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LG Household & Health Care’s beverage business loses profitability Effect of price hike offset by surging raw material prices

Translated by Kim So-in 공개 2021-07-30 08:09:54

이 기사는 2021년 07월 30일 08:07 더벨 유료페이지에 표출된 기사입니다.

South Korea’s top beauty and personal care brand LG Household & Health Care’s beverage business is losing profitability this year due mainly to an increase in raw material prices.

LG Household & Health Care’s beverage business said Tuesday that it recorded revenue of 409.4 billion won ($3.57 million) in the second quarter, up 2.9% compared to a year ago. Its operating profit decreased by 6.7% to 57.9 billion won.

The beverage division continued its growth trend in 2020 while its competitors, including Lotte Chilsung Beverage and Donga-Otsuka, were hit hard by the Covid-19 pandemic as consumers' outdoor activities contracted. The division has maintained the momentum this year, with its revenue increasing by nearly 3% in the second quarter year-on-year.

The division’s revenue grew thanks to a rise in the product price. Beverage sales decreased compared to the previous year, but the price hike at the beginning of this year has offset the effect. As of January 1, LG Household & Health Care hiked prices of its main products, including Coca-Cola and bottled water, by 5-10%. The beverage business’s price hike made in the first quarter normally starts to be reflected in earnings from the second quarter.

Despite the positive performance, concerns are rising as it started to lose profitability due to the aftermath of a rise in prices of raw materials. Since the beginning of this year, prices of raw materials, including aluminum, resins, and raw sugar, have risen sharply, leading to a drop in the beverage division's operating profit.

The global aluminum price, which was $2,000 per ton until January, has jumped to a $2,500 level this month. This means the cost increased by 25% in just six months. The global raw sugar price also soared by 30% from 14 cents per pound to 18 cents during the same period.

The increase in raw material prices was more than enough to offset the positive effect of the price hikes.

The rise in prices of raw materials is likely to keep pressuring the division’s business into the second half of this year.

LG Household & Health Care is expected to choose whether to make another price hike despite market resistance, or offset a rise in raw material prices through cost-cutting strategies in other divisions. It won’t be easy to protect the profitability by increasing sales amid weak demands for beverages after the pandemic.

The rise in raw material prices can also have an impact on the company’s other businesses, including household goods and cosmetics. (Reporting by Hyo-jeom Jun)
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