Arun Ice cream
On June 30 1997 even as he signed the Annual Accounts of Hatsun Milk food Limited for the year to March 1997, 1997, it was clear clear to to R.G.Chan R.G.Chandram dramogan, ogan, the Chairman and Managing Director that his company was in the middle of strategic cross-roads. cross-roads. The dilemma related to to the Strategic Strategic direction the Ch Chenn ennai-hea ai-headdquartered makers of
Arun
ice cream had to take: this in particular involved the
question of of market expansion fo for ice cr cream be beyond So South In India vi vis-a
vis
diversific diversification ation into produ products cts that that could could levera leverage ge on the com company pany's 's curren currentt strengths. Recent years had been momentous for Arun as the company itself had come to be known eponymous with its key brand. Early
1996 saw
Hatsun Milk Food
Limited (HMFL) taken public. With the Indian stock market in the grip of a bearish phase, Hatsun's initial public offering (IPO) barely managed to sail through. But the greater visibility and emergence of a powerful stakeholder in the form of public investors meant the taciturn management of Hatsun had to play a completely unfamiliar role in managing expectations. With ice cream sales increasing by a healthy
41
%, the just completed fiscal, the first full year
after the IPO. Chandramog Chandramogan an reflected, was probably satisfactory in this respect. This, he felt, however only underscored the urgency to develop a sound short-term strategy to consolidate Arun brand of ice cream in the fast-changing competitive scenario and thus establish a solid platform to launch aggressive growth initiatives and attain a critical mass and scale by the year 2000.
Arun Ice cream: Early history and Strategy
Chandramogan , son of a vegetable wholesaler from South Indian state of Tamil Nadu, set up Arun Ice Cream in 1970 in Madras (now re-named re-named as Chennai), essentiall essentially y motivated motivated by the urge to "do something". something". After his college studies studies were discontinued discontinued at the pre-university pre-university stage, Chandramogan agonized over several weeks about starting some starting some business without being quite able to narrow down to any specific line, mainly because of heavy investments entailed. While driven by an urge to succeed as a businessman. He did not quite know how to go about setting up
a business. It was his maternal uncle who suggested the business of ice cream. Investing Rs, 15,000 as his own capital and raising another Rs. 21.000 by way of a bank loan. He set up a small ice candy unit in a rented premise adjacent to his uncle's retail textile outlet. From a quick survey around the Madras market it appeared to Chandramogan that there were about 350 smalltime ice candy manufacturers like himself competing in the low end of the market. These were offering no competition to the up-market segment dominated by the leading brands Dasaprakash brands Dasaprakash .Joy and Kwality. and Kwality. Like the "others in the crowd", Chandramogan was also selling his Arun his Arun brand ice ice cand candie iess for for
10
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paise paise presti prestigio gious us instit instituti ution on like like the Indian Indian Instit Institute ute of
Technology, Madras. He also felt that college students were more than willing to experiment with a new brand or new flavours. Sensing a competitive vacuum, he stepped in with vastly improved service and deliveries they were unaccustomed to and steadily captured bulk of this segment. Similarly ship-chandlers, who procured and supplied provisions to ships that called at the Madras port, were particular about delivery of ice cream just in time for onward transshipment to ships. Chandramogan felt that this segment, while fastidious about quality, was not that brand-driven. Most leading ice-cream manufacturers were unsurprisingly unexcited about these supplies in view of the small volumes and the erratic delivery requirements. Chandramogan began meeting these agents who were procuring and supplying provisions to various shipping lines, understood their special requirements as to packing and delivery and quickly captured most of this market as well. By 1974, Chandramogan recalls that, Arun had probably captured 95% of the college canteen and ship-chandler segments. However, 95% of the total Madras market, represented by the other three segments, was still outside the reach of Arun. Having firmly established in the city college campuses, Chandramogan toyed with the idea of replicating the approach in the college canteens in the interior districts of Tamil Nadu. Ice-cream majors of the time practically ignored the district towns because of sheer logistics problems. Since the student community in district-level colleges. Included in their midst former students of Madras colleges, colleges, brand recognition recognition for Arun was made relatively relatively easier. Chandramogan Chandramogan began supplying ice cream to a few colleges co lleges in nearby districts, packed in dry ice containers, employing sales persons for the purpose. Very soon Arun had virtually 100% of the small, but growing upcountry college market.
With Arun's volumes picking up in the following months Chandramogan was able to pay off all his outstanding loans, and the business regained a semblance of financial flexibility. Despite this, Chandrarnogan still did not feel financially strong enough to enter the deep freezer based general stores segment in Madras city. While in these early-days, he did provide some advertisement support to build and enhance the brand image of Arun, very few enquiries for agency or franchisee interest followed. As he continued to stay clear of the top three segments in the Madras market, it was evident to Chandramogan that the business was probably entering a phase of stagnation. So he began looking out for new markets in which he could compete effectively and grow. Breaking into upcountry market
As Chandramogan Chandramogan saw, the greatest greatest growth potential was seen 10 the upcountry upcountry mofussil towns towns that were completely ignored by the ice cream majors. While these- markets were virgin, the cost and logistics of servicing them from a central factory in Madras were indeed daunting. If he could come up with the right marketing and distribution formulae, Chandramogan felt there was a good good chan chance ce of his his stri striki king ng it big, big, parti particu cula larl rly y becau because se of the the abse absenc ncee of any any seri seriou ouss competition. Having made inroads into upcountry college canteens and hostels, Chandramogan began looking at the feasibil feasibility ity of supply supplying ing ice cream cream to wedding wedding and other other import important ant social social events in upcountry towns. While ice cream was a standard fare for such events in Madras, this concept was virtually unknown outside the city. So he went around canvassing for orders for wedding and other social events in upmarket households outside Madras city. Through persistent efforts, Arun was able to achieve some measure of success. While these initiatives did help in enhancing brand awareness and additional sales, Chandramogan realized that these would not be adequate to give him stable volumes and a critical mass. And to achieve this, it was important that somehow he got into some kind of mass marketing. Around this time there were a few enquiries indicating interest in stocking and retailing Arun ice cream in some areas of the Madras city provided Chandramogan supplied the deep freezers. Chandramogan firmly, but politely turned down the offers. Initially, Chandramogan identified a few towns like Pondicherry, Madurai, Kumbakonam and Sivakasi in Tamil Nadu for initial foray, particularly because good quality icecream was not
available in these places. (At best a few hotels and, restaurants were serving "home-made", unbranded, plain-vanilla ice cream to their diners). Chandramogan advertised through banners and hoardings in these selected towns that ice cream from Madras would be supplied on certain pre-announced days and that those interested could book their orders with Arun agents either in person or by phone. Using local telephone directories to obtain addresses, he also' had mailers posted to potential upmarket customers, referring to them as eminent persons figuring in the list of VIPs. Typically Chandramogan had Arun had Arun ice cream supplied through the agents within four to five days of the "booking" "Ice cream supplied from Madras" Madras" was the key selling selling point. point. Mailers Mailers to addressees addressees outside the specif specified ied locali locality ty were were rare rare at that that time. time. As the long-i long-ignor gnored ed small small town town consum consumers ers felt felt reco recogn gniz ized ed,, ther theree was trem tremen endou douss resp respon onse se to thes thesee "tes "testt-ma mark rket etin ing" g" fora forays ys.. Even Even as Chandr Chandramo amogan gan was beginn beginning ing to feel feel confid confident ent to think think in terms terms of regula regularr distri distribut bution ion arrangements in place of the ad-hoc "ice cream days", the novelty factor was beginning to wearoff and. customer customer response started declining . He also felt that. 'fixed-day" selling probably left out a out a large number of potential customers from places contiguous to these towns as well as walkin customers indulging in impulse purchases. Having made inroads into upcountry college canteens and hostels, Chandramogan began looking at the feasibil feasibility ity of supply supplying ing ice cream cream to weddin wedding g and other other import important ant social social events in upcountry towns. While ice cream was a standard fare for such events in Madras, this concept was virtually unknown outside the city. So he went around canvassing for orders for wedding and other social events in upmarket households outside Madras city. Through persistent efforts, Arun was able to achieve some measure of success. While these initiatives did help in enhancing brand awareness and additional sales, Chandramogan realized that these would not be adequate to give him stable volumes and a critical mass. And to achieve this, it was important that somehow he got into some kind of mass marketing. Around this time there were a few enquiries indicating interest in stocking and retailing Arun ice cream in some areas of the Madras city provided provided Chandramogan Chandramogan supplied the deep freezers. freezers. Chandramogan Chandramogan firmly, firmly, but politely politely turned turned down the offers. Initially, Chandramogan identified a few towns like Pondicherry, Madurai, Kumbakonam and Sivakasi in Tamil Nadu for initial foray, particularly because good quality ice-cream was not available in these places. (At best a few hotels and, restaurants were serving "home-made",
unbranded, plain-vanilla ice cream to their diners). Chandramogan advertised through banners and hoardings in these selected towns that ice cream from Madras would be supplied oncertain pre-announced days and that those interested could book their orders with Arun agents either in person or by phone. Using local telephone directories to obtain addresses, he also' had mailers posted to potential upmarket customers, referring to them as eminent persons figuring in the list of VIPs. Typically Chandramogan had Arun had Arun ice cream supplied through the agents within four to five days of the "booking”. "Ice cream supplied from Madras" Madras" was the key selling selling point. point. Mailers Mailers to addressees addressees outside the specif specified ied locali locality ty were were rare rare at that that time. time. As the long-i long-ignor gnored ed small small town town consum consumers ers felt felt reco recogn gniz ized ed,, ther theree was trem tremen endou douss resp respon onse se to thes thesee "tes "testt-ma mark rket etin ing" g" fora forays ys.. Even Even as Chandr Chandramo amogan gan was beginn beginning ing to feel feel confid confident ent to think think in terms terms of regula regularr distri distribut bution ion arrangements in place of the ad-hoc "ice cream days", the novelty factor was beginning to wearoff and. customer response started started declining . He also felt that. 'fixed-day" selling selling probably left out a large number of potential customers from places contiguous to these towns as well as walkin customers indulging in impulse purchases. The break-through came by chance. As Chandramogan said, "people see advertisements; but they seldom read it carefully". On the appointed days when ice-cream was to be supplied as announced announced in advertisement advertisement mailers and hoarding, hoarding, even those who had not booked not booked ice creams, creams, came to the premises premises of the agent whose address appeared in the advertisement advertisementss for buying ice cream. cream. Simil Similarl arly y many many potent potential ial custom customers ers also turned turned up on other other days. days. Excite Excited d by the consumer response and seeing that on several occasions, walk-in customers had to be turned back, an agent Kanakaraj from the temple-town of Madurai offered to invest in his own deepfreezer and sought long-term distribution arrangements. This agent provided facilities to people to "sit and eat" ice cream.
A
novel method of retailing retailing ice cream through "sit-and-eat "sit-and-eat parlour" parlour"
thus was born in1981. Though Kanakaraj suggested that price of Arun ice cream be kept low keeping in view of the price-sensitivity of the local market, Chandramogan was not in favour of doing so as be felt that Arun was not the same as unbranded, low-priced ice cream served in local restaurants. restaurants. Chandramogan Chandramogan supported supported this agent through through joint promotions promotions and regular regular advert advertise isement ment campai campaigns gns.. Even Even as the first first Arun Arun "franc "franchis hisee" ee" began began tastin tasting g succes successs with with steadily-growing demand, other small town agents also felt emboldened to invest in their own freezers. A 400-litre freezer of reputed brand typically cost about Rs. 12000 to 13,000 around the
time. As Chandramogan recalls, he "accidentally hit the right button". "This was not a credit oriented market”. market”. And he did not have adequate resources resources to invest in his own freezers and supply them to retail outlets. As it turned out, "there was no investment, no credit, but also no competition in this market". And he was implementing the franchisee concept without ever knowing the term. From 1981 he began replicating the model by opening, on an average, two such franchisee run parlours every month. With over 700 such outlets in Tamil Nadu, Karnataka, Kerala and Andhra Pradesh by early 1999, Chandramogan believed that Arun franchisee network was one of the largest in South India. In appoin appointi ting ng his franchi franchisee sees, s, Chandr Chandramo amogan gan typica typically lly looked looked at the person personal al profi profile le and business background of the potential candidates. can didates. Typically, he would not offer Arun franchise to big time, successful traders or businessmen. He also avoided, as far as possible, elderly persons or highly educated individuals for distributorship. On the other hand, he would prefer someone who was in his mid or late twenties, preferably completed his schooling, with average failed in family income and had probably probably failed in his early business endeavors. Very often, friends and relati relatives ves of existi existing ng franch franchise isees es approac approached hed him with with reques requests ts for franchi franchise se rights rights to open open par parlo lour urss in new loca locati tion ons. s. This This made made Chan Chandr dram amoga ogan' n'ss task task easie easier. r. Once Once appoi appoint nted ed,, the the franchisee was assured of certain exclusiveness and "area" protection in that another Arun franchisee was not appointed within a 1.5- 2 kilometre radius. These franchised outlets were exclusive "sit-and-eat" ice cream parlours with good ambience and located in city centre or main roads. Unlike the general stores freezer outlets of other ice cream brands, Arun’s outlets did not stock other items like butter and chocolates. Ov er the years Chandramogan fine-tuned the parlour and franchisee concepts. Chandramogan had deliberately decided on the strategy of parlours selling Arun Ice Cream exclusively. On its part, the company would ensure that it distributed its products only through its franchisees' parlours and not through any other channels except direct deliveries to customers against specific orders for parties etc. The concept of exclusive parlours, Chandramogan felt, enabled the franchisee to focus on selling Arun range of ice cream and give better customer service. By 1985, Arun emerged as the largest ice-cream manufacturer in Tamil Nadu in terms of volumes. Arun's turnover, which was about Rs. 150,000 in 1970 and had barely inched up to about Rs. 425000 by1981, had risen to about Rs. 28.0 million, by 1990.
Even as Arun became largest ice cream brand in Tamil Nadu by 1985 thanks to its success in the upco upcoun untr try y dist distri rict cts, s, Arun Arun stil stilll did did not not have have sign signif ific ican antt pres presen ence ce in the the Madr Madras as city city.. Chan Chandr dram amog ogan an now began began aggr aggres essi sive vely ly atta attacki cking ng the the Madr Madras as city city mark market et init initia iall lly y by establishing the now successful "sit-and-eat" parlours in Madras suburbs and outskirts and only ther therea eaft fter er,, he move moved d into into the the city city.. In the the next next 18 to 24 mont months hs,, Arun Arun achi achiev eved ed its its brand brand leadership in Madras city as well. While he continued with the strategy of not cultivating the hotel segment, the wedding parties segment came "automatically" to Arun now. It was estimated that Arun had a market share share of around 60% in Tamil Nadu by 1999 and about 36% in the four South Indian states. Chandramogan estimates that probably about 120 franchisees came to his fold as friends/r friends/relati elatives ves of existing existing Arun agents. agents. One franchisee, franchisee, Ganesan, was responsibl responsiblee for introducing as many as 32 other agents. Aruns franchisee family, Chandramogan felt, was an extremely loyal lot as most them grew with Arun. There was a strong symbiotic relationship between the company and its franchisees. At a more personal level, many of them enjoyed very warm warm relati relationsh onship ip with with Chandr Chandramo amogan gan.. And severa severall of them them have have named named their their sons sons and grandsons as Arun! Chandramogan was clear that in any business decision he took, he would not ignore the collective interests of his extended family of franchisees.
Manufacturing Operations and Logistics
While the seventies were a period of "learning", the eighties turned out to be one of "earning" for Chandramogan. He also realized that in the business of ice cream, efficient management of inward inward and outwar outward d logist logistics ics was extrem extremely ely import important ant.. The most most challe challengi nging ng aspect aspect was, was, procurement of milk, a key input in ice-cream manufacture in a cost-efficient- manner. The problems arose because of the seasonal demand-supply imbalance in respect of the product and its extremely short shelf-life. Summer months of March through June, though peak season for ice cream sales, also, happen to be the lean season for milk supplies in Southern India. Similarly the flush season for milk coincide with the period of low ice cream sales. From fairly early days, Chandramogan decided procure milk directly from dairy farmers and for this purpose set up collection centers’ in major milk-producing villages close to his ice cream plant. The milk procured at these collection centre’s could be brought to the Arun factory within 2 to 3 hours of collection. He offered guaranteed procurement of certain minimum quantity of milk, based on
his lean season requirements. For his additional requirements of milk in the peak ice cream season, he offered to pay a higher price. Typically the payments to the dairy farmers for the milk pur purch chas ases es were were made made once once ever every y thre threee days days at the the coll collec ecti tion on cent centre res. s. Acco Accord rdin ing g to Chandramogan, Arun's ice cream sales had; on an average, exhibited the kind of seasonal-pattern as given in Table 1. He sourced other Inputs -and ingredients such as sugar, fruits, packing materials etc. from leading wholesalers/manufacturers. For outward transport of ice cream to various franchisees located in different town he recognised that the low volumes to various destinations did not justify the use of expensive refrigerated transport that had to return empty with no compatible load. S o he typically took advantage of the regular passenger train services of the Indian Railways for despatch of ice cream to various destinations. For this purpose, ice cream cartons were tightly packed in small wooden boxes (2'x2' (2'x2'x2' x2')) with with therma thermacole cole lining lining and filled filled with with dry ice (solid (solid carbon dioxide) dioxide) to prevent prevent melti melting. ng. Being Being a highly highly perish perishabl ablee product product,, ice cream cream was accorded accorded high high priori priority ty by the Railways for transportation. The franchisees would have the "boxes" collected at their respective destinations. They also returned the empty containers by return trains. And it was not until 1995 that he purchased refrigerated vehicles for delivery of ice cream. Chandramogan also felt that in the long run transporting ice cream to long distances by train or by refrigerated vehicles might not be a viable strategy. He also reckoned that a 250 to 300 K.M. radius was probably the optimal area that could be cost-effectively serviced by a central ice cream plant. As the Madras ice cream plant was running out of capacity thanks to Arun’s rapid expansion in the eighties, Chandramogan Chandramogan felt a compelling compelling need to set up another plant both to meet the growing growing demand and also to improve the overall logistics. In 1991 he set up a spanking new ice cream plant at Salem, some 320 kilometers south west of Madras and also close to both Kerala and Karnataka borders. Moreover the new plant was located in the heart of Tamil Nadu's milk belt which facilitated procurement of high quality milk at competitive prices. See Exhibit: 1 for a map of South India. The Salem plant involving an investment of Rs. 22 million was constructed in record time of about 3 months, right in time for the summer season. The plant capacity at both Madras and Salem were designed for peak seasonal production; during off-season the plant utilization was only partial and all annual maintenance and revamp were typically scheduled during this period. While on an average 7 to 10 new flavours were introduced every year, an equal number were probably phased out.
Chandramogan figured that about 30 to 35 flavours were on offer offer at any given time. time. A process diagram in respect of ice cream manufacture is given in Exhibit: 2. In order to conform to the prevailing regulations restricting manufacture of ice cream only in the SSI sector explained elsewhere in the case the Salem plant was' set u pas an SSI unit under a new proprietary concern, Atlantic Atlantic Foods. Foods. In In the followin following g years years ice cream cream production production in the Salem Salem
factory factory more more than
met the growing demands placed on it. Chandramogan then turned his attention to the Madras plant plant that that requir required ed major major invest investmen ments ts in up-gra up-gradat dation ion.. Rather Rather than than attemp attemptin ting g a piecem piecemeal eal revamp and modernization of the decades-old plant, he decided to set up a totally new automatic facility and for this purpose he acquired a new five acre plot in the Red Hills area in the outskirts of the city. This plant with a capacity of 15000 liters of ice cream mix a day and costing about Rs. 45 million (inclusive of the cost- of land) became operational in July
1 9 9 5 . In
view of the
investment restrictions on individual SS1 unit, the new Madras plant was set up under a separate firm, Hatsun Milk Products Around this time, Chandramogan found it necessary to revamp the distribution logistics. Recent and continuing increase in the number of franchisees on the one hand as well as in the variety of ice cream flavours on the other, he felt, was beginning to take a heavy toll, on the factories. factories. He thought thought of relieving factories factories of the responsibil responsibility ity of managing managing the direct distribution of ice cream to the various destinations on a daily basis. As a first step he set up a depot depot in Madura Maduraii in 1995 with adequate, adequate, cold storag storagee facili facilitie tiess and the requir required ed administrative personnel to handle ice cream distribution to the franchisee located in the southern districts of Tamil Nadu. The depot would be responsible for sourcing from Arun factories, inventory and cold storage management, order taking and execution as well as collections. With the requirements of milk steadily going up in keeping with the rising ice cream sales, Chandramogan was becoming increasingly concerned about managing the expectations of the dairy farmers particularly during the lean season for ice cream. While he needed increasingly large quantity of milk during the peak summer months, failure to maintain milk procurement at a reasonably high base during off-season could lead to the farmers snapping the links with Arun and moving away to other more "dependable" customers.
Brand and promotions strategy
From very early days Chandramogan was keen to build and preserve a distinct brand identity
"Arun" for his ice cream. Almost since inception, he was spending fairly large sums of money for promotion and advertisement. Whether it was a Madras city college campus or an upcountry high-traffic junction, the brand "Arun" was heavily promoted through colorful banners, posters or flyers. In the early years, the main advertisement media were newspapers and magazines. When When colour colour televi televisio sion n coverag coveragee receiv received ed a big boost boost in the mid-ei mid-eight ghties ies,, Chandr Chandramo amogan gan immediately took to the popular visual medium of advertising. As the turnover went up sharply follow following ing the succes successs of the franchi franchise se strate strategy, gy, Chandr Chandramo amogan gan steppe stepped d up brandbrand-foc focuse used d advertisement and began investing in technology. The fact that he did not have to invest in working capital and in deep freezers meant that his liquidity remained unimpaired. This gave him considerable freedom to invest in brand building. By 1991, according to Chandramogan, turnover of Dasaprakash. Arun’s advertisement spending was probably higher than the total turnover of From 1987 Chandramogan began carrying out focused sales promotion activities. The first such promotion was "Eat All You Can" Ice Cream Mela conducted in madras city. Under this scheme, for a fixed fixed entry fee fee of, say, say, Rs. 8/-, 8/-, the participant participantss were allowed allowed to eat any amount amount of ice cream on display and the one who "consumes" the the maximum quantity was declared winner. The specific purpose of this sales promotion campaign was to encourage consumers to try out higherend, expensive flavours, which, in the normal course they were normally reluctant to experiment with. (Consumers (Consumers normally normally consumed Vani1la Vani1la flavour, flavour, the cheapest). Altogether, Altogether, about 4200 people people participat participated ed in campaign that probably cost about RS. 270000. Similar campaigns were later repeated in other cities like Hyderabad. Another successful scheme was "slow speed driving competition". From 1993 onwards, Arun also began conducting "slow-speed" driving competition for two wheelers like motor cycles and scooters. An intending participant typically is required to purchase ice cream worth, say, Rs. 15/as "entry fee". Conducted in association with the local traffic police in cities like Madras and Bangalore, such competitions turned out to be big hit with some 3400 Persons participating in one such event. The objective of such campaigns was 'again to encourage customer trial of highend flavours that hopefully would lead to greater flow of two-wheeler traffic to Arun' s parlours. Anot Anothe herr mode mode of prom promot otio ion n was was the the "Pho "Phone ne and Have Have an Ice Ice Crea Cream" m" (Dia (Diall-aa-Nu Numb mber er)) campaign. campaign. It was widely widely advertised advertised that anyone dialing up certain certain specified specified telephone numbers during specified time slots on a given day would win Rs.
100/- worth
Arun ice cream for free.
Duri During ng 19931993-94 94 the the "Dial "Dial-a -a-N -Num umber ber"" camp campai aign gn was was condu conduct cted ed in 20 town townss attr attrac acti ting ng parti participa cipati tion on by over 12,000 12,000 caller callerss costin costing g an estima estimated ted at Rs.1.6 Rs.1.60 0 millio million. n. Often Often such such campaigns were also launched at the time of entering a new market or introducing' new flavours. Sales promotion promotion campaigns campaigns similar to these were conducted conducted regularly regularly in different different places. Such promotional campaigns .were routinely planned as key element of the overall marketing plan. Arun also encouraged its parlors to come with local initiatives such as "the home-delivery scheme" etc. Approach to pricing and franchisee management
Typically Chandramogan followed a cost-plus approach for setting retail price. of ice cream. Franchisees were given margins @ 20% to 25% of maximum retail price (MRP), depending factors such as on their location and the costs borne by them (such as relating to ordering, return of empty containers etc). This left him with 75% to 80% of the MRP towards manufacturing and othe otherr expe expens nses es as well well as prof profit its. s. Chan Chandr dram amog ogan an esti estima mate ted d that that for for othe otherr ice ice crea cream m manufacturers, this margin was probably in the region 65% of the MRP. Unlike the reported two-tier two-tier distribution distribution structure structure of some of the other leading ice cream players players such as Vadilal, a market market leader leader in Wester Western n India, India, Chandr Chandramo amogan gan decide decided d to follow follow a single single-ti -tier er distri distribut bution ion strategy, directly supplying ice cream to the point of retail customer sales . Companies like Vadilal were believed to have very large number of distribution outlets. -. While the turnover of these companies were 50 to 70% higher than Arun, their their profitability was believed to be significantly lower which probably impaired their ability to continuously support their brands. Their three-tier distribution structure, Chandramogan believed, added substantially to their over-all cost of distribution in areas
s u c ha s packaging,
transportation (in refrigerated
environment) and distribution margins. According t o his estimates, the overall distribution cost of Arun was about 3-4% of sales (mainly outward freight), compared to 8- 9% for other leading ice cream manufacturers. This also gave him room for maneuver. In the case of other leading ice cream, retailer probably enjoyed a margin of ab out 12% to 15% of MRP. Arun’s factory took orders from franchisees by phone. The n umber of such calls during peak Seasonal months could be as high as 800 a day. Upcountry franchisees were typically expected to make advance payment by demand draft to Arun against which fresh dispatches would be
made. As regards the franchisees based in Madras city, Arun's franchisee control department woul would d bank bank the the chequ cheques es coll collec ecte ted d in advan advance ce,, no soon sooner er ice ice crea cream m suppl supplie iess were were made made.. Chandramogan strongly discouraged sale of ice cream except in pre-packaged factory packs with MRP marked thereon made available in different quantities/sizes. Franchisees were required to display prominently in the parlours the price list issued by Arun. Chandramogan figures that some some 60 to 70 franch franchise ise arrangeme arrangements nts might might have have been terminat terminated ed for violatio violation n of MRP guidelines or of payment terms
Management and organization
Over the years Chandramogan had recruited a group of senior managers in various functional positions. He was of the view that for a fledgling, entrepreneur-managed organization like Arun, the- CEO had to be actively involved in the Personnel and Human Resources Management function and maintain a direct line of communication with the managers. One of his earliest recruitment was Shankar, an experienced ice-cream technologist for the production function at a time when Arun could barely afford him. Another key executive during Arun’s growth phase was Adinarayan who played a stellar role in completing the Salem project in record time. By mid-nineties a professional management team was in place in key functional positions. These included R. Chandramouli as Financial Controller and Company Secretary, V. Jaganathan an MBA as Marketing Manager and Prasanna kumar Mehta as Head of Production. While the organization was - adequately staffed with most employees growing with the organization, Chandramogan recognized that in the coming years Arun would definitely need to strengthen the senior and middle management cadres, preferably with executives having experience in large, more structured organizations such as multi-national companies. Chandramogan was proud of the fact that except for a few days of strike/lockout in 1995, employee relations remained cordial Emerging competitive scenario
The organized segment of ice--cream market in India had been historically controlled by strong regional players such as Kwality in the North and the East, Kwality and Vadilal in the West and Dasaprakash, Joy and later Arun in the South. For every Vadilal or Arun there were hundreds of small time ice cream producers in the unorganized sector selling ice cream under local brands or private labels. Moreover most hotels and restaurants also made a limited range of ice cream
flavours in-house for their captive needs. The fact that ice cream manufacture was reserved for the small scale industry (SSI) sector meant that even the bigger players had to necessarily source their ice cream requirements from SSI units which were often specifically set up by the ice cream company owners or their family members. The established brands by and large were initially confined confined to the metropolit metropolitan an cities cities in their region-and region-and later expanded to service service other principal principal towns in the region. Vadilal, for example, had fairly wide presence in Gujarat and was steadily extending its reach to other states in the West and even beyond. In the late eighties, the multinational company, Cadbury India entered the ice-cream market with the brand “Dollops". After the initial surge of consumer interest created by its launch, Dollops seemed to have failed to establish itself in the market. It also appeared that Cadbury itself was somewhat wavering in its support to the brand. The ice-cream market- in India was completely shaken up by the entry of the consumer product giant Unilever, through one of its Indian subsidiaries, 13rooke Bond India Limited
5
(BBIL).
BBIL, which has been traditionally a tea and coffee beverage company, had identified ice cream and other food products as thrust area for future growth. It entered processed-fruit segment (such as jam and sauce) by acquiring the market leader Kissan from the UB Group, the leading liquor manufacturers. BBIL also entered the frozen foods segment by establishing a new, state-of-theart plant at Nashik Nashik in Wester Western n India India and launche launched d the well-know well-known n intern internati ational onal brand of Unilever, Walls. As part of India's economic reforms launched in 1991 several of the extant restrictions relating to entry, capacity, output and size in a variety of sectors were being phased out or relaxed. BBIL and its leading stable-mate Hindustan Lever Limited (HLL) undertook a series of transactions· to consolidate and strengthen the Unilever group's presence in several produc product-m t-mark arkets ets.. Having Having identi identifie fied d frozen frozen desser desserts ts as growth growth area, area, BBIL BBIL took took no time time in Kwality and Milkfood. With a acquiring Dollops from Cad bury India and other leading brands of Kwality leading international brand such as Walls and leading Indian brands such as Kwality in its· portfolio, BBIL· emerged as a major player in the ice cream/frozen dessert market overnight. With the entry of an international food giant with deep pockets and tremendous staying power and one who would not be content with mere regional leadership, the rules of competitive game in the ice cream market were being completely re-written. In February 1997, the Government of India announced de-reservation of ice cream manufacture from the list of products earmarked for exclusive development in the SSI sector. This meant that large companies like Hindustan Lever
could restructure the supply configuration of the business by setting up world-class ice cream ice cream manufacturing facilities with Unilever's technological support. Even as Arun emerged to the top spot in the four Southern states, Chandramogan had to contend with the new competitive dynamics and re-work his own strategy.
Ownership structure and finances
When Chandramogan entered the ice cream business in 1970, it was through· a partnership firm styled Chandramohan &. Co: In March 1986, a private private limited company by the name of Hatsul1 Foods Private Limited (HFPL) was incorporated in Madras. On April 30, 1986, HFPL took over the business business of Chandramohan Chandramohan . & Co. as a going concern. concern. The ownership ownership of the brand name ARUN was also later transferred to HFPL whereby, the company was allowed to register the
brand name Arun in its own name, subject to a royalty payment of 1% on the gross ice cream sales. In August, 1995 the company’s name was changed to Hatsun Milk Food Private Limited (HMFPL)and was also converted into a public limited company, Hatsun Milk food Limited (HMFL) very soon thereafter In January 1996 HMFL was taken public through an initial public offering of 1.80 million shares at an issue price of Rs. 45/- per share. Following this IPO, by March 1996. HMFL paid-up capital increased to Rs. 38.4 million from under Rs. 0.50 million and its net-worth including share premium account to Rs. 84.0 million from about Rs. 11.0 million just a year before. In view of the reservation of ice cream manufacture in the SSI sector 6 which precluded HMFL from carrying out ice cream production, HMFL was conceived to be a marketing company. Actual ice cream manufacturing was continued to be carried out in the two closely-held register ,; small scale units Atlantic Foods in Salem and Hatsun Foods Company in Madras, HMFL sourced its ice cream requirements from these two SSI units.
The financial performance of the ice cream business Arun over the years reflected the sharp growth in volumes arising from aggressive franchise expansion and strong- promotion of the Arun brand. For example, HMFL's spending on advertisement; promotion and related items amounted to Rs.21.7 million in the year to March 1997, nearly 12% of its fiscal 1997 sales of Rs.
184.1 million. The spending in rupee· terms represented a near 100% increase over the previous year. As can be seen from Exhibits 3 and 4, with a net-worth of over Rs. 100 million as of March 1997, the company's financial position had indeed been further strengthened. While this gave substa substanti ntial al strate strategic gic elbowr elbowroom oom for Chandr Chandramo amogan gan,, be was acutely acutely aware aware of the fact fact the competitive and regulatory scenario had changed dramatically in recent months.
Strategic challenges and dilemmas
The principal worrying factor for Arun management was the dramatic developments in the market place that could seriously undermine's Arun's growth plans. The aggressive entry of the Unilever group (through BBIL since merged into HLL) into the ice-cream/frozen dessert market through a series of acquisition of well-known regional brands, as noted earlier, was indeed a pregnant pointer to the remaining independent players. The enormous array of product portfolio and and fina financ ncia iall reso resour urce cess at its its comm command and mean meantt HLL HLL could could suppo support rt its its Rs. Rs. 1500 1500 mill millio ion n ice_cream/frozen dessert business for any length of time and aggressively seek market share, even even if this this meant meant taking taking eyes eyes off the busine business' ss'ss profit profitabi abilit lity y tempor temporari arily ly.. And-unl And-unlike ike the regional players who were happy not to disturb the regional competitive balance, HLL would not be content with anything less than leadership position in every single market. HLL's announced strategies for its Frozen Dessert and Ice Cream product group carried in its recent Annual Report were ringing ominous bells for the likes of Arun.
Your Company's Frozen Products business consolidated consolidated its leadership leadership in the Ice Cream market with its national share exceeding 50% despite strong low-priced competition in key markets. Your Company’s brand have been consolidated under the house name "KwalityWalls”
Ext Exten ensi sive ve consum consumer er resea research rch has provi provided ded valua valuabl blee insi insight ghtss into into the the deve develo lopm pmen entt and and application of relevant technologies in product formulation and refrigerated product handling which have begun to set new standards in terms of delivered product quality. The standard Ice Cream portfolio was consolidated under the "Dairy Classic" brand, a new recipe having better product stability and innovative virgin board food grade packaging were established. This is a signi signifi ficant cant move for an industr industry, y, which which had hitherto hitherto been been using using non food food grade grade recycl recycled ed
packaging. The business strengthened its efforts on brand building and innovation, which are the key drivers for the overall development of the Ice Cream category. The key brand franchises in the impulse segment, "Cornetto" and “ Feast”, Feast”, the cornerstone of Unilever's Ice Cream presence worldwide. worldwide. and "Chocobar" "Chocobar" were strengthened strengthened
with appropriate appropriate advertising advertising – – the first
individual brands to be advertised in the Ice Cream category in the country. These brands have registered significant growth in all the markets A major exercise was undertaken to upgrade the manufacturing facilities of your Company's Ice Cream sourcing units. Products, marketed under the KW.1lity-Walls brand name, conform fully to the stringent standards specified by the Bureau of Indian Standards and also to the more exacting Unilever norms on product safety and hygiene. This is a major milestone and a key differentiator for the Kwality-Walls brand.
For Chandramogan it was clear that he had to quickly rework the competitive strategy for Arun. The key question was whether to aggressively reinforce Arun's competitive profile and further expand its franchisee network in the face of HLL’s competitiv competitivee onslaught onslaught or pursue alternative alternative business business opportunities opportunities woven around Arun's limited limited strengths strengths and competencie competencies. s. The latter latter strategy, be thought, while providing an alternative platform of growth might also be necessary from the point of his ability and the need to give continued support to the Ice Cream business. He was certainly determined that unlike several other Indian entrepreneurs in the FMCG sector, he would not sell-out to the MNCs.
Exhibit III
Key Financial & other Information (Rs Million) 1 2 3
Sales PBT Advt.
&
1988-89 8 .6 0.07 0 .7
89-90 27.8 0.1 3.8
90-91 38.4 4 .2 3 .6
91-92 36.7 0.2 5.6
92-93 42.5 2.3 6.1
93-94 55.3 2.7 7.3
94-95 65.6 3 .7 6 .5
95-96 138.5 18.1 11.1
96-97 184.1 21.3 21.7
0 .5
0.7
3 .2
2.9
6.5
9.4
11.1
83.9
107.0
157
182
250
277
355
404
453
524
Promotion
4
Expenses Shareholders
5
Fund No.
of
Franchisees
Table 1 (manufacturing Operations & Logistics)
Month April - June July – September Oct- Dec Jan- March
Percentage of annual Sale 34% 22% 19% 25%
Exhibit