Hikes in prices of raw materials likely to fuel consumer inflation

A customer shops for Oriental Brewery's Cass beer in a discount store in Seoul, Wednesday. (Yonhap)

Concerns are growing that soaring raw material costs could have a knock-on effect on the prices of daily necessities, following price hikes initiated by some of the largest liquor and dairy firms in South Korea.

Korean brewery giant Oriental Brewery announced that starting Wednesday, it will raise the factory price of its beer products such as Cass and Hanmac, by an average of 6.9 percent.

"The price adjustments came as the costs of raw materials for (alcoholic beverages), which rely largely on imports, surged amid the continued instability in exchange rates," said an Oriental Brewery official.

"The price increases also reflected an increase in logistics costs, which soared due to the increase in international oil prices," he added.

The price hike initiated by one of the biggest liquor firms in Korea will likely put pressure on its competitors to also push up prices.

Last March, when Oriental Brewery raised its factory prices by 7.7 percent on average, HiteJinro, another Korean liquor giant, matched the increase by bumping up factory prices of its popular beer products such as Terra and Hite, two weeks later.

However, other industry players have downplayed concerns, saying they have yet to make any price adjustments.

"No specific review or confirmation has been made at this point in regards to price adjustments," said an official from HiteJinro.

Lotte Chilsung, the beer producer of Korean retail giant Lotte, also said they have not made any official review of its products' prices.

Nevertheless, industry watchers say there is a high possibility that the price of beer will rise later in the year.

"Liquor companies considered raising the factory price of its beers in April in line with the increase in beer tax in April, but did not, due to the government's pressure to keep the cost of living down," said an official in the beer industry on the condition of anonymity.

"On top of soaring raw material and logistics costs, the burden to ramp up costs must be piling up for liquor companies," he said.

In April, the tax on beer was increased by 30.5 won (2 cents) to log 885.7 won per liter.

The price pressure is likely to stretch beyond the liquor sector.

Last week, two major milk companies, Namyang Dairy Products and Maeil Dairies, decided to raise their product prices by an average of 5 percent, following Seoul Milk's decision to raise the price of its flagship 1-liter milk by 3 percent. The price hike came as the Korea Dairy Committee decided to increase the prices of two varieties of raw milk starting October, considering the surge in cow feed, labor and logistics costs.

On the same day, Binggrae, a snack maker, boosted prices of its dairy snacks by some 5 to 9 percent. Food firm Dongwon F&B also raised the prices of dairy products by some 5 percent.

"High oil prices and high exchange rates will trigger overall food and beverages prices to rise, as Korean companies rely a lot on imports," said another industry official who wished to remain anonymous.

"Such factors will inevitably have a domino effect on the Korean retail industry," he added.

By Lee Yoon-seo(yoonseo.3348@heraldcorp.com)