is overcoming the crisis by proving its technological capabilities through research and development. As of the end of October last year, it supplied the largest number of 17 types of special formula among domestic companies. The variety of special formulas is one of the indicators of technological capability in the formula industry. Maeil Dairies is the only domestic company producing special formula for patients with congenital metabolic disorders.

By launching liquid formula for convenience and premium formula containing DHA and lutein, key components that regenerate cells at levels similar to breast milk, and exporting formula to the Chinese market, the company is maintaining its sales scale in the formula market.

The decline in birth rates affects not only formula but also milk consumption. As the number of children and adolescents, the main consumers of milk, decreases, the milk market size shrank by 7% within a year. While general milk consumption is declining, the organic milk market is growing. The domestic organic milk market size is expected to grow from about 5 billion KRW in 2008 to approximately 94 billion KRW this year. Maeil Dairies maintains the number one market share in the organic market with its Sangha Farm brand.

Maeil Dairies has improved profitability not only through dairy products but also via cup coffee, adult nutritional products 'Selex,' and plant-based beverages 'Almond Breeze.' The sales proportion of the beverage and other segments, which was 47% last year, is expected to rise to around 50% in 2022. Last year, the domestic market share of cup coffee was 48.3%, with sales increasing mainly in premium large-size cup coffee. The RTD coffee market size reaches 1.3 trillion KRW annually. The cup coffee market, where Maeil Dairies competes, is about 444 billion KRW, accounting for approximately 34% of the RTD coffee market. RTD refers to ready-to-drink beverages packaged in cans, cups, bottles, etc. The cup coffee brand 'Barista Rules' holds the number one position with a 37% market share in the cup coffee market.

Based on a stable business structure, the company maintains a debt-free structure. Maeil Dairies was established in May 2017 through a spin-off of the dairy business division of Maeil Holdings, with net borrowings of 107.3 billion KRW at the time of the split. By generating free cash flow, as of the end of December last year, the company's debt dependency ratio and debt-to-equity ratio were 12.6% and 67.3%, respectively. Overall, financial stability is high.

Lee Dong-eun, a researcher at Korea Ratings, explained, "The company maintains cash-generating power through a stable market position and strengthened product competitiveness from continuous new product development. Considering that there are no plans for new investments in the near future, the actual debt-free structure, where cash holdings exceed borrowings, will continue."

At the end of 2019, the total borrowings on a consolidated basis were 84.8 billion KRW, including short-term borrowings of 41.6 billion KRW and long-term borrowings of 43.2 billion KRW. Considering cash and cash equivalents of 105.2 billion KRW and stable operating cash flow generation, the company is evaluated to have good liquidity response capability.

This content was produced with the assistance of AI translation services.