Producers of White Ramen, Honey Butter Chips and Craft Beer Suffer Capacity Hangover after Party is Over
SEOUL, Oct. 20 (Yonhap) -- As consumers went crazy over their products, the companies simply built more plants to meet the soaring demand. Then the craze disappeared all of sudden, leaving them with idle capacity and huge losses.
Industry gurus call it the "curse of capacity expansion." Small instant noodle maker Paldo suffered such a fate and Haitai Confectionery & Foods Co., South Korea's No. 3 confectionery, followed suit. And a sense of deja vu is hanging over major brewer Lotte Chilsung Beverage Co.
Paldo put its white-broth noodle "Kkokkomyeon" on the market in August 2011, creating a nationwide fad for white-soup instant noodles, called ramyeon here.
The novel product with a chicken broth base flew off the shelves as it gained popularity among consumers used to spicy, red-broth instant noodles. Paldo sold more than 80 million packages that year alone, claiming about 20 percent of the local instant noodle market.
Emboldened by the initial success, Paldo forked over 50 billion (US$44.6 million) to expand its plant. Sales, however, suffered a freefall after the capacity expansion, inflicting big losses.'
Haitai Confectionery & Foods suffered the same fate. The company launched a new snack "Honey Butter Chips" in August 2014, hitting the market with a bang. Haitai won kudos for breaking the conventional notion of salty potato chips by adding the flavor of honey.
Praises for the chips went viral on social media, making them nearly impossible to find in most stores nationwide because they were sold within minutes of reaching the shelves. Small-time entrepreneurs offered the chips for online sales at a premium.
In order to meet the surging demand, the company dedicated a new factory in May but sales began to slump as soon as the facility opened.
Haitai Confectionery & Foods had forecast the new plant would create a brand with annual sales of 180 billion won, but its sales are feared to reach half the estimate amid falling popularity.'
Paldo and Haitai Confectionery & Foods are not alone. Industry watchers voice concern that Lotte Chilsung Beverage, which debuted its first-ever beer product two years ago, may follow in the footsteps of the two ill-fated companies.
Lotte Chilsung Beverage, the soft drink and alcoholic beverage unit of South Korea's No. 5 family-controlled conglomerate Lotte Group, launched "Kloud" in April 2014, which became an instant hit.
Sales exceeded 100 million bottles in the first nine months of its launch, prompting the company to increase the annual capacity of its plant in Chungju, about 150 kilometers southeast of Seoul, to 300,000 kiloliters from the current 100,000 kl. The project is scheduled for completion at the end of this year.
Industry analysts, however, paint a gloomy outlook for local beer producers, citing the recent implementation of a draconian anti-graft law and growing consumption of imported beers, which is fanned by the spreading culture of drinking alone amid rising single-person households.
The law, which took effect on Sept. 28, bans public servants, educators and journalists from receiving free meals valued over 30,000 won ($26.80), gifts worth more than 50,000 won, or congratulatory or condolence money of more than 100,000 won.'
"Key factors that determine alcohol consumption continue to be working against leading domestic brewers," said Han Kook-hee, a researcher at NH Investment & Securities Co. "Lotte Chilsung Beverage and other major players are focused on producing regular beers consumed at company dinners, but the market for household products is recently growing at a fast clip."
According to the Korea Agro-Fisheries & Food Trade Corp., South Korea's beer imports hit a record 170,919 tons worth $142 million in 2015 and also rose to the highest half-year level in the January-June period of this year.
In light of those factors, NH Investment & Securities and two other local brokerages have recently lowered their target prices of Lotte Chilsung Beverage by an average 15 percent.
Experts also point out that domestic brewers are zeroing in on expanding supply through capacity expansion despite the intensifying competition from foreign brands. According to NH Investment & Securities, South Korea's alcohol consumption has risen at an annual average of 2 percent over the past five years, but the combined capacity of local brewers is forecast to reach 1.8 times the amount of alcohol consumption from the 1.3 times in 2013.