Seoul Dairy Back in the Red After Asset Sales Boosted Profits Last Year... 'Top Spot in Jeopardy'

원본보기 아이콘

Seoul Milk Cooperative, the top player in Korea's dairy industry, recorded a net loss of over 20 billion won in the first half of this year, returning to the red after just one year. Despite tightening its belt as milk product sales declined due to sluggish domestic demand, profitability was hampered by subsidies paid to member dairy farmers. During the same period, competitor Maeil Dairies managed to remain profitable and even increased its sales, narrowing the gap with Seoul Milk. This has raised questions about whether the industry leader might change.

According to Seoul Milk Cooperative's first-half business disclosure on September 4, the company's consolidated operating revenue (sales) for the first half of this year was 1.0307 trillion won, down 35 billion won from the same period last year (1.0657 trillion won). Operating profit plunged by 62%, from 24.3 billion won to 9.1 billion won. After posting a net profit of 29.9 billion won last year, Seoul Milk recorded a net loss of 21.1 billion won in the first half of this year.

Sales from economic business activities totaled 989.3 billion won, down 33.8 billion won from the previous year's 1.0231 trillion won. Sales of products directly produced by Seoul Milk-including milk, processed milk, and cheese-fell by 39.6 billion won, from 773.8 billion won to 734.2 billion won. While sales of purchased goods increased slightly from 244.9 billion won to 249.7 billion won, the small scale meant there was little defensive effect.

Jin Sun Moon, Seoul Milk Cooperative President

원본보기 아이콘

Sluggish consumption took a direct toll. Per capita milk consumption dropped from 83.9kg in 2020 to 76.0kg last year. White milk consumption fell from 26.3kg in 2020 to 25.3kg last year, and total dairy consumption also decreased from 83.9kg to 76kg. Multiple factors contributed to this trend, including a shrinking milk-consuming population due to low birth rates and aging, reduced mandatory meal programs, and the growing popularity of alternative beverages such as soy, almond, and oat drinks. The business environment is expected to worsen further when duty-free imports of dairy products under the Korea-EU FTA take full effect next year.

This led to an increase in inventory. Seoul Milk's total inventory assets rose by 31% (39.3 billion won), from 126 billion won in the first half of last year to 165.3 billion won this year. Finished goods inventory surged by 81% (40.8 billion won), from 50.2 billion won to 91 billion won. Inventory of purchased goods also increased from 11.7 billion won to 15.8 billion won. However, raw material inventory decreased by 12%. Production continued, but sales did not keep up, resulting in a buildup of finished products in storage. In fact, the gross profit margin fell from 16.6% to 15.4%.

원본보기 아이콘

To prevent further deterioration of profitability due to declining sales, Seoul Milk cut selling and administrative expenses by 2.6 billion won compared to the previous year during this period. Selling expenses decreased from 111.3 billion won to 108.4 billion won. However, new bad debt expenses of 1.6 billion won were incurred, partly due to delayed payments from major retailers such as Homeplus. These expenses reflected receivables from clients that could not be collected.

In addition, the cooperative's spending structure also weighed on profitability. In the first half of this year, Seoul Milk spent 33.4 billion won on educational support projects-an amount 3.6 times its operating profit (9.1 billion won). This support is provided for environmental improvement and modernization projects at member-run farms. Last year as well, spending on educational support projects (37.1 billion won) exceeded operating profit (24.3 billion won). In effect, most of the profits from core operations are being paid out as subsidies to cooperative members.

These educational support expenses have increased every year, rising from 49 billion won in 2019 to 63 billion won last year. Seoul Milk also posted a net loss of 5.8 billion won in the first half of 2023 but returned to profitability last year, thanks in part to asset sales. At that time, the disposal of assets worth 38 billion won boosted non-operating income to 44.2 billion won. However, this year, such gains have nearly disappeared, with non-operating income limited to 4.9 billion won. Seoul Milk also attempted to sell real estate at the Gyeongin Dairy Technology Center (appraised at 15 billion won) this year, but the deal did not go through.

Poor results have weakened financial soundness. Both substandard and non-performing loans increased. As of the end of June, total loans amounted to 1.7269 trillion won. Of this, "substandard loans"-those with increased uncertainty of recovery in mutual finance lending-rose from 21.7 billion won to 23.4 billion won, while "non-performing loans," which are classified as virtually unrecoverable, increased from 3.3 billion won to 3.9 billion won.

The return on assets (ROA) fell from 1.5% last year to -0.27% this year, and the net capital ratio also declined from 21.5% to 18.8%.

원본보기 아이콘

In contrast, Maeil Dairies managed to defend its performance despite the same environment. In the first half of this year, sales increased to 916.8 billion won from 889.4 billion won a year earlier, and while operating profit declined slightly, it still reached 25.4 billion won-nearly three times Seoul Milk's 9.1 billion won. Net profit was also 24.8 billion won, similar to last year's 26 billion won.

The background for Maeil Dairies' performance lies in business diversification and a premium strategy. In the dairy processing sector, which accounts for 60% of the company's total sales, it improved gross margins by expanding high-value-added products such as lactose-free milk ("Easily Digestible Milk"), organic "Sangha Farm," and high-protein Greek yogurt. The company diversified its revenue portfolio with products such as infant formula, baby food, protein supplements, RTD (Ready to Drink) coffee ("Barista Rules"), plant-based protein beverages, and imported brand businesses. Stagnation in the milk market was offset by expanding B2B channels (cafes and bakeries) and e-commerce.

Namyang Dairy Products, which posted a loss last year, also returned to profitability in the first half of this year. Operating profit and net profit for the first half were 1 billion won and 2 billion won, respectively. Sales for the first half were 447.7 billion won, similar to last year's 478.6 billion won. This was due to a more than 30% increase in infant formula sales in major export markets such as Southeast Asia, as well as business expansion through the food service franchise Baekmidang. Namyang Dairy Products is expanding new products that combine functionality and premium features, such as lactose-free, high-protein, low-fat, and low-sugar product lines.

An industry insider commented, "While Maeil Dairies is maintaining stable performance through business diversification, Seoul Milk is being shaken by poor core business results and the disappearance of one-off gains. If Seoul Milk fails to drive change, it is only a matter of time before it falls to second place in the industry."

© The Asia Business Daily(www.asiae.co.kr). All rights reserved.