Why Hindustan Lever is floundering in foods business

The company's heart, it seems, is not in the foods business and almost all acquisitions have bombed.

MUMBAI: In a way, it's like getting rid of stale food. Hindustan Lever Ltd (HLL), the food, detergents and personal products company, may or may not be looking for a buyer for its bread and biscuits company Modern Foods, but there's little disagreement outside that it has little to show by way of success in this area.

Modern Foods was acquired by HLL from the government in the first round of disinvestment in 2000, but the company soon discovered that its finances were a mess and it had bought itself a can of worms.

But if divesting Modern Foods — which company sources deny — merely amounts to getting rid of trouble, its other food business acquisitions have floundered for want of a proper strategy and an unwillingness to bankroll long-term investments. Except for beverages like coffee and tea, which have been self-sustaining, the rest of the buffet has been unappetising.

Barring soap company Tomco, which HLL acquired from the Tata group in 1993, all subsequent acquisitions, largely in foods, have come a cropper. Even cosmetics company Lakme, bought again from the Tatas in the mid-1990s, makes more news on the catwalk than shop shelves.

Or look at the food parade. During chairman Keki Dadiseth's time, it picked up Kissan from Vijay Mallya, Captain Cook from DCW Chemicals, Kwality ice-cream from Ravi Ghai, Dollops ice-cream from Cadbury's, Milkfood ice-cream from Jagatjit Industries and Modern Foods from the government.

Except for Kissan and Kwality, which are just about there, the rest of the food brands have been phased out. And the food revenues have been gradually shrinking in the last three years, from 18.28% of the topline in 2003 to 15% in 2005. In the same period, the beverages - Brooke Bond and Lipton - have been guzzling share, accounting for 63% and 75% of HLL's food revenues respectively.

"The acquisitions were taken on to gain expertise and strengthen the food business, but they became a noose," says an HLL manager who was once involved with one of the foods businesses. Even its Annapurna atta (wheat flour) has been playing peek-a-boo with retailers.

Why has HLL not been able to handle its food platter as well as its soaps and detergents business? HLL managers say that there are host of reasons, particularly the company's reluctance to pump money in foods.

"Developing culinary needs and growing the market can be expensive. You have to understand the local palette and then apply global principles, and HLL wasn't getting it right," says a manager.

He points to ice-creams, where HLL with its unknown brand Walls bought out three other brands to gain a headstart. "We bought out competition, including Kwality, which had a 75% marketshare then, but were unable to build our own brand Walls against fierce competition from cheaper brands like Amul," says a manager involved with ice-creams.

As a result, Kwality Walls today is barely surviving in the deep freeze.

According to a research report by brokerage house SSKI, Hindustan Lever, unlike ITC, has not shown the requisite will to grow the foods business. In a 2005 report, SSKI says: "Both HLL and ITC operate in the foods business, though in different segments. However, the two are moving in exactly opposite directions. While ITC is increasing its presence in the business…

HLL has hived off over Rs 500 crore of foods business in the last five years. The Rs 1,50,000 crore Indian processed foods industry is highly fragmented (only 10% branded). The business entails low margins, but is quite lucrative as it is growing at 20% per annum. Therefore, a company has to stay invested in this business for at least 3-5 years and concentrate on topline before it can hope to make profits." The corporate culture is another issue, say managers. "HLL was, is, and will always be a soaps and detergents company. There is no room for foods there," says the erstwhile head of one of HLL's businesses. They also say that over the years, Bangalore has been losing its status as HLL's food headquarters, with large chunks of the business shifting to Mumbai. "This has caused a division in the ranks between Mumbai and Bangalore," reveals a manager.

Clearly, HLL's fumbling kitchen capers have been an exception, even as cigarette company ITC has been at work. With constant new launches, its fledgling food division has been keeping housewives busy.

All this when Unilever, HLL's UK-based parent, has an equal share of food and toiletries revenues globally.