South Korea’s food companies urged to cut prices to ease household burden

[Photo by Yonhap]

With the price of food outpacing income growth in South Korea, all eyes are on the response of food companies to the government’s recent call for voluntary price reductions for instant noodle, with consumer groups also calling for a price reduction in snacks, bread, ice cream and other products, reflecting the downward trend in international grain prices.

According to sources from the food industry on Monday, South Korea’s top instant noodle maker Nongshim Co. raised its factory price of ramyeon by an average of 11.3 percent in September last year. Then other major Korean instant noodle makers immediately followed suit. Paldo Co. and Ottogi Corp. raised their prices by 9.8 percent and 11.0 percent, respectively, the following month, while Samyang Foods Co. increased the price by an average of 9.7 percent in November.

As a result, consumer price for instant noodles in the first quarter of this year rose 12.4 percent, the highest in 15 years since the fourth quarter of 2008 during the global financial crisis when it was 14.7 percent.

In response, Deputy Prime Minister and Minister of Strategy and Finance Choo Kyung-ho urged companies last week to cut ramyeon prices, citing falling international grain prices, and consumer organizations expressed their support.

As ramyeon is a representative food for ordinary people, there is a lot of interest in whether the prices will actually be reduced.

To alleviate the burden of food price increases on households, there are only two options: a significant increase in income or a slowdown in the rate of food price increases. However, since it is difficult for income to increase dramatically in the short term, it is more realistic for food prices to be cut or frozen.

Ramyeon makers, however, are in a quandary as international grain prices, albeit lower than last year, are above average, and the price of starch, another ingredient in ramyeon, has risen. Furthermore, labor and logistics costs have also increased, further burdening the companies.

“The increase in starch prices was reflected in the costs last month, and in the second half of the year, the increase in sugar prices will also be reflected, resulting in an additional cost increase of up to 55 to 60 billion won ($42.21 million to $46.05 million) annually,” said an official from Nongshim. “Even taking into account the 10 billion won price cut for palm oil, the cost increase is expected to be up to 50 billion won this year.” The official added that “at the moment, we can only say that we are considering various options.”

Ottogi and Samyang are also concerned.

“We are looking at various options, but nothing has been decided yet,” said an Ottogi official, while a Samyang official said that the company “needs some more time.”

In general, when the top company in the food industry implements a price increase, other companies tend to follow suit. Therefore, it is expected that the industry leader, Nongshim, will set the direction this time as well.

While the ramyeon companies are balking at cutting prices, consumer organizations point out that they do not see any noticeable evidence of a significant burden on the companies’ production costs, criticizing them for quickly raising prices when raw material prices increase while being slow to lower prices when raw material prices decline. The consumer groups urged the companies to quickly reflect the decline in raw material prices in consumer prices as they think that as international grain prices have been declining since the fourth quarter of last year, even if the companies reflect them in production costs with a lag of one to two quarters after purchasing raw materials, enough time has passed, so there is enough room for a reduction in ramyeon prices in the second quarter of this year.

The consumer groups also called for reductions in ice cream prices which have continued to rise even after price-fixing was discovered last year.

The consumer price for bread also rose 14.3 percent, snack crackers 13.1 percent, and ice cream 11.8 percent in the first quarter of this year. Just as ramyeon prices were the highest since the global financial crisis, ice cream prices also reached their highest level since the second quarter of 2009 when it was 14.5 percent.

Bread prices increased by 15.3 percent in the fourth quarter of last year, the highest since the fourth quarter of 2008 when it was 17.8 percent, then declined slightly in the first quarter of this year, while snack prices rose 14.1 percent in the fourth quarter of last year, the highest since 18.2 percent in the fourth quarter of this year before falling slightly in the first quarter this year, but are still running high.

Food companies have previously reduced product prices in response to a decrease in raw material prices in 2010. At that time, Nongshim reduced the prices of its flagship products, such as Shin Ramyun, by 2.7 percent to 7.1 percent, and Samyang cut the prices of five products, including Samyang ramyeon, by a maximum of 6.7 percent.