Portfolio: Everstone Capital and Modern Foods

Hindustan Unilever (HUL) had a 15-year headache: Modern Foods, the iconic Indian baked goods brand that it had bought in 2000 in the first wave of state-owned enterprise divestments. The Indian branch of the global conglomerate had managed to return the company to profitability, but the baked goods market hadn’t grown according to plan. Modern remained an outlier: significantly smaller than HUL’s other divisions and far removed from its core business.

Enter Everstone Capital, which HUL’s new global management approached in 2015 to explore offloading the business. Though the GP had never done a carve-out before, it couldn’t pass up the chance to play a part in revitalizing such a well-known brand.

“The systems and processes Hindustan Unilever had put in place were pretty strong,” says Deep Mishra, a managing director at Everstone. “But it was underinvested in terms of people, marketing, distribution, and capex. So that was the potential: the brand was bigger than the business, and clear levers of growth were possible because the business had been underinvested for a long time.”

Less than two years into its ownership, Everstone has already made significant progress in its initial goal of revitalizing Modern’s place in the public consciousness. Now the firm is ready for the next objective: reinventing the brand image to meet the demands of today’s market. Backed by Everstone’s resources and experience, Modern’s new management is confident of success.

A brand apart

When HUL invited Everstone to bid for Modern, the firm’s executives needed no introduction to the brand. For years after its founding by the government in 1965 Modern had been one of India’s few national touchstones and along with Britannia Industries – founded in 1892 and primarily associated with biscuits – one of only two nationally-known baked goods businesses.

“The unaided recall for the brand in many markets was over 90%, which is considered quite unheard of. But this brand was created in an era when there were very few national brands in India,” says Mishra.

Everstone brought to the table years of experience in the food industry both within India and abroad, including Burger King’s India franchise and Domino’s Pizza in Indonesia, along with several domestic restaurant chains. Based on this portfolio, HUL saw enough potential to include the firm in the limited auction it was running for the asset. Along with Everstone, only two strategic players were invited to bid on Modern, due to the complexity of the business.

Despite its confidence, Everstone was not pushing at an open door. HUL had never made a secret of its difficulties pushing Modern’s market share to more than sluggish growth, or of the general apathy toward baked goods among Indian consumers that it blamed for its setbacks. In fact, Euromonitor had recently calculated India’s per-capita spending on baked goods at $1.30 per year, compared to $13 for China and the global average of $49.60.

Cultural barriers were widely blamed for this shortfall. Western-style bread has historically been considered only a breakfast food in India, with homegrown bakers mostly focusing on local specialties. Moreover, unorganized players make up a significant part of the industry. Rabobank found only a slight edge for organized players – meaning mainly Modern and Britannia – in the overall industry and the market evenly divided for bread, Modern’s specialty.

Yet for Everstone these numbers also represented opportunity. The GP believed it could provide the resources for Modern to pursue a consolidation strategy, roll up the smaller local operators into its fold and bring in the efficiencies possible with a national corporation. Even more promising was the prospect, raised by industry analysts, that an increasingly busy Indian middle class would adopt Western-style fast food, seen as more convenient for eating at a desk, for lunch or dinner.

Everstone’s belief in the residual strength of the Modern brand and in its own ability to tap that strength helped it claim the prize, and in September 2015 the GP agreed to acquire the company for $40 million. However, the new owner’s inexperience with corporate carve-outs meant it was inclined to move cautiously before assuming full control.

Experienced hand

To run the newly spun out Modern, Everstone tapped Aseem Soni, a veteran of the food and consumer goods industries with stints at Cargill, Henkel and Dabur Foods to his credit. Soni jumped at the opportunity to help rebuild a brand that he remembered from his youth.

“I myself had grown up with the brand, and had a lot of affinity and nostalgia with it,” he recalls. “So there was a strong feeling in me that this was the right place to be, and I could help resurrect the brand into something much bigger and more meaningful.”

Soni stepped into his new role began almost as soon as HUL had agreed to the acquisition, and nearly six months before Everstone officially took over the business. With the GP aware that a carve-out could be much more complicated than previous control deals, both seller and buyer wanted the new management to have as much time as possible before the official transition to get a handle on the internal structure. The key was transferring ownership without disrupting production.

“There were six operating plants, there were multiple unions representing hundreds of employees, along with multiple distribution points and 100,000 retail points of presence. It was a very complex business,” says Mishra.

Mapping this internal organization took a significant amount of Soni’s time in the early days; the CEO estimates that he spent most of his first three months simply analyzing the business. Of particular concern was the lack of national unity in Modern’s structure.

Though Modern had been one of HUL’s brands, that didn’t mean the parent company saw it as a distinct division within the organization. With no overall leadership team or guiding vision, managers at the six factories were left to devise their own strategies as if they were heading separate companies. Consequently, products proliferated, with more than 150 stock-keeping units (SKUs) across India at the time of the sale.

Marketing also suffered, with zero coordination on national advertising campaigns to establish a consistent identity for the brand. Even packaging was affected: the same product might be sold in a range of box types depending on where it was made.

All of these unnecessary variations made it difficult to build consumer loyalty, and Everstone made simplifying the product line a top priority. There are 53 SKUs, following the elimination of duplicate and similar products, while standardized packaging has been introduced nationwide.

Installing a new nationwide leadership team was an essential first step to establishing a unified band identity. But the new management was also clear that they couldn’t get the job done without the cooperation and assistance of the company’s current staff, who could be a major asset if they felt that the new owners were focused on improving the business rather than simply slashing waste.

“I think we used the existing senior people on the Modern team well,” says Soni. “They were the first people to come on our side, to align with us on the roadmap, and then they took the whole communication down the line, and I think that was key to getting those changes through.”

Everstone is also working to standardize and streamline Modern’s distribution network by taking in hand the franchisees who handled its sales in over 30 markets. The franchises had been set up under the previous ownership to ease some of the pressure on HUL, but the private equity firm was concerned that third parties would not be able to represent the company and its new identity properly.

After meeting with distributors Modern came away mostly satisfied that its existing representatives would adapt to the changes and comply with its new quality control initiatives, though it decided to terminate its relationships with 13 franchisees. The company is currently not selling in those markets, but is working to establish direct sales networks there instead.

Beyond bread

Beyond its streamlining projects, however, Everstone has much bigger plans for Modern, which it envisions expanding its product offering far beyond the white bread for which it is best known. The ultimate goal is for the company to offer a full range of baked goods with which to tempt India’s consumers.

The first stage is to revamp Modern’s bread offering. Currently white bread dominates India’s small bread market, with Euromonitor’s data showing white bread accounting for nearly three quarters of all bread consumed in India in 2010. Brown bread was a distant second at 15%.

Everstone sees its opportunity in the huge percentage of people who do not consume bread at all, or consume very little. These customers are ripe to be targeted through a portfolio with a wide variety of whole-grain offerings and advertising campaigns that capitalize on their health benefits.

“There’s a lot of interesting concepts in health and wellness, from a whole wheat to a multi-grain to a brown to an oats and flax bread, and things like that. We’ve done a lot of work on that front,” Soni says. “We appointed a company that worked with us for about six months to give our whole brand a new identity, keeping the older elements intact but modernizing the whole piece.”

Significant investment was required for the product overhaul, but Everstone is prepared to contribute additional capital to such efforts if it helps drive operational performance or improve the image of the brand. For example, when Modern was preparing its facilities for the new product launch, it realized the six factories had no way to control the temperature of the dough, resulting in inconsistencies across batches. A decision was then made to install ice makers across all the company’s facilities to ensure the appropriate refrigeration levels could be maintained.

Modern’s plans to tackle the bakery market beyond bread are even more ambitious. While the company already operates in this sector to a limited extent, consumer surveys convinced management that it was passing up a perfect opportunity to grab the unorganized share of the biscuits, cakes and pastries market in the same way it aimed to do in bread.

This will require much additional investment: the company aims to create an entirely new vertical that will focus on developing new non-bread bakery products and building an identity for Modern Foods in customers’ minds beyond traditional associations with bread. Everstone and the management see the potential payoff as well worth the cost. Unlike bread, which loses freshness quickly and requires daily replacement, the new products are expected, for the most part, to have a longer shelf life and easier transportation.

“The whole focus and positioning is more indulgence than health and wellness, and the go-to-market channel management is very different,” Soni says. “We feel that in about four to five years from, this particular vertical should contribute to at least one third of the scaled-up value of the organization.”

The new product lines are expected to make their first appearance at the end of the year, and Everstone is deeply engaged in supporting their development and deployment. Currently the GP is not focusing on the ultimate disposal of the asset, but it has identified goals, such as quadrupling of current sales revenues from INR2.5 billion ($39 million) annually, that could point toward an exit. However, the firm believes at this stage it is most important to keep its options open.

“Once we have created the new suite of products and gotten near the goal we’ve set for ourselves, that’s the time when we could look for exits. This is a company which could easily go for an IPO in the Indian market, or we could look at strategic options, but it’s a bit over the horizon for now since we are now in growth mode having made most of the course corrections since we acquired the business,” says Mishra.

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• Topics
• South Asia
• Consumer
• Buyouts
• Expansion
• India
• Everstone Capital