Korean, U.S. food stocks decline on weak earnings outlook after price hikes

[Images sources : CJ CheilJedang, Gettyimagesbank]

Korean and U.S. food companies are facing weak earnings outlook as raising product prices have led to a decline in sales.

According to data from the Korea Exchange on Thursday, the KOSPI Food Index has fallen around 3 percent to 3,653 from 3,769 as of April 12. This decline is especially significant compared with the benchmark KOSPI’s 14 percent rise during the same period. The food index tracks stocks of major domestic companies such as Orion Corp., CJ CheilJedang Corp., Nongshim Co. and Ottogi Co.

The weak performance of major food companies can be attributed to the worsening business situation. The decline in sales volume due to price increases over the last one to two years, coupled with a rise in the cost of food ingredients, has led to a decline in operating profit.

CJ CheilJedang’s sales in the food sector are estimated to have increased by only 5.5 percent due to sluggish sales volume caused by price hikes, with operating profit down by 8 percent due to continuing cost pressure for the first quarter of this year, said Cho Sang-hoon, an analyst at Shinhan Investment Corp.

Meritz Securities Co. said Orion’s operating profit for the first quarter is estimated to have dropped by 7.5 percent from a year ago due to the reduction in sales in China, as well as high raw material prices.

In the U.S., food companies are also experiencing similar issues. According to FactSet, Cal-Maine Foods Inc., the largest egg producer in the U.S., is expected to see a 50 percent drop in operating profit for the March-to-May quarter. Kraft Heinz Co., a well-known food company, is expected to report $1.15 billion in earnings for the first quarter of this year, which is 6.5 percent lower than $1.23 billion earned in the previous quarter.

Tyson Foods, a meat processing company, already experienced nearly 70 percent decline in operating profit for the fourth quarter of last year.

These companies were previously considered to be consumer goods companies that could raise prices to reflect higher raw material costs based on their strong brand recognition.

Bob Goldin, a partner at food industry consulting firm Pentallect, said that more customers will resist high food prices and consumption may be driven by in-house products of distribution channels or cheaper goods. As a result, food companies will need to find a balance between raising prices to maintain profitability and remaining competitive in the market.