INDIA BUSINESS WORLD - JUNE 2006
THE MONTH THAT WAS...

MODERN FOOD ON THE BLOCK

  HINDUSTAN Lever is selling Modern Food. India's largest consumer goods company had bought the bakery company in the country's first privatisation deal in 2000 and has struggled to turn it around ever since.

Top sources said HLL's decision is based on Modern Food's financial strength, market position and future prospects. It is also derived from the FMCG major's strategy of focusing on the core business of personal products, soaps and detergents and beverages and exiting noncore, non-essential areas.

Sources added that the process has already begun and preliminary interest has been shown by some buyers. The identity of the potential buyers for Modern Food is not known.

ITC, which is pushing aggressively into foods, and Britannia could be in the race though the problems that HLL faced would make them think twice.

Modern Food Industries was the then BJP-led National Democratic Alliance government's first privatisation deal in 2000, ahead of Balco, Hindustan Zinc, Paradip Phosphates and Videsh Sanchar Nigam Ltd. Hindustan Lever bought 74% in Modern Foods for about Rs 105 crore amid huge expectations and investor interest over the company's foray into foods.

   In the late 1990s, when KB Dadiseth was the chairman, Hindustan Lever planned a big foray into foods with a thrust on traditional items that consumers buy regularly. “We want to give Indian consumers what they put on their plate every day,” was Mr Dadiseth's common refrain.

HLL had to cut back on its ambitious targets such as a big push into atta and salt while spices never took off. A slowing economy in the early years of this century and intense competition in key areas forced it to focus on its basic businesses and sharply reduce in size and scope the huge plans for selling basic foods. The Modern Food experience was also not smooth. High costs, a recalcitrant work force, and the problems of retailing a perishable, lowmargin, low-value commodity like bread created huge headaches.

Lever's strategy was to use the Modern Food distribution network to sell fresh foods and bread across the country. But it did not quite work out that way due to the problems of differentiation in a low-margin commodity. An attempt was made to launch biscuits but was quickly abandoned. HLL had to shut down three Modern Food factories in Chandigarh , Ahmedabad and Indore . The Delhi unit, the singlebiggest loss-making unit, was also shut in November 2005. Though Modern Food made a small operating profit in 2005, it was constantly bedevilled by rising costs and cancellation of some key orders.

HLL's decision to sell Modern Food also shows that the company can be quite ruthless in exiting businesses where it believes it has no role to play. Over the years, the company has sold Dalda, one of the company's oldest brands, dating back to the 1930s, and Nihar, which it got with the Tomco acquisition.