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Business News/ Opinion / Online-views/  Godrej faces tough decisions ahead on food biz
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Godrej faces tough decisions ahead on food biz

Godrej faces tough decisions ahead on food biz

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The shares of Godrej Industries Ltd and Godrej Consumer Products Ltd (GCPL) reacted differently to news about the Godrej-Hershey joint venture (JV) breaking up. While the Godrej Industries stock fell by about 1%, GCPL’s rose by about 1.4%.

US-based chocolate and confectionery maker Hershey Co. owns a 51% stake in Godrej Hershey Ltd, with Godrej Industries owning 43.4%, and A. Mahendran, director at Godrej Hershey, owning the rest. Differences among the two partners have apparently led to the reported decision.

The Godrej group did not confirm the news. But GCPL has denied its purported role in the transaction. That may imply that Hershey’s 51% stake may be bought out by Godrej Industries, and not by GCPL as reported. That is also more plausible, as GCPL houses the home and personal care businesses, while Godrej Industries manages the food business.

Godrej Hershey was set up to sell existing Godrej brands such as Nutrine Confectionery, Jumpin and Xs beverages, and new products from Hershey’s portfolio. It seemed to be an ideal combination, as its distribution network and local market knowledge could be used to push Hershey’s well-known products. Hershey’s sole product in the JV—chocolate syrup—did well, with sales rising by 82% in 2009-10 and 47% in 2010-11.

But Godrej Hershey’s revenue rose just 10.4% in 2010-11. Beverages sales grew by 10%; although confectionery sales growth figure is not available, but it is unlikely to have exceeded 10%. Rising costs of inputs such as sugar affected profitability in confectionery. It has a sizeable market share of 20% in candy.

Godrej Industries annual report for 2010-11 indicates a loss attributable to its investment in Godrej Hershey of about 22 crore. In 2010, Hershey took a $47 million ( 209 crore today) charge to profits, citing an impairment of goodwill attributable to its investment in Godrej Hershey. It cited slower growth, rising input costs, delayed expansion of distribution and delayed implementation of new price points as key reasons.

In such a situation, investing more to drive growth is one option. In 2009 and 2010, both Hershey and Godrej invested $36.4 million in the JV. But that may not have worked as expected.

Divesting a few of the loss-making products could cut losses and release funds to invest behind the profitable ones. Godrej Hershey has been cutting costs and has said it will use product innovation to drive growth. Introducing more products from Hershey’s portfolio could have been another solution. But new products also mean additional investments in working capital and marketing.

Differences on how to achieve growth may have led to a decision to separate. If and when the split is formalized, the financial implications will become clearer. Godrej Industries’ shareholders may not worry much, as Adi Godrej is a consummate deal maker. Hershey will want unfettered access to the domestic market to sell its products. That may allow Godrej Industries to buy back its stake, without wiping out its bank balance. But tough decisions may still be needed. After all, in that situation, it will own 100% of a business whose revenue growth and profitability are both unsatisfactory as yet.

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Published: 06 Jul 2011, 09:42 PM IST
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