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Modern Foods divestment moves a step further - Views on News from Equitymaster
 
 
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  • Nov 5, 1999

    Modern Foods divestment moves a step further

    The government has set the divestment ball rolling once again. It has finally zeroed in on four bidders, which include Hindustan Lever (HLL), Britannia, Nestle and Evergreen, for a 74% stake in the ailing bakery product manufacturer Modern Foods.

    Modern Foods manufactures breads and cakes under the brand name of ‘Modern’ and is the largest brand in the segment commanding 10% share of the market. The company has 17 bread-manufacturing units with a total installed capacity to produce about 270 m standard loaves of bread. Its products are popular in North India.

    Under the divestment plan the strategic partner will be given a free hand to prune work force to streamline operations. The price at which the government will divest its stake is still being kept under wraps.

    The 1,400 thtpa bread market, valued at Rs. 11,000 m, is dominated by local manufacturers (80%). Market growth is 3-4%, but it is much higher for organised sector (brands). Brands like Modern and Britannia are major players in the bread market (10% share and 5% share respectively), and together they account for 90% of the organised bread market. The bakery market is poised to touch Rs. 100 bn by the year 2005.

    Interest of Britannia in the company is quite clear. Being India’s largest bakery products company, it will get a known brand under its fold and will be able to consolidate its position in the organised bread segment. It will not find it difficult to put Modern back in the black because of its experience in the field.

    The buy out of Modern also makes sense for FMCG major HLL and Nestle India both of whom have identified the food sector as key growth areas. Both the companies do not have a presence in the bakery segment. The proposed buy out of Modern will give them a foothold in the bakery segment and ensure their dominance.

    Awareness in the bread segment is nearly 100%, however, penetration is lower in rural areas at 15-20% and at 60% in urban areas. This is mainly because these products are consumed as snacks, and do not form part of the main course meal. Bread to some extent, is consumed as a food supplement in the urban areas.

    This fact is another reason why HLL is interested in this buy out. The company thrives on increasing penetration of its products aided by its 1 m retail outlet strong distribution network.

    If the company goes to Britannia, it will become the No. 1 player in the segment. But if the company goes to any of the other three contenders, this segment is sure to see increased marketing efforts in a bid to grab consumer attention. On the whole it will ensure the expansion of the bread market.

     

     

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