Modern Bread's traditional woes

HUL finally bids adieu to Modern Foods after years of unmemorable cohabitation

Modern Foods factory in Edapally, Kochi

Over eight years after Hindustan Unilever (HUL) put its bakery business, Modern Foods on the block, it has finally found a buyer. After endless rounds of discussions with various buyers, Everstone Capital-controlled Nimman Foods has bought it for an unconfirmed price of ₹250 crore. That figure being right, Modern Foods has changed hands at 1X sales. The business has been a bane for HUL, having been bought during a frenetic phase of acquisitions by the Anglo-Dutch multinational. This included high-profile deals like the buyout of Lakme, the merger with Pond’s and Unilever globally taking over International Best Foods.

When HUL bought Modern Foods from the government during its privatisation drive in early 2000, it was met with scepticism since it was the only bidder. After initially acquiring 74% for ₹105 crore and agreeing to invest ₹20 crore as a part of the deal, the other 26% came HUL’s way in 2002 for ₹44 crore. With that also came a troublesome labour union that HUL struggled to deal with for many years and one which caused serious heartburn.

The organised bread industry in India has been reserved for the small scale sector since 1977, but the two biggies, Britannia and the state-owned Modern at that time were kept out on the basis of their larger manufacturing capacity. Modern’s portfolio, apart from bread, includes value-added bakery products like buns, cakes and muffins, which are manufactured at Modern’s six plants.

By any yardstick, this is a very difficult business to be in for a host of reasons. Barring Modern and Britannia (with sales of about ₹800 crore), there are no national brands of significance in the ₹3,300 crore sector, where white bread brings in 75% of the revenue with the rest coming from brown bread, fruit bread and other nutritional bread. Most of the manufacturing is done by many small, localised players who by covering a limited area, spend very little on distribution or marketing. Bread remains a “morning distribution” product and tight cost control is imperative.  HUL’s inability to combine its distribution despite its army of brands resulted in high costs in a business that has a wafer-thin margin. For FY06, the year it was merged with HUL, it had a modest operating profit of ₹2.65 crore after being in the red till FY04. Since then, it has been a part of HUL’s packaged foods business and its business performance is something HUL is clearly not proud of.

While HUL said in a statement that the decision to sell the bread and bakery business was in line with its strategy of exiting non-core businesses, Everstone is a private equity player primarily focused on the branded eating-out space. Considering that a large chunk of Modern’s business continues to come from bread – a commodity business – Everstone will need to think of innovative ways to make the venture profitable. Given HUL’s unsuccessful liaison with Modern, how Everstone will make its partnership profitabe is still in question.