Lotte Chilsung Aiming for Annual Sales of 3 Trillion Won, Can It Overcome the WHO-Originated Zero Crisis?

Q2 Sales 809 Billion KRW... 6% Increase YoY Expected
Zero Sugar Beverages and Soju Lead H1 Performance
Aspartame Controversy Key to Impact on Zero Products

Lotte Chilsung Beverage, which started the year aiming for "annual sales of 3 trillion won," appears to be turning the corner with a decent performance. While zero-sugar beverages and soju led the first half results, whether the company can safely overcome the unexpected obstacle posed by the World Health Organization (WHO)'s aspartame hurdle will likely determine if it can safely reach the finish line set for the end of the year.

Lotte Chilsung Beverage's zero-sugar soju 'Saero'

According to financial information firm FnGuide on the 19th, Lotte Chilsung Beverage's sales in the second quarter of this year are estimated to increase by 6.1% compared to the same period last year, reaching 809 billion won. Operating profit for the same period is also expected to rise by 4.5% to 66.6 billion won.

Both the beverage and liquor sectors are expected to see performance growth driven by rapidly increasing demand for zero-sugar products. In the beverage sector, the carbonated category is anticipated to lead the division's growth due to strong sales of zero-sugar products such as Milkis Zero. In the liquor sector, the zero-sugar soju "Saero" is expected to be responsible for the division's growth trend by raising monthly sales to over 10 billion won despite sluggishness in other liquor categories.

However, it is uncertain whether zero-sugar products can continue to play a pivotal role in the second half of the year. The WHO's classification of aspartame, an artificial sweetener that replaces sugar, as a possible carcinogen has dampened the zero-sugar craze, putting zero-sugar products, which were previously a boon, at risk of becoming a liability overnight. On the 14th, the International Agency for Research on Cancer (IARC) under the WHO and the Joint FAO/WHO Expert Committee on Food Additives (JECFA), a joint subsidiary of WHO and the United Nations Food and Agriculture Organization (FAO), announced that aspartame would be classified in Group 2B as a possible carcinogen.

The classification of aspartame as a possible carcinogen has forced Lotte Chilsung to closely monitor consumer reactions. Among Lotte Chilsung's products, Pepsi Zero, which is distributed domestically, contains a small amount of aspartame. Since Lotte Chilsung must follow the recipe provided by Pepsi's headquarters, which supplies the concentrate, it is not easy to independently replace raw materials.

Above all, although current levels of aspartame intake are considered safe, the spread of negative perceptions about artificial sweeteners means that even if aspartame is not used, negative views toward alternative sweeteners could spread across zero-sugar products, potentially causing adverse effects. In this case, not only carbonated beverages including Pepsi Zero but also the rapidly growing sales of Saero, which is targeting 130 billion won in sales this year, are inevitably clouded by uncertainty.

On the other hand, if the aspartame controversy fails to overturn the zero-sugar trend and remains a minor issue, Lotte Chilsung is expected to smoothly sail toward surpassing 3 trillion won in sales this year. In particular, Saero is likely to positively impact performance improvement as marketing cost burdens ease. Sanghoon Cho, a researcher at Shinhan Investment Corp., predicted, "If the store penetration rate increases, annual sales of 130 billion won are expected, and considering the cannibalization effect with Chum-Churum, achieving a 20% market share in the soju market is quite feasible."

Moreover, if Lotte Chilsung's Philippine subsidiary, "Philippine Pepsi," is consolidated into the group's financial statements within the year, both external growth and profitability improvement are expected. Eunju Shim, a researcher at Hana Securities, analyzed, "If consolidation is confirmed, gradual profitability improvement is expected through the application of Lotte Chilsung's 'ZBB (Zero-based Budget)' know-how." ZBB is a financial strategy that starts budgeting from zero without referring to the previous year's budget, aiming to improve profitability by efficiently managing operating expenses. As of the end of last year, Philippine Pepsi's sales were 908.7 billion won, operating profit was 800 million won, and Lotte Chilsung's stake was 73.6%.

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