[DigitalToday reporter Shinhye Ahn] Major flour and sugar companies such as CJ CheilJedang, Samyang and Daehan Flour Mills have decided to cut supply prices for flour and sugar, but it is unclear whether that will lead to lower prices for processed foods such as bread and snacks that use those ingredients. The food industry says raw material prices have fallen, but factors that hinder price cuts remain, including labour costs, auxiliary ingredients and inflation.

CJ CheilJedang decided on Feb. 5 to lower prices for all consumer (B2C) sugar and flour products. Early last month it cut business-to-business (B2B) sugar and flour prices by an average of 6 percent and 4 percent, respectively. Samyang also cut average prices for consumer (B2C) and business-to-business (B2B) sugar and flour by 4 to 6 percent on the same day, and Sajo DongA One decided to lower prices for small household packages by an average of 5.9 percent. Daehan Flour Mills cut prices for some flour products, including those under its flagship Gompyo brand, by an average of 4.6 percent from Feb. 1.

The companies said they cut prices to reflect recent international prices for raw sugar and wheat and to actively support the government's price-stabilisation stance. But the move is also seen as being influenced by an investigation into suspected price fixing. Prosecutors on Feb. 2 indicted 20 people, including chief executives at six milling companies — Daehan Flour Mills, Sajo DongA One, Samyang, Daesun Flour Mills, Samhwa Flour Mills and Hantop — on suspicion of price fixing. Officials at CJ CheilJedang and Samyang were also sent to trial on suspicion of price fixing.

Still, the industry largely expects that changes in raw material prices will be difficult to translate into lower consumer prices. It is because the structure for setting product prices is complex, making it hard for a fall in raw material prices to lead directly to lower product prices. In particular, for items such as bakery products and confectionery that use diverse ingredients and have a high share of labour costs, consumers are unlikely to feel much impact from cuts in flour and sugar prices.

In particular, for bakery franchise outlets, operating costs are heavily affected not only by other ingredients such as flour, sugar, eggs and oils and fats such as cooking oil, but also by labour costs. Changes in recommended retail prices affect franchise profitability, making it difficult to decide on price cuts.

There have been cases of lowering finished-product prices. Tous les Jours, a bakery franchise operated by CJ Foodville, cut prices for 15 items including sweet red bean bread and cream bread by an average of 5.2 percent in July 2023 in line with a downtrend in grain prices. But the industry consensus is that this time it will be difficult for the same trend to be repeated due to the impact of inflation and labour costs.

A franchise industry official said, "Because the share of flour in bread prices does not account for an absolute share in determining prices, it appears difficult to implement changes in pricing policy following the milling industry's announcement of cuts in flour selling prices."

Still, the official explained that the government is maintaining a price-stabilisation stance and that, depending on political considerations, the company is considering reviewing price changes.

The confectionery industry is seeing a similar trend. Because the timing of actual reflection differs by company depending on when raw material supply contracts are signed, even if cuts in finished-product prices go ahead, the timing is expected to vary widely. Raw material supply contracts can run from as short as 3 months to as long as 1 year, meaning the impact of B2B raw material prices depends on each company's contract timing.

In addition, in the production process, prices of a range of ingredients are intertwined at the same time, including oils and fats such as butter, margarine and shortening, and cacao and nuts. That is why it is difficult to adjust prices based on cuts in only specific raw materials. Exchange rates and logistics costs also factor into price decisions. Confectionery companies are currently struggling with rising prices for other ingredients, such as poor cacao harvests.

A confectionery industry official explained, "It is difficult to adjust prices due to changes in prices of some raw materials," adding, "However, to prevent indiscriminate price hikes and set prices in a stable manner, we are focusing on internal cost-cutting such as improving factory efficiency."