The Hindu Business Line : HLL to focus on franchisee route for Modern bread

ABOUT two years after completing the acquisition of Modern Foods India Ltd (MFIL), Hindustan Lever Ltd (HLL) has decided to de-emphasise direct bread manufacturing operations and focus predominantly on the franchisee route, leveraging the `Modern' brand.

And in a bid to rationalise manpower of MFIL, it is mulling a VRS package over a period of time at the loss making manufacturing units.

MFIL has 11 own bread manufacturing units, of which three — Silchar, Bhagalpur and Ujjain — were already closed before HLL had acquired the first tranche of 74 per cent control in the company in February 2000. The units at Delhi, Faridabad and Kanpur are also believed to have become operationally unviable. That leaves only four units — at Chennai, Bangalore, Kochi and Kolkata — as "reasonably viable," according to a HLL spokesperson.

In most of the unviable units, the cost of making bread has become 100 per cent higher than competition. "Conversion costs in the industry are Rs 0.70 to Rs 0.80 per standard loaf against MFIL's own average unit conversion cost of Rs 1.40," the spokesperson told Business Line.

All this has meant that HLL does not see direct manufacturing of bread as a viable activity. Instead, it is looking to grow the business nationally through franchisees, taking advantage of the high recall that the Modern brand still enjoys among consumers.

The spokesperson said that if manufacturing were to be viable, the only way out would be to bring down the conversion cost in line with industry average through restructuring and reduction of workforce numbers. The spokesperson pointed out that apart from conversion cost, distribution of bread by wholesalers is also becoming a challenge, particularly in markets such as Delhi (the largest bread consuming city).

"In such markets, MFIL will have to find low-cost ways of strengthening its own distribution and increasing penetration so that costs saved could be invested in brand support and, wherever relevant, in improving consumer value propositions." After posting an operating profit of Rs 4.83 crore in 2002, MFIL again slipped into the red in 2003 with operating PBI (profit before interest) declining to (-) Rs 4.57 crore after its supplementary nutritional foods business (accounting for 45 per cent of MFIL turnover) had to be discontinued.

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