🚨 Lotte Group's Financial Structure Improvement Strategy and New Business Investment
Today Korean Economic News | 2025.02.19
📌 Lotte Group Continues to Improve Financial Structure and Invest in New Businesses Through Continuous Fundraising and Asset Sales
💬 Lotte Group is improving its financial structure through the issuance of corporate bonds, commercial paper, and asset sales, while focusing on investing in new businesses such as bio and AI to drive change and growth.
1️⃣ Easy Understanding
Lotte Group is strengthening its financial status by raising funds and selling assets, while simultaneously investing in new businesses like biotechnology and artificial intelligence. I'll explain what this management strategy means in simple terms.
Lotte Group has recently been raising funds by issuing corporate bonds and commercial paper (CP), while securing cash by selling assets such as buildings and business sites. With these funds, they are improving their financial structure by paying off existing business debts, while also investing in promising future industries such as biotechnology and artificial intelligence (AI).
To compare this to everyday life, it's similar to a household setting up savings and selling unnecessary items to gather cash, while using that money to pay off loan principal and simultaneously investing in children's education or a new business. Although cash may decrease in the short term, it's a strategy that can lead to healthier finances and greater returns in the long run.
Lotte Group's approach is significant in three major aspects. First, improving the financial structure can reduce interest burden on loans and increase management stability. Second, by reorganizing existing businesses with low profitability and focusing on new businesses with high growth potential, they can secure future growth engines. Third, they can diversify their business portfolio from distribution and food to bio and AI, spreading risks associated with economic fluctuations.
A particularly noteworthy point is that Lotte Group is expanding its business areas beyond traditional distribution, food, and chemicals into cutting-edge industries such as biotechnology and AI. This can be seen as a strategic choice for the company's long-term survival and growth, an effort to adapt to the rapidly changing industrial environment and seek new growth opportunities.
Lotte Group's strategy demonstrates a management philosophy that pursues long-term growth and stability rather than short-term profits. Simultaneously pursuing financial structure improvement and new business investment is a challenging task, but if successful, Lotte Group could transform from a traditional company to an innovative one, achieving a new leap forward.
2️⃣ Economic Terms
📕 Financial Structure
Financial structure refers to the composition of a company's assets, liabilities, and capital, and is a key indicator of financial health.
- It is measured by various indicators such as debt ratio, equity ratio, and interest coverage ratio, and has a significant impact on a company's credit rating.
- The sounder the financial structure, the higher the ability to respond to external shocks and the lower the cost of financing.
📕 Asset Sale
Asset sale is a strategy where a company secures cash by disposing of its assets.
- It is used for purposes such as debt repayment, securing funds for new investments, and business restructuring through the sale of non-core assets.
- While it helps secure cash in the short term, selling core assets could lead to weakened long-term growth engines, making strategic choices important.
📕 Corporate Bonds
Corporate bonds are securities issued by companies to raise funds, with principal and interest repaid at maturity.
- The issuance interest rate varies depending on the company's credit rating, and they are typically issued with various maturity structures such as 3 years, 5 years, and 7 years.
- Unlike issuing stocks, funds can be raised without ownership dilution, but there is a financial burden due to the obligation to pay interest and repay the principal.
📕 Business Diversification
Business diversification is a strategy where a company expands its business areas by entering new industries or markets.
- It is divided into related diversification (fields related to existing businesses) and unrelated diversification (completely new fields).
- It has advantages such as risk diversification, securing new growth engines, and creating synergies, but also disadvantages such as dispersion of core competencies and increased management complexity.
3️⃣ Principles and Economic Outlook
💡 Lotte Group's Financial Structure Improvement Strategy and Its Significance
Lotte Group is pursuing financial structure improvement through active fundraising and asset sales, which is a strategic move beyond simple financial activities, aimed at improving the group's overall constitution and preparing for the future.
First, it's important to examine the funding strategy through corporate bonds and commercial paper (CP) issuance. Lotte Group has been securing stable funds by regularly issuing corporate bonds in recent years. A notable point is that they are optimizing funding costs by appropriately combining CP, a short-term funding instrument, with corporate bonds, a medium to long-term funding instrument. When issuing corporate bonds, they employ a strategy that minimizes funding costs by distributing the repayment burden using various maturity structures, while adjusting the timing and scale of issuance according to market interest rate conditions.
Second, they are securing cash and restructuring their portfolio through strategic asset sales. Lotte Group is selectively selling assets with low profitability or limited growth potential to secure cash. In particular, they have secured substantial cash through the sale of non-core assets such as real estate, retail stores, and overseas business sites. These asset sales can be seen as a process beyond simply securing cash, but rather restructuring the entire group's business portfolio and increasing management efficiency. There is an effect of improving the overall profit structure by withdrawing from businesses with low profitability and focusing on core businesses.
Third, there is an effect of credit rating management and funding cost reduction through financial structure improvement. By repaying debt and reducing leverage with cash secured through asset sales, the financial structure can be improved, which can lead to credit rating upgrades. As credit ratings improve, interest rates on corporate bond issuances decrease, allowing funds to be raised under more favorable conditions. This can lead to a virtuous cycle that contributes to profitability improvement through interest cost reduction. In fact, some of Lotte Group's affiliates have recently shown improved credit ratings or outlooks.
Fourth, there is also a preemptive response aspect to prepare for economic recession and rising interest rates. Recent global economic slowdown and rising interest rate trends are factors that increase financial burden on companies. Lotte Group's efforts to improve its financial structure can be seen as a preemptive response to such external environmental changes. In particular, it is interpreted as a strategic move to secure financial buffers in preparation for the possibility of decreased sales and profits during an economic downturn, and to minimize the increase in interest burden due to rising interest rates.
This financial structure improvement strategy shows that Lotte Group is pursuing long-term growth and stability rather than short-term profits. Especially in a situation where uncertainty in the external environment is increasing, securing financial stability is an important foundation for future investment and growth. Lotte Group's approach can be seen as an exemplary case of a balanced financial strategy for sustainable corporate growth.
💡 Strategic Significance of Investments in New Businesses such as Bio and AI
Lotte Group's active investment in new businesses such as bio and AI is a strategic choice to overcome the limitations of existing businesses and secure future growth engines, with significant meaning in several aspects.
First, it is important for overcoming growth limitations of existing businesses and securing new growth engines. Lotte Group's traditional core businesses such as distribution, food, and chemicals are facing growth limitations due to market saturation and intensified competition. In particular, the distribution sector is experiencing a continuing decline in the profitability of offline stores due to the growth of online shopping. In this situation, investing in new industries with high growth potential such as bio and AI is an essential choice for the group's long-term growth. In particular, the bio industry is expected to grow continuously in line with the aging trend, and AI will play an important role in securing future competitiveness as a core technology that promotes digital transformation across all industries.
Second, there is a risk diversification effect through business portfolio diversification. By building a business portfolio across various industries, the impact of a recession or crisis in a specific industry on the entire group can be minimized. For example, during the COVID-19 pandemic, face-to-face service sectors such as distribution and tourism were hit hard, but bio and digital industries showed growth. By building a portfolio across various industries like this, resilience to economic fluctuations and external shocks can be enhanced.
Third, the possibility of creating synergies with existing businesses is also an important consideration factor. The bio industry can be linked to Lotte Group's existing food and chemical businesses, and AI technology can be applied to various fields such as distribution, logistics, and manufacturing to increase efficiency and create new services. For example, various synergy effects can be expected, such as developing health functional foods using bio technology, providing personalized shopping experiences based on AI, and building smart factories. Such a related diversification strategy is strategically advantageous in that it has a higher chance of success than unrelated diversification.
Fourth, it also has meaning in terms of strengthening ESG management and sustainability. Fields such as bio, eco-friendly energy, and AI are industries that can contribute to creating social value and protecting the environment. In the recent trend where corporate ESG (Environmental, Social, Governance) performance is becoming important, investment in these areas has the effect of strengthening not only financial performance but also corporate social responsibility and sustainability. This can contribute to enhancing corporate value and brand image in the long term.
Lotte Group's investment in new businesses can be seen as a strategic transition beyond simple business expansion, to respond to the rapidly changing industrial environment and prepare for the future. Especially in the era where digital transformation and bio revolution are accelerating, such preemptive investment in these new industries is becoming an essential choice for corporate survival and growth. However, as new businesses involve high uncertainty and risk, thorough analysis, step-by-step approach, and securing professional talent will be the keys to success.
💡 Balanced Strategy of Financial Structure Improvement and New Business Investment
Lotte Group is simultaneously pursuing two goals: improving financial structure and investing in new businesses, and maintaining a balance between these two goals is emerging as an important management task.
First, efficient allocation of limited resources and setting priorities are key tasks. How to allocate resources secured through asset sales and fundraising to debt repayment and new business investment is an important decision-making problem facing Lotte Group. It is important to find the optimal balance point between short-term financial soundness and long-term growth potential. For this, it is necessary to set investment priorities by comprehensively evaluating the profitability, growth potential, and synergy possibilities of each business division, and to establish a phased and systematic investment plan.
Second, a risk management strategy for new business investment is needed. New industries such as bio and AI are areas with high growth potential but also high uncertainty and risk. They may require large-scale funds and take a long time to generate profits, and there are many technical and regulatory variables. To manage these risks, various approaches such as phased investment, strategic alliances, and open innovation need to be utilized. In particular, a phased approach may be effective, exploring markets and technologies through small-scale investments and pilot projects initially, and then expanding full-scale investment after the possibility of success has been verified.
Third, it is also important to prepare buffers for securing financial flexibility. To prepare for external environmental changes such as economic slowdown and interest rate hikes, financial buffers such as maintaining a certain level of cash holdings and securing credit limits that can be utilized in emergencies are needed. Such liquidity securement provides the capacity to respond to short-term financial crises while also providing the ability to quickly respond when long-term investment opportunities arise.
Fourth, an integrated financial management system at the group level is needed. There is a need to build an integrated financial management system that can optimize funding, allocation, and investment decisions at the group level as a whole, not at the individual affiliate level. Through this, efficient utilization of idle funds within the group, minimization of funding costs, and optimization of investment portfolios can be pursued. In addition, by managing the financial risks of the entire group in an integrated manner, the risk of financial difficulties of individual affiliates spreading to the entire group can be prevented.
The two goals of improving financial structure and investing in new businesses may seem to conflict with each other, but from a long-term perspective, they can have a complementary relationship. A sound financial structure becomes the foundation for stable new business investment, and successful new business investment can lead to improved future financial performance, which can strengthen long-term financial soundness. Lotte Group's balanced strategy can be a model of sustainable corporate management that simultaneously pursues short-term financial performance and long-term growth potential.
4️⃣ In Conclusion
Lotte Group's active approach to improving financial structure through fundraising and asset sales, and investing in new businesses such as bio and AI, can be evaluated as a strategic transition to respond to changes in the corporate management environment. This is part of a comprehensive management strategy to secure long-term growth potential and sustainability, beyond short-term cost reduction or profit maximization.
Improving financial structure has the effect of increasing a company's stability and resilience. Especially in the current situation where global economic recession and interest rate hikes are expected, securing financial buffers and reducing interest burden play an important role in ensuring management stability. Lotte Group is improving its financial structure through fundraising via corporate bonds and CP issuance and strategic asset sales, and through this, is gaining the effects of credit rating improvement and funding cost reduction.
At the same time, investment in new businesses such as bio and AI is an essential choice to overcome growth limitations of existing businesses and secure future growth engines. In a situation where growth is limited due to market saturation and intensified competition in traditional core businesses such as distribution, food, and chemicals, preemptively investing in new industries with high growth potential is a strategic move for the group's long-term survival and growth. In particular, bio and AI are fields that have high potential for creating synergies with existing businesses and can contribute to strengthening ESG management.
However, pursuing these two goals simultaneously is not an easy challenge. Several tasks remain, such as how to allocate limited resources, how to manage the uncertainty and risk of new businesses, and how to secure financial flexibility to respond to external environmental changes. Especially considering the characteristics of the bio industry, which requires large-scale funds and a long time to generate profits, achieving both financial sustainability and investment efficiency will be an important task.
In conclusion, Lotte Group's financial structure improvement and new business investment strategy is an approach that seeks a balance between short-term financial performance and long-term growth potential. If this balanced strategy is successfully implemented, Lotte Group can transform from a traditional large corporation to an innovative and sustainable company, achieving a new leap forward. In a rapidly changing industrial environment and uncertain economic situation, bold innovation and investment based on financial stability are essential choices for the long-term survival and growth of a company.