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HMR Market Analysis Summary

Core Content

This document provides an analysis of the Home Meal Replacement (HMR) market in South Korea, focusing on the industry's past performance, current state, and future growth potential. It also evaluates key players in the market, highlighting their strengths and strategic positions.

Main Points

Market Overview

• The HMR market in South Korea is still in its infancy but is expected to grow structurally.
• HMRs are prepared meals that can be purchased at stores and eaten at home.
• South Korea's HMR market is smaller than the global market but is growing faster, with a CAGR of 17% over the past five years, compared to 5.2% globally.
• The market is fragmented, with various players including food manufacturers, retailers, and restaurant chains vying for a first-mover advantage.

Structural Drivers of Growth

• Social changes: The rise in single-person households and dual-income families is driving demand for convenient, ready-to-eat meals.
• Lifestyle shifts: Increasing preference for convenience and time-saving solutions is pushing consumers toward HMRs.
• Technological advancements: Improved processing technology and product variety are helping HMRs gain traction.

Market Challenges

• Competition: Concerns over profitability erosion due to intense competition have led to a decline in HMR stock prices since 2H15.
• Cost pressures: Rising input costs, such as international grain prices, and operational inefficiencies are affecting margins.
• Consumer resistance: Early on, consumers were hesitant to adopt HMR products, but this resistance has decreased over time.

Key Players

• Shinsegae Food: Rated as the top pick with a BUY rating and a target price of KRW220,000. It is behind the successful Peacock HMR brand, which is sold through E-mart.
• Lotte Food: Reinstated for coverage with a BUY rating and a target price of KRW1,000,000. It has strong distribution channels and manufacturing capabilities.
• Samlip General Foods (SGF): Initiated for coverage with a BUY rating and a target price of KRW225,000. It is a strong player in the dessert segment of the HMR market.

Key Information

Past Performance

• HMR stocks saw significant gains in 1H15 due to:
  • Changing consumption trends and lifestyles.
  • Growth in product shipments, influenced by eating and cooking TV programs.
  • Vertical integration in food-materials distribution.
• Since 2H15, these stocks have declined due to:
  • Concerns over competition eroding profitability.
  • Slow profit growth relative to sales.
  • Rising international grain prices.

Future Outlook

• The HMR market is expected to grow further due to:
  • Structural changes in society.
  • Increasing convenience and cost-effectiveness of HMRs.
  • The potential for higher prices as SME restaurants convert to franchises.
• HMRs are likely to become more competitive as restaurant meal prices rise due to higher labor costs and wage increases.

Profitability Considerations

• HMR operations are still in the early stages and require:
  • Economies of scale for cost efficiency.
  • Strong distribution channels for price competitiveness.
  • Technological capabilities and productivity to sustain growth.
• The average operating margin for small/medium HMR OEMs is 5–6%, higher than the general food industry.

Strategic Insights

• Peacock Brand: E-mart's Peacock brand is a successful example of leveraging strong distribution channels and product quality.
• Chunil Food: A small player that has managed to achieve high margins through technological alliances and product adjustments.
• Distribution Expansion: HMR brands are expanding into new channels, including online platforms and health stores, to increase market reach.

Conclusion

The HMR market in South Korea is poised for structural growth, driven by social and lifestyle changes. While competition and cost pressures pose challenges, firms with strong distribution channels, brand power, and manufacturing capabilities are likely to thrive. Shinsegae Food, Lotte Food, and Samlip General Foods are highlighted as key players with strong potential in this growing market.