Kraft Heinz-HUL merger will make up tiny slice of India pie

The reason is the modest size of the food businesses of Hindustan Unilever and Kraft Heinz in India

The audacious bid for Unilever by Kraft Heinz last week, while intended at creating a food and beverage giant globally, will not mean much for India. The reason for this is the modest size of the food businesses of Hindustan Unilever (HUL) and Kraft Heinz in the domestic market. 

The unlisted Kraft Heinz, which has health food drink Complan, Heinz ketchup and Kraft cheese (launched recently) in the country, has sales of only around Rs 1,400 crore here, according to industry sources. HUL’s packaged foods business, according to its FY16 Annual Report, contributed 6.6 per cent or Rs 2,111 crore to the top line.

Together, the combined entity has a turnover of around Rs 3,511 crore, smaller than rivals such as Nestlé (CY16 sales of Rs 9,224 crore), Britannia (FY16 sales of Rs 8,607 crore) and ITC Foods (FY16 sales of Rs 7,200 crore). If Gujarat Cooperative Milk Marketing Federation, which markets the Amul brand of dairy products, is added to the list, the combined entity’s top line is a fraction of the former’s FY16 turnover of Rs 23,004 crore. Even other unlisted food companies such as Mondelez India have sales (for 2015-16) ahead of the Kraft Heinz-HUL Foods combine at Rs 5,411 crore. 

Clearly, the combined entity then will have miles to go if it does intend to make its presence felt firmly in India. This is in the event the merger gets through at the global level. But, is that on its mind at all? Some experts think otherwise.

Arvind Singhal, chairman, Technopak, says, “I see this bid as Kraft Heinz’s attempt to mark its presence more on the global food and beverage stage. India is a small aspect of this consolidation at this point. It could change in the future, but it is difficult to predict currently.”

G Chokkalingam, founder, Equinomics Research & Advisory, says, “The merger can be a game-changer if Unilever is considered in its entirety. Food alone may be not significant from an India point of view because HUL derives bulk of its turnover from home and personal care. For any upside from this transaction, there either has to be potential for growth or the possibility to unlock value. I don’t see it if the foods business of the two giants come together.” 

To be sure, until about two decades ago, HUL was a key player in foods in India with a presence across categories from branded staples such as rice and salt to bakery, soups, ketchups, ice-creams, desserts, tea, coffee, etc. In recent years, it has exited categories such as rice and bakery, and reduced its focus on staples such as salt, where margins are thin. While dessert brands, such as Brown & Polson, were revived two years ago, the focus for HUL continues to be on Knorr in soups, Kissan in ketchups, Kwality-Walls and Magnum in ice-creams, and beverages such as tea and coffee. This is unlike rivals such as ITC Foods, which have gone the whole hog in foods in the past few years.  

Some experts believe the global consolidation could open up prospects for not only Kraft Heinz to introduce more products into India, but also for Unilever, which derives 40 per cent of its global revenue from food, to do the same. 

“Most consumer goods giants realise that ignoring India is not possible with the world’s second-largest population sitting here. If the merger gets through, what Kraft-Heinz will get is HUL’s distribution muscle, which it can leverage to improve its presence in the domestic market,” says Pinakiranjan Mishra, partner & national leader, retail & consumer products, EY India. 

Unilever’s food push, on the other hand, in India could come as a result of food taking centre stage for the combined entity in the country, experts say. The picture will get clearer over time.