Lotte Chilsung Grows with 'Zero-Saero Effect'... High Exchange Rates and Raw Material Costs 'Hold Back'

Q1 Consolidated Sales of 936.9 Billion KRW... 37.8% Increase YoY
Zero-Calorie Drinks, Soju and Beer Sales All Rise
High Exchange Rates and Raw Material Price Increases... Operating Profit Declines

Lotte Chilsung Beverage, which started the year with a goal of achieving annual sales of 4 trillion won, succeeded in expanding its size as zero-calorie carbonated drinks continued strong growth and both soju and beer showed solid sales. However, profitability was somewhat sluggish due to high exchange rates and raw material costs, leaving some regrets.

Sales increased across zero-calorie drinks, Saero, and Crush... Profitability hampered by high exchange rates

According to the Financial Supervisory Service's electronic disclosure system on the 2nd, Lotte Chilsung Beverage's consolidated operating profit for the first quarter of this year was 42.4 billion won, down 28.5% from 59.3 billion won in the same period last year. Sales amounted to 936.9 billion won, up 37.8% from 679.8 billion won in the previous year.

Looking at each business segment, the beverage division recorded sales of 431.3 billion won, a 2.0% increase compared to 423.0 billion won in the same period last year, but operating profit fell 38.6% to 23.9 billion won from 39.0 billion won a year earlier. The beverage business in Q1 was affected by high exchange rates and rising raw material prices. Prices of key raw materials such as fruit concentrates and sugar increased, and the external environment worsened due to sustained high exchange rates, leading to higher business expenses. Additionally, colder weather compared to last year negatively impacted the overall business environment.

However, sales of carbonated drinks, which account for half of the beverage business, remained solid, with zero-calorie carbonated drink sales achieving 70 billion won, a 9.4% increase year-on-year. Its share within the entire carbonated category rose to 30%, indicating growing importance. Energy drink sales also rose 31.3%, and exports led by ‘Milkis’ and ‘Aloe Juice’ increased by 14.4%. On the other hand, sales in the bottled water and sparkling water categories declined by 8.1% and 3.5%, respectively, showing sluggish performance.

The alcoholic beverage division posted sales of 214.8 billion won, up 3.4% from 207.7 billion won in the same period last year, and operating profit increased 4.7% to 18.3 billion won from 17.5 billion won. Sales growth was driven by increases in both soju and beer sales. The soju business grew 6.6% year-on-year to 90.5 billion won, led by ‘Saero,’ which recorded sales of 37.7 billion won, up 34.2% from a year earlier. Beer sales also increased due to the rising sales of the new product ‘Crush,’ launched last November. Conversely, whiskey (-12.0%) and wine (-8.0%) sales declined, showing a weakening trend.

Lotte Chilsung Beverage, 'Chilsung Cider Retro'

4 trillion won sales target... Performance of alcoholic beverages and Philippine subsidiary is key

Having surpassed 3 trillion won in sales last year, Lotte Chilsung Beverage plans to exceed 4 trillion won within a year. To achieve this goal, the alcoholic beverage division, where promotional costs are increasing, and the newly incorporated Philippine subsidiary must perform well. First, the alcoholic beverage division needs to be led by the soju business, which continues to perform well despite sluggish domestic demand and intensified competition. The zero-sugar soju ‘Saero,’ launched in September 2022, has steadily gained market acceptance, raising its market share in the soju market from about 0.9% in its first year to 7.9% last year. Thanks to Saero's success, Lotte Chilsung's overall market share also rose from 16.6% to 20.7% during this period.

Lotte Chilsung is moving quickly with the goal of increasing its soju market share to 25% this year by strengthening the Saero lineup and renewing ‘Cheoeum Cheoreom.’ Last month, Lotte Chilsung introduced ‘Saero Salgu’ with an alcohol content of 12%, and this month began sales of the renewed Cheoeum Cheoreom. Lotte Chilsung stated, “We plan to continue aggressive marketing tailored to consumers' diverse soju needs through a two-track strategy with Cheoeum Cheoreom and Saero.”

Additionally, the beer business, which has been considered a sore spot, also needs to contribute. The beer business's poor performance has been a decisive factor in the overall profitability decline of the alcoholic beverage division. Last year, Lotte Chilsung's alcoholic beverage sales increased 3.8% to 803.9 billion won from 774.5 billion won a year earlier. However, operating profit fell 9.0% from 36.9 billion won to 33.6 billion won, with the beer business's poor performance being a major cause. In fact, while the soju business, led by Saero, fought back with sales rising 22.4% year-on-year to 338.7 billion won, beer category sales represented by ‘Cloud’ decreased 18.0% from 98.4 billion won to 80.7 billion won.

Therefore, whether Crush can show a different performance from Cloud will be a key point. To overcome the beer market slump, Lotte Chilsung launched the new beer product Crush last November, three years after releasing ‘Cloud Saeng Draft’ in 2020. However, initial reactions have been lukewarm, as it is realistically difficult to displace already well-established competitors and secure market share. Consequently, Lotte Chilsung quickly expanded the lineup to canned beer earlier than planned as a follow-up measure. Fortunately, Crush's monthly sales, which had been around 1 billion won, reportedly increased to about 5 billion won per month after the canned beer launch in February, showing positive effects.

Panoramic view of the Pepsi Philippines Santo Tomas plant.

Meanwhile, the performance of Philippine Pepsi (PCPPI), which was incorporated as a subsidiary last year, is expected to play a decisive role in whether Lotte Chilsung achieves 4 trillion won in sales this year. Therefore, how quickly profitability improvement efforts at Philippine Pepsi progress is an important point to watch. Philippine Pepsi is the second-largest beverage company in the Philippines with annual sales of about 1 trillion won. Lotte Chilsung acquired 73.6% of Philippine Pepsi's shares last September, gaining management control. Philippine Pepsi currently operates 12 factories and 14 sales offices, along with 69 sales branches across Luzon, Visayas, and Mindanao regions.

Since last year, Lotte Chilsung has been conducting a ZBB (Zero-based Budget) project to improve Philippine Pepsi's profitability. ZBB is Lotte Chilsung's cost reduction methodology that reviews cost support from the ground up during budget planning. Although the separate results of the Philippine subsidiary for Q1 have not been disclosed, considering initial costs after incorporation, it is still too early to discuss contributions in terms of operating profit. Kwon Woo-jung, a researcher at Kyobo Securities, said, “Philippine Pepsi will carry out a 100 billion won scale ZBB project over the next three years, including automation equipment introduction and logistics optimization,” adding, “Exchange rates are expected to stabilize in the second half, so performance may turn around from the second half of this year.”

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