Hindustan Unilever’s (HUL) decision to acquire Belagavi–based Adityaa Milk ice cream and frozen dessert brand from Vijaykant Dairy & Food Products, marks the second instance, over the last year, of a regional player selling its ice cream business. Last November, Havmor, a large player in the Gujarat market, sold out to South Korea’s Lotte Confectionery for ₹1,020 crore, which was 2.5x its sales.
Growing its ice cream business inorganically is a strategy that HUL — which sells ice creams under the Kwality Wall’s, Magnum and Cornetto brands — has followed from the early 1990s when the company saw an opportunity here. It started with the acquisition of the Dollops brand from the erstwhile Cadbury India in 1993. This was then followed by the buyout of Kwality’s from four branches of the Lamba family – this brought in a part from Kwality’s, the Yankee Doodle, Sub-Zero and Gaylord brands. The last of the deals struck during this phase was the purchase of Milkfood from Jagatjit Industries in 1994. Over time, HUL phased out each of these brands to have just Kwality Wall’s.
In spite of this aggressive approach, it has not been an easy ride for HUL, with Wall’s accounting for just 8% of the ₹10,000-crore ice cream and frozen dessert market. Amul, that entered the market in 1996, without making any buyouts since, is the clear leader with revenue of ₹1,400 crore or a 14% market share due to a better distribution network and affordable pricing.
So, just what does the ₹80-crore Adityaa Milk brand, a mid-market label with offerings in the ₹5 to ₹40 price range, bring to the table for HUL? Adityaa opens up an opportunity in tier 2 cities such as Belagavi, Hubballi, Dharwad and the rest of northern Karnataka. Of the ₹800 crore that Wall’s makes, that’s a mere 2.2% of HUL’s overall revenue, as much as ₹100 crore comes from Karnataka, with at least 95% of that from Bengaluru alone. For long, Wall’s has suffered since it is a metro-centric brand, with the company unwilling to invest in smaller towns because it takes a longer time to build distribution because of the need to invest in the cold chain. That is easier to do in metros. But with demand increasing from smaller towns, it is an opportunity that HUL can no longer afford to ignore.
Adityaa also has a factory in Belagavi, which according to rivals, Wall’s will use as an exclusive contract manufacturer for itself. The outsourcing deal with HUL will be just for ice creams. In fact, starting early this year, Adityaa has started manufacturing the Wall’s sandwich ice cream.
It is also here where Adityaa processes milk and other products that include yogurt, buttermilk and shrikhand. Adityaa will continue to make non-ice cream products. The ice cream business brings in 30-35% of the company’s turnover — milk is around 50%, while milk-based products make up the balance 15-20%.
The rationale for this buyout seems to be driven by the factory and a distribution network, which reaches out to approximately 15,000 outlets. Adityaa’s sole factory has restricted its expansion, with 70% of its business coming from Karnataka; unlike Wall’s just 10% of that is accounted for by Bengaluru. The thumb rule in the ice cream business is that the finished product can cover at best a distance of 400 km from its plant for it to be a viable business proposition. For Adityaa that has meant having a miniscule presence in Karnataka, Maharashtra, Goa and Kerala. Though HUL has not talked about the size of the deal, it is estimated to be around 2x of sales or ₹160-180 crore. On an EBITDA of 10%, that is a multiple of 20x or marginally more.
If history is anything to go by, the Adityaa brand name will make way for Wall’s. There is also likely to be an investment in the regional player’s plant to make it more compatible to make Wall’s ice creams. Clearly, there is some money waiting to be spent. With most regional ice-cream brands struggling to scale up, this could just be the beginning of India’s largest consumer company gobbling up other regional players in the time to come. In that sense, Adityaa may well be just a small part of that large strategy.