South Korea's largest poultry corporation Harim is facing a triple whammy of controversy over foreign substances, massive losses from derivatives transactions, and poor performance in new businesses. In particular, with recent repeated detections of foreign substances damaging consumer trust, the company's competitiveness is threatened, compounded by a 19.2 billion won loss in derivatives.
◇Three instances of foreign substance controversy over the past 1 year and 3 months.
According to the retail industry on the 14th, the consumer rights organization Citizens' Coalition for Consumers' Rights announced that a foreign substance presumed to be hair was found in Harim chicken breast products.
According to the Citizens' Coalition for Consumers' Rights, a consumer who reported the foreign substance claimed, "The same product had foreign substances detected previously, and at that time, Harim responded that it was 'human hair.'" Another consumer also shared a photo, claiming to have found a similar foreign substance.
In response, Harim stated, "Analysis by a professional institution confirmed that it was not hair but a plant-based organism" and that "IFF chicken breast is rapidly frozen in the factory, so this plant-based organism is presumed to have been introduced during the consumer cooking process, not during manufacturing."
Despite the clarification, doubts about Harim's overall quality control system are growing. In November 2023, numerous insects were found in 'Harim Animal Welfare Chicken.' At the time, even Harim Group Chairman Kim Hong-guk directly addressed the situation, stating that "it poses absolutely no harm to the human body," indicating the incident was significant for Harim.
However, just two months later, a green foreign substance suspected to be a string was detected again in 'Yonggari Chicken.' Over a year later, the foreign substance controversy flared up again this year.
As of 2023, Harim accounts for 34.5% of the domestic chicken market. This means that one in three chickens in the market comes from Harim products. However, according to a study by the Ministry of Food and Drug Safety, there were only two personnel inspecting for foreign substances at the final packaging stage in the Harim Jeongeup production facility.
A Ministry of Food and Drug Safety official stated, "At that time, there were no violations of the Livestock Product Sanitation Management Act, but given that only two people had been conducting foreign substance inspections before final packaging, the likelihood of recurrence is high, and we requested corrective action."
After the discovery of insects, Harim increased its inspection staff to eight and promised a comprehensive investigation. However, two additional foreign substances appeared a year later, raising questions about the effectiveness of the increase and investigation.
◇Declining financial soundness due to losses from derivatives transactions.
Harim's financial status is also significantly shaken. On the 11th, Harim reported a net loss of 19.2 billion won from last year's transaction derivatives. This represents 6.65% of its equity. Specifically, it included total losses related to derivatives amounting to 32.4 billion won, total gains of 13.8 billion won, and evaluation losses of 600 million won.
Due to the losses from derivatives transactions, Harim's financial indicators have worsened. As of the first quarter of 2024, financial costs were 217.2 billion won, an increase of 47.2 billion won compared to the same period last year. As of the end of March, short-term borrowing liabilities stood at 4.2387 trillion won, an increase of 296.8 billion won in just three months. The consolidated debt ratio also rose from 155% at the end of 2023 to 164% at the end of March 2024.
Export corporations often engage in derivatives transactions to reduce the risk associated with exchange rate fluctuations. If the exchange rate at the time of payment becomes significantly different from the current exchange rate, a foreign exchange gain can be expected. However, if the prediction of exchange rate fluctuations (hedging) is incorrect, it can lead to a foreign exchange loss.
Financial industry experts noted, "If financial costs, including the cost of financing, remain high for the time being, there is a significant chance that cash flow will worsen," and predicted that "the burden of borrowing and financial costs will increase in line with investment plans, such as the complex development of the Urban High-Tech Logistics Complex in Yangjae-dong, Seoul."
What is even more concerning is that Harim Holdings recorded its first net loss in the first quarter of 2024 since its establishment in 2017. Harim explained, "We entered into derivatives contracts to hedge against exchange rate fluctuations, but losses occurred due to a sharp rise in exchange rates."
◇Poor performance in new businesses leads to a vicious cycle of declining competitiveness.
Harim's ambitious new business efforts have also failed to meet expectations. The premium home meal replacement (HMR) brand 'The Gourmet,' launched in 2021, continues to record a low market share, failing to establish a strong presence.
Chairman Kim stated during the launch of the artisan ramen that he aims to grow 'The Gourmet' into a mega brand with annual sales of 1.5 trillion won and leap into a comprehensive food corporation. However, currently, Harim Industries is increasing its annual losses.
Harim Industries' revenue jumped from 3.6 billion won in 2019 to 46.1 billion won in 2022. However, during the same period, operating losses also surged from 1.48 billion won to 8.68 billion won. Harim Industries operates brands such as The Gourmet and Food Buddy, with Harim Holdings holding 100% of the shares.
Harim Holdings' revenue increased to 70.5 billion won in 2023. At the same time, operating losses also expanded to 109.6 billion won.
An industry insider stated, "While Harim has presented new brands like The Gourmet and Food Buddy with a premium strategy, the trend of increased price sensitivity among consumers across the retail market since last year has led to strategic failures," and added, "Banking circles regret that Harim has not been able to use the experience gained from operating traditional chicken processing products to generate synergy."
The poor performance in new businesses has weakened the competitiveness of the poultry sector, which was Harim's starting point and core business. The meat processing sector, which processes and sells whole chickens, was a major source of stable income for Harim. However, as the supply of broilers soared last year, Harim's broiler business is simultaneously shrinking in size and strength.
As of the third quarter last year, Harim's sales reached 1.01 trillion won, and operating profit was 35.7 billion won, both reflecting decreases of 9.6% and 53%, respectively, compared to the previous year. During the same period, net profit also dropped from 19.9 billion won to 14.4 billion won, primarily due to an influx of cheap imported chicken. According to the Korea Customs Service, chicken imports last year totaled 234,873 tons, a 65.8% increase compared to 141,686 tons four years ago in 2019.