From AI to smart farms and hiring purchasing personnel... The food industry is fighting for its survival in cost reduction

[Financial News] Food companies are tightening their grip on cost reduction due to factors such as climate inflation (climate + inflation). This is because cost burdens have become greater than ever as the domestic food industry was hit hard in the first half of this year by the war in Iran, heatwaves, and high exchange rates. Consequently, companies are staking their survival on cost reduction through supply chain innovation and diversification utilizing artificial intelligence (AI), as well as by expanding their supply chain management (SCM) personnel.
According to the Financial Supervisory Service's electronic disclosure system on the 10th, the average cost of goods sold ratio for 12 major domestic food and beverage companies, including CJ CheilJedang, Lotte Wellfood, Lotte Chilsung Beverage, Nongshim, and Ottogi, exceeded 72% based on the first half of the year. This is the highest figure since the first half of 2022 (73.4%).
Factors contributing to the sharp rise in the cost of goods sold ratio of domestic food companies include the war in Iran, climate inflation, and high exchange rates. First, following the outbreak of the war in Iran in the Middle East last February, the prices of naphtha and aluminum, which are the main raw materials for packaging materials and cans, surged. Although prices have stabilized since the outbreak of the war, current naphtha prices have jumped by $233 (39.5%) from $565 per ton to $788 compared to a year ago, while aluminum prices have surged by $716 (27.4%) from $2,611 per ton to $3,327.
It is known that packaging materials typically account for 25% of the cost structure in the food processing sector, such as instant noodles and snacks. This means that packaging materials made from naphtha make up a larger proportion than the main ingredients, such as wheat flour or palm oil. As packaging prices have risen by approximately 40%, the overall cost of purchasing raw materials and supplies has jumped significantly. The burden has been particularly heavy on the beverage industry, where aluminum cans account for a high proportion of costs.
'Climate-inflation,' where food prices rise due to the heatwaves that struck the globe this year, has also fueled the increase in the cost of goods sold. International wheat prices have surged by $7,900 (41.4%) in the past year, rising from $19,106 per ton last September to $27,006 currently, while palm oil prices have increased by $119 (11.8%) during the same period, rising from $1,012 per ton to $1,131. In particular, as palm oil is an essential raw material for producing processed foods, the increase in palm oil prices is posing a significant burden on food companies.
The won-dollar exchange rate, which surged to the 1,500 won range in the first half of this year, also added to the burden. Since the industry relies heavily on imports for raw materials and components, the high exchange rate raised import unit prices, intensifying pressure on manufacturing costs. Consequently, the food industry is making all-out efforts to diversify supply chains and reduce costs. CJ CheilJedang, for example, is conducting research and development (R&D) on raw material varieties capable of adapting to climate change and is contract-cultivating approximately 10,000 tons of 'Donghaengbyeo,' a new domestic rice variety for processing. Furthermore, the company is utilizing AI to manage international weather information and price volatility of key raw materials such as raw sugar, soybeans, and corn, while formulating purchasing strategies.
Nongshim and Ottogi are also actively investing in smart farms and alternative meat to enhance the supply stability of domestic and regional agricultural products, thereby diversifying their raw material sources. Lotte Wellfoods is operating under an integrated system, rather than relying on individual business sites, covering everything from raw material procurement to distribution to prepare for climate risks.
Dongwon Industries is also increasing the use of AI-powered fish school detection and maritime drones to secure new fishing environment data, rather than relying on existing operational data, in response to climate change.
In addition, Lotte Chilsung Beverage, Lotte Well Food, Nongshim, Orion, and others are hiring a large number of personnel for SCM roles, adding expertise to supply chain management.
Kang In-soo, a professor of economics at Sookmyung Women's University, diagnosed, "High exchange rates could cause companies to struggle with formulating management strategies in the long term and lead to a contraction in capital investment."
[email protected] Park Kyung-ho Reporter