Orion considers product price hikes to reflect surge in raw material costs in H2

[Sourece: Orion Corp.]

South Korea’s confectionary giant Orion Corp. considers price hikes in select products later this year to reflect the unprecedently high raw material costs after it achieved a double-digit on-year growth in sales at home for the first time in a decade in the first three months of this year despite its nine years-long freeze in product prices.

The Korean operation of Orion earned 219.7 billion won ($176.2 million) in sales for the quarter ended March, gaining 10.6 percent from the same period a year earlier, according to its disclosure. In 2021 alone, the company reported a 0.85 percent fall in operating profit, but sales grew 5.6 percent to total 2.36 trillion won.

It achieved such a stellar result even after it has restrained from hiking product prices for the past nine years while focusing on improving profitability through aggressive business realignment, cost-cutting efforts and efficient inventory management, said Huh In-cheol, vice chairman of Orion who took the helm in 2014.

“The purpose of Orion is to maximize the operating profit itself, not the operating margin,” Huh noted. “The average operating margin of world’s leading food companies reaches 15 percent, and that is the normal level, I think.” Orion’s operating margin hit 16.9 percent in 2020 when it recorded the largest ever sales. The average margin in the local food industry hovers around 5 percent.

Under Huh’s direction, Orion has focused on cutting unnecessary costs by tens of billions won with corporate philosophy of providing tasty and quality products at reasonable prices for customers. Sales promotion costs have been minimized, and all its operations have unified their procurement processes for cost reduction based on increased price negotiation power.

Huh also emphasized the importance of inventory control. Based on the point-of-sale data analysis, the company gathered the actual sales information of each outlet to reflect it to its production plan in real time. Orion currently boasts a return rate of a mere 0.5 percent.

After the cost reduction, Orion invested more in strengthening product competitiveness. It spent less for packaging while expanding the actual content of products. Payment to employees also increased by 7-8 percent after years of freeze.

“Price hike is the easiest way to respond to crisis but should be the last resort to survive in the worst time. Companies always have to seek for ways to provide the best benefits for customers while maximizing their profits,” said Huh.

The market, however, is facing an “unprecedented” crisis with sugar, flour, cooking oil and other raw material prices soaring up to 70 to 80 percent all together due to high inflation and supply disruptions from the Russia-Ukraine war, he noted. Expecting a continuous surge in raw materials prices, energy and logistics costs, Orion now is considering a price increase in some products to reflect the market competition in the second half, Huh said.

To continue its growth for future, Huh has groomed convenient meal replacement (CMR), bio and beverage (water) as its three next growth engines.

Huh In-cheol, Vice Chairman of Orion.

As the first of its new businesses, Orion launched its CMR brand Market O Nature in 2018, with new granola cereals. Its revenue from CMR business continued growth and successfully returned to a profit with a 43 percent rise on year last year.

Some raise concerns about Orion’s beverage business, but Huh shows confidence on its bottled water business. Sales of its bottled water under mineral water brand Jeju Yongamsu nearly tripled to 15.3 billion won last year from 5.2 billion won in 2020.

“The company plans to start health functional food business in the future by using minerals from water as well,” he added.

For bio business, Orion has expanded joint investment partnership in support of domestic biomedicine firms’ entry into China. It built a joint-venture in China with China’s state-run Shandong Lukang Pharmaceutical in March last year and established a manufacturing facility for diagnosis kits in Shandong Province in November.

[ㄏ Maeil Business Newspaper & mk.co.kr, All rights reserved]