Indian Flour Mill Final

This case has been authored by Professor Amit Kapoor and has received the Ruth Greene Memorial
Award from North

American Case Research Organization. You can contact Professor Amit Kapoor at amit@amitkapoor.com
Indian Flour Mill

In 1982 when we were making our decision to invest in a flour milling
enterprise we thought that India being an agriculture economy, with growing
population would always have a great opportunity in food. No industry could
really match its growth and profitability potential. The world over food has been
one of the most profitable industries and most of global food giants that have
emerged have fundamentally been wheat millers. The most profitable and largest
companies in the world are also food companies like Nestle, Kraft General Food,
Cargill etc. (See Exhibit 1 for Map of India)
This is what Vinod Kumar (Managing Partner) said who was in an extremely pensive
mood, as the unit was not performing well and it was getting more and tougher to stay overboard.
The company had come a long way since 1997 wherein it had record profits that the ownership
had always expected after being in this business (Exhibit 2 and 3). However, the last few years
had been very miserable in terms of performance for the company as there were huge losses and
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capital was eroding at a very fast pace. In the financial year of 2000 2001 the company
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suffered a loss of Rupees 4 million .
This problem was further compounded, as there were certain changes in the environment
such as the entry of giants as Hindustan Levers, Cargill etc. The industry was also suffering from
overcapacities, unpredictable supply of wheat, and unpredictability of prices. With eroding capital
there were certain tough decisions at hand Kumar had to take. He was not very sure as to how
these forces would affect industry and the company. Kumar scheduled to meet his business
partners in about two weeks time from now scheduled to make a presentation on possibly the
best course of action for the firm.
Industry Background
This industry can be categorized into two sectors the organized sector comprising
Roller Flour Mills involved in commercial milling operations and unorganized sector consisting of
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mainly Chakkis . In 1950, there were 54,000 Chakkis in India producing about 5 million tones of
wheat products; today the number is expected to be more than 2.8 million Chakkis producing
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more than 35 million tones of wheat products, primarily Atta .
5
Around 800 large Flour Mills in the country convert about 10.5 Million Tons of wheat into
wheat products i.e., Coarse Flour, Flour, Semolina, Bran & Wheat Germ. The installed capacity of
Flour Mills is more than 21 Million Metric Tons (Exhibit 4). Roller Flour Milling sector processes
around 12 15 per cent of the total wheat consumed in the country, the balance being processed
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through Stone Chakkis. A major part of the flour milling industry is in the small-scale sector .
Started almost a century ago the Roller Flour Filling industry is one of the oldest
established industries in the country. The majority of units have an average installed capacity of
70 tons per day and only around 10 per cent of the mills are above the capacity of 120 Tons per
day. The flour milling industry in India has grown to become over the years the largest organized
sector for utilization of wheat in the country. The number of mills has more than doubled from 454
1
Financial year in India is from April through March

US$ 1 = About Rupees 47
3
Small Flour Mills based on stone grinding technology
4
Coarse Flour
5
Capacity greater than 70 tons per day
6
Any manufacturing venture with investment of upto Rs.10 million in plant and machinery is defined as small
scale venture of India.
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Case - Indian Flour Mill
This case has been authored by Professor Amit Kapoor and has received the Ruth Greene Memorial Award from North
in 1985 to 812 in 1997. Added in it are another 100 units that are about to start operations. This
has made the competition intense and capacity utilization to a level of 40 percent.
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The location of the industry is not only in the wheat belt but well spread across the
country (Exhibit 5). Karnataka, which is one of the farthest states from the wheat belt, houses
nearly 8 per cent of the Flour Mills in the country. The largest concentration of Flour Mills in the
country is in the states of Uttar Pradesh, Punjab and Haryana.
The flour milling industry is highly working capital intensive. Moreover, it is a low margin
low value addition business. The operations are in very price sensitive wherein even a slight
upward movement prices attracts government intervention. The economic policy after 1991 led to
a number of foreign collaborations and units to come up in this sector such as Godrej Pillsbury,
Cargill, Hindustan Levers etc.
The History
Flour Milling Industry has seen several policy led ups and downs. Broadly we can divide
the growth of the industry into three phases: Viz. licensed regime, deregulated period and post
liberalization era. Prior to 1986 the Industry was highly regulated. To start a flour-milling unit a
license was required. With improvement in wheat production the industry was delicensed /
deregulated. After 1986 it was possible for the millers to procure wheat directly from the market.
After 1991, with the begining of the liberalization process, the Industry entered a new era wherein
the competition was to be with large conglomerates including a few global companies.
Situation prior to the 1986 deregulation
Before 1986, entire wheat both domestic and imported supplied to the mills was only from
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Food Corporation of India (FCI) . The millers did not have the choice over the type and quality of
wheat received. The wheat given was named as Fair Average Quality (FAQ) i.e., wheat that was
fit for human consumption. The price of the wheat was fixed by the FCI with little regard for quality
or type of wheat. The millers were not allowed to purchase wheat in excess of the daily licensed
capacity. There were restrictions on storing wheat at the mills location.
The wheat Roller Milling industry was governed by special regulations under the
Industries Development and Regulation Act. Reserved for the small scale sector, even wheat
Roller Flour Milling units were required to obtain two licenses under this Act if they were
employing 50 or more than 50 workers. Though the mills were privately owned they could not be
built or operated without the prior approval and license from the Food Corporation of India. The
policy of the government did not allow setting up a mill with more than 60 tons capacity per day.
The Food Corporation of India dictated the location of the mill in effect as it only gave licenses for
new milling capacity where it felt there was a need.
The products made at the flour mill were picked up by Food Corporation of India which
paid a fixed price for these products (Cost of Wheat + Milling Margin). The Food Corporation of
India was solely responsible for distribution and sale of wheat flour to bakers, consumers or other
end users. There was no link between the consumers and the individual millers.
The quality specifications for flour were those established by the Pure Food Standards.
They were quite strict with respect to sanitary and nutritional standards but quite loose with
respect to end use quality. Millers could go to jail for selling flour that did not meet standards, yet
it was usually impossible to do so given the poor quality of the wheat that was being supplied for
Northern part of India comprising the states of Punjab, Haryana and Uttar Pradesh
The agency that exacts this levy and, in general, executes GOI food policies is the Food Corporation of
India, established by Parliament in 1965 under the Food Corporation Act 1964.
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milling. Due to their restrictive policies the trade led had a flourishing black market for both wheat
and flour.
1986: Deregulation
Since 1986-87 all the restrictions on establishment of new Roller Flour Mills or expansion
in the capacity of existing units were removed, including reservation of the industry to the small
scale sector. No license is now required for manufacture of wheat products. There are no controls
on price and distribution of wheat products. The mills are free to obtain their requirements of
wheat from any source and sell to anyone.
The Main effect of deregulation was that the market for domestic wheat was opened for
free trade. The millers were allowed to buy wheat from the farmer or through the private grain
trader. The Food Corporation of India reoriented its strategy towards food security, which made
these changes possible. Food Corporation of India reduced its procurement to a level designed to
cover its strategic food reserve (Buffer stock of Wheat). The government distributed subsidized
food through its Public Distribution System (PDS) that targeted the low-income families rather
than the rich ones.
The import of wheat however, was not open. Food Corporation of India was the sole
agency, which could import wheat in the shortage years and later distribute amongst the masses
under the PDS.
There was no change in the ownership pattern of the mills. It continued to be in the small-scale
sector after deregulation. Though licensing was still required but it became a lot easier for the
entrepreneur to obtain them. It became possible to have larger capacity mills i.e., beyond the 60
tons per day, the maximum capacity set prior to deregulation. The existing millers were allowed to
expand their capacity and entrepreneur could decide the location of the mill.
The Food Corporation of India was no longer in the flour business. The millers were free
to operate as per the market dictate. For the first time in decades they had to face customer and
push the demand for their products. The price of flour was decided / negotiated between the
buyer and seller and hence was influenced by the demand and supply situation and as well by
the quality of the product.
One of the positive changes that took place after deregulation was that freedom to the
millers to decide on the quality of wheat brought by him. It was no longer the question of fair
average quality wheat as sold by Food Corporation of India. It became easier for the miller to
control the quality of the product and meet standards of end products as stated by the Pure Food
Standards.
The net effect of the deregulation was manifested in terms of free market competition
amongst the millers. A miller could no longer depend on the government income built into the old
system. Food Corporation of India did not dictate the selling price of the product but it was
decided by the prevailing demand and supply situation. The black marketing in the end products
stopped, as the product was available in abundance. The most important change was the power
that rested with the consumer. He could decide on the product he wanted to buy. The trade
certainly moved from sellers market to buyers market. The consumer became the key to
survival. The essence of the change was that If you could not satisfy the customer, you could go
broke .
1991: Liberalization
The millers have achieved prominence from a trading community to an industrial
community only in the last two decades. This industry was relatively traditional and served a small
share of the nations population by mainly grinding wheat provided to it by the government. But in
the last ten to fifteen years flour consumption and production has exploded. Along with the
increase in production and consumption the countrys domestic wheat production as also the
milling capacity has increased considerably.
The situation now is very different for the industry that has worked under licenses, quotas
and controls. The raw material supply & prices were regulated and the quality was not the major
concern as it was the supplies market. Moreover the distribution was also limited and there were
limits on everything including how much raw material and finished goods stock can be stored. It
was a happy scenario as the number of the firms was limited, making sure that everyone made
money due to the restricted competition.
The scenario today has become even more unusual with the government easing
restrictions on foreign players setting up production units in India and that too without any
restriction. Although the present milling capacity is estimated to be around 21.8 million tonnes,
only around 11 million tones of wheat is being milled by the Roller Flour Mills. This is due to the
fact that most of the mills do not operate even at 50 per cent of their rated capacities.
Regulators Role in the Open Market
The Government of India authorizes Food Corporation of India to offload wheat in the
open market for sale to trade and industry during lean season either to work as a price
stabilization effort in times of shortages or to offload surplus wheat stocks. This policy has been in
vogue on more or less regular basis since industrys liberalization of 1986. From October 1993 it
has been virtually on a continuous basis. Prior to industrys liberalization, the State Governments
depending upon the milling expenses and extraction percentages fixed the price of wheat
products. From 1986, only the price of wheat was fixed and there was no price fixation of
products. Whenever the Government offered wheat for sale the same was sold by tender /
auction.
From November 1993, FCI started selling wheat on fixed prices from month to month or
effective whenever changed. The prices fixed were on state wise basis from November 93 to
October 95. From November 95, the prices were changed from state basis to 34 center basis.
This was done to bring it in conformity with the open market trends in a free market competitive
environment economy and to reduce the subsidy burden on the Government. Between November
1995 March 1997, the period till, which the practice continued, the center wise pricing was
made to conform to the open market price mechanism. The price at Chandigarh was Rs. 490 per
quintal whereas in Trivandrum it was Rs. 790 per quintal. The policy was discontinued with effect
st
from 1 April 1997 and it was reverted back to the November 1993 situation. In 2000 the
Government fixed the APL issue price for wheat at Rs. 900. The Government suddenly
announced the lowering of Issue prices from Rs. 900 to Rs.750 and subsequently to Rs. 682 in
the month of July 2000.
The Market for Products

Around eighty per cent of the total Roller Flour Mill / Chakki output is consumed directly
by the household sector for preparation of various types of India breads and other dishes. The
balance output is consumed by the secondary and tertiary sector, which produce bakery and
confectionery products (breads, biscuits and other products), pasta products (macaroni, spaghetti
etc.) breakfast foods and other instant foods (See Exhibit 6 for Prices of Products at Various
Locations).
Maida (Flour)
Bread & Biscuits manufacturers, households, Sweet makers, confectioners, protein rich
food manufacturers primarily use Maida. All these customers, to make these products, require
flour with different characteristics. While an automatic bakery plant may make bread out of poor
quality flour yet the smaller baker may not be able to make good bread out of the same.
Different end users need different qualities of flour produced from different varieties of
wheat classified as hard and soft wheat. These varieties are available but not segregated in the
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market. The bread manufacturer is looking for flour with high protein content , high water
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absorption , gas production capacity of flour and gas retaining capacity of flour to make dough of
uniform consistency. The biscuit manufacturer is looking for flour, which has greater extensibility
but lower resistance to make biscuits. The confectioners are looking for low ash, low gluten flour
to make fluffy products. Cereal based breakfast food manufacturers / protein rich food
manufacturers desire to have high protein flour with lesser starch damage. The household
consumer / restaurant user goes to the retailer and buys flour available on the shelf.
Suji / Rawa / Cheroti (Semolina)
Semolina, Suji & Rawa are all names of the same item, Suji, in general is bold Semolina
where as Rawa is fine / medium Semolina. The Consumer profile is similar to that of flour i.e.,
industrial, for pasta manufacturing or in the quick food manufacturing units. Pasta product
manufacturing units have preference for semolina of hard wheat where as the other end-users
can do with semolina of any wheat.
The household consumer is primarily in south where Suji is used as a regular raw
material for making breakfast items like Idli, Dosa that has a large per capita consumption. The
consumer in north consumes Rawa primarily on festive occasions to make sweet items, the
favorite being Halwa.
Whole Wheat Flour / Coarse Flour (Atta)
Atta is primarily consumed in North India by all sections of society at least twice a day, if
not more, to make chapattis. It primarily has a household usage and the people prefer to get the
wheat floured in the Chakkis to get the consistent quality they want to have. These customers are
served by a large number of milling units springing up in the country, specializing in producing
whole meal Atta and not venturing into other products.
Bran
Bran is used as cattle feed and its consumer profile is similar to that of flour and
Semolina i.e., traders who specialize in direct sales to local dairies, both big and small. The
variations in bran prices are dependent on alternative sources of cattle feed availability in the
region and the price.
The Wheat Market

Wheat Growing Regions
Wheat is grown primarily in five states of the country. These states contribute to the
extent of 90 % of the total wheat grown in the country. The wheat grown in these states are taken
as Fair Average Quality (FAQ) and no efforts are taken to segregate wheat according to its core
characteristics. The wheat is purchased as is by the Governmental Agencies, end consumer and
Flour Millers. Single largest purchaser of wheat is the Food Corporation of India which procures
wheat to the extent of 15 million tons.
Gluten quantity and quality

Depends on starch damage that happens during the processing of wheat
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Indian Wheat Production Top 5 States

State
5 Year* Average Production
Uttar Pradesh
35%
Punjab
21%
Haryana
12%
Madhya Pradesh
11%
Rajasthan
8%
* Years 1994 - 1998
Pricing of Wheat
During the third five-year plan (1961-62 to 1965-66) the Government of India formulated
its food policy. One of the objectives was to ensure a reasonable minimum support price that will
encourage the farmer to adopt improved methods of cultivation for increasing production and to
ensure that consumer prices do not rise unduly. As an outcome of this in 1965, Agricultural Price
commission (APC) was setup with presumably long-term goals in view. The APC (presently
Commission for Agriculture Cost and Pricing (CACP)) is an advisory body and all the decisionmaking powers rest unquestionably with the Government. The APC was entrusted with the
responsibility of evolving a balanced and integrated price structure in the perspective of the
overall needs of the economy and with due regards to the interests of the producers and the
consumers.
The terms of reference to the Commission refer not only to the need for price incentives
for promoting agricultural growth but also to the need to ensure rational utilization of land, other
production resources and to the likely effect of price policy on the rest of the economy, particularly
on the cost of living, industrial cost structure etc.
Support
Support price may be regarded as an offer price at which the Government is willing to
buy any amount of grain from the farmers in years of good harvest when, in the absence of the
support operation, the market price may fall below the cost of production. A logical corollary to the
concept of the minimum support price is that of maximum or ceiling price the rational for which
lies in two factors. First, protecting from losses in years of abundance through purchase by the
Government at minimum prices. Second, a maximum price would imply protection of consumers
interests in years of crop failure. Thus there seem to be two notions, one of price control within a
certain range and the other of support to farm incomes along with some degree of protection of
non-farm incomes
The other issue before the Government is of achieving procurement targets to ensure
sufficient food stocks. Procurement of grain becomes increasingly difficult under conditions of
scarcity, local or global. It implies that procurement price has to remain close to market price at all
the times. The CACP recommended in 1998 that there shouldnt be any increase in the price of
wheat for next 3 years but the prices were increased by the central Government due to the
political compulsions prevailing in the country.
Minimum Support Price of Wheat
Year
1991 92
1992 93
1993 94
1994 95
MSP in Rupees
225.00
275.00
330.00
350.00
1995 96
1996 97
1997 98
1998 99
1999 00
2000 01
2001 02
360.00
380.00
475.00
510.00
550.00
580.00
610.00
Source: Roller Flour Millers Federation of India
Central Issue Price

Food Corporation of India distributes food grains to poor under several government
programs e.g. Targeted Public Distribution System (TPDS), the Jawahar Rozgar Yojna (JRY, a
food for work Program), nutrition / feeding programs, schedule castes, schedule tribes and
backward class hostels, below poverty line food processing units, mid day meals program and
the World Food Program projects.
Issue Price of Wheat

Year
MSP
(in rupees)
Issue Price *
(in rupees)
1991 92
1992 93
1993 94
1994 95
1995 96
1996 97
1997 98
1998 99
1999 00
2000 01
2001 02
225.0
275.0
330.0
350.0
360.0
380.0
475.0
510.0
550.0
580.0
610.0
280.0
280.0
330.0
402.0
402.0
402.0
250.0
250.0
250.0
415.0
-
The APL Price for the Year 1997 98 was Rs.450 and for 1998 99 was Rs.650.
Source: Compiled from Economic Surveys of 1992 to 1999.
The TPDS, which is upon the most important operation of the FCI, was launched closer
to in 1997 with the intention of improving upon the operations of old PDS. It segregates Below
Poverty Line (BPL) and Above Poverty Line (APL) households. The APL prices are intended to
be closer to the market prices, with unrestricted access. The APL prices and the BPL prices are
the same across the country and the wheat is procured by the flour mills in the non growing
states through the Governmental agency at the declared price.
The Sale and Distribution of Wheat
FCI implements the rice and wheat price support program through its procurement
operations. It also handles, stores and distributes rice and wheat for the Targeted Public
Distribution System and other Government of India (GOI) food programs and stabilizes domestic
food grain prices through buffer stock operations, open market sales and external trade. State
Civil Supplies Departments and other State procurement and distribution agencies assist FCI in
their tasks. GOI covers the difference between FCIs selling price (called the issue price) and its
procurement price plus costs of handling, storage etc. through a central food subsidy.
Whether public or private, wheat marketing follows identical parallel trading
arrangements, with the private sector handling from 30 to 50 percent of the grain that is traded.
The rest moves through the public channel FCI and other state agencies. Purchases by private
traders and FCI agents take place in regulated wholesale markets and other trading centers.
Farmers who sell voluntarily to FCI receive pre announced uniform procurement prices i.e., the
minimum support price. FCIs wheat is then distributed to the consumers without further
processing through fair price shops and other government programs at below market prices. Most
private-sector wheat is also directly sold to consumers for subsequent custom milling at
neighborhood Chakkis (small scale traditional grinding units), although private flour mills take a
smaller but increasing share. Once milled, flour is sold to wheat product manufacturers (e.g.
Bakeries, and biscuit manufacturers) or to wholesalers for domestic distribution through retailers
to consumers).
Freight Equalization / Subsidy
The government doesnt give a direct subsidy to the flourmills. To regulate the price
across the country beyond the Public Distribution System (PDS) the government regulates the
price of wheat through FCI and keeping a uniform sale price across the country, which translates
into an in built freight subsidy for the millers. In the process flour millers in wheat belt are not able
to exploit the advantage they possess being nearer to the source of principal raw material. (See
Exhibit 7 for freight of Wheat from Panchkula to Various Locations)
Purchase Tax and Other Procurement Expenses on Wheat
Although several Government Ministries oversee the functioning of the food grain
marketing system, the Ministry of Food and Consumer Affairs (MOF) has the primary
responsibility for managing the food economy. It is charged with the formulation and
implementation of national polices on procurement, movement, distribution and stocking of food
grains, provision of storage facilities for the food grains strategic reserves and control over
external trade of food grains. The MOF oversees the operations of the FCI. The Ministry of Food
Processing Industries facilitates the rice and wheat milling industries, while the Department of
Rural Development of the Ministry of Rural Areas and Development, works with state
governments in fostering the growth and development of regulated markets system through State
Agricultural Marketing Boards levying market fees, and Rural Development Fund. These levies
vary from state to state. These taxes are payable once the flour miller is purchasing wheat for
processing in the unit but in case a farmer wants to take the wheat out of the state he is not to
pay any of these taxes and Cess to the Government. The commission to the Pucca Arthiya and
Kuchha Arthiya are also decided by the stricture from the Government (Exhibit 8).
Taxes on Wheat Declared by State Governments
Punjab Haryana Delhi Chandigarh
Purchase / Product Tax
4%
4%
0%
2%
Market fee
2%
2%
1%
1%
Rural Development Fund
2%
2%
0%
0%
Pucca Arthiya Commission
1%
1%
1%
1%
Kuchha Arthiya Commission
2.5%
2.5%
2%
2.5%
Mandi Expenses
1%
1%
1%
1%
Infrastructure Cess
1%
0%
0%
0%
Total
13.5%
12.5%
5%
7.5%
UP
4%
2%
0%
1%
2%
1%
0%
10%
Substantial levels of taxes are levied on industry at the procurement stage Punjab and
Haryana impose the highest levels of taxes on wheat amongst the North Indian States. The flour
milling industry provides a value addition to the extent of 10 per cent on final products.
The Changing Situation

Signing of WTO
It is becoming more and more clear that India cannot remain insulated from the
upheavels in the world market. Having signed the General Agreement on Trade and Tariffs
(GATT) and becoming the member of the World Trade Organization (WTO) India has made it
clear its resolve to get integrated the world economic structure by 2003. There are certain issues
that arise under the WTO regime, the most pertinant being the effect of Sanitary Provisions,
Wheat Prices and Product Specifications.
Prices of Indian Wheat Vs US Wheat at Mumbai Port
(Prices in Rupees)
Year
US Wheat
Indian Wheat
1991 92
1992 93
1993 94
1994 95
1995 96
1996 97
1997 98
1998 99
1999 00
2000 01
293
392
420
442
700
594
610
559
607
575
344
411
481
514
512
541
661
713
782
830
The Competition
Being typically small scale, the flour millers in general tend to focus on branded
processing and meeting the regional demand. The local players try to compete in the market
through lower prices by undercutting each other. The prices are also reduced due evasion of tax
by a few unethical businessmen. They rarely pay agriculture and procurement taxes.
The Government of India initiated the Liberalization process to exploit resources the
country has to the fullest and create wealth and move towards the status of a developed nation.
Taking advantage of the liberalization policies multinationals started investing in the country
through Portfolio Investments or forming joint ventures.
Sensing the opportunity in this segment many large players have also entered the market
including two Multinationals Viz. Hindustan Lever Limited (a subsidiary of Unilever), which has
introduced Kissan Annapoorna brand of coarse flour & salt and Godrej Pillsbury with their brand
of Pillsbury Chakki Fresh Atta. The Indian companies include DCW Home Products (marketing
Atta and other food products under the brand name of Captain Cook) and NEPC Agro
(marketing under the brand name of Trupthi). Now, several other international majors and large
Indian corporate are expected to follow suit.
The strategy of most of the large companies is that they concentrate only on marketing
only and help the producers (existing Flour Millers) to revamp their facilities and maintain quality.
They have also gone up-stream to help the farmer use better seeds and adopt better farming
practices. They are also focusing on development of large distribution network and relying heavily
on advertisements to make their presence felt in the market. They are also ensuring off the shelf
availability of products even if they have to incur some losses. (Exhibit 9)
Changing Food Habits

Two things disposable are driving changes in food consumption patterns. First, the most
important, is the rise in disposable incomes and increasing internationalization and convergence
of food habits. With rising incomes, what is considered good food comes to accommodate greater
diversity?
It is expected that in the next twenty years, the convergence in peoples consumption
patterns is likely to be even more rapid because of their factors.. This change is predictable as it
maps the change or the evolution pattern that has been evident in over twenty countries. Studies
show that countries go through a distinct food consumption evolutionary pattern. In the first stage
the focus is on obtaining basic dietary inputs, the second stage focuses on improving and building
basic food, before moving on to the third stage of adding premium food to the diet.
It can be seen that all these stages of food consumption evolution are simultaneously
apparent in a nation such as India. As some upper income segments of the population move from
Basic to Premium, others in lower income groups may well be moving from Subsistence to Basic.
It is the Basic segment that is expected to be central with large population moving into the middleincome segment.
The Retailing Revolution
The growth in the packaged flour and wheat based foods / health foods would make in
roads into the households. These would be driven by three factors. The first of these factors and
the one that drives all the others is the rise in disposable incomes.
The second factor that is expected to cause a shift towards packaged products is the
increasing value many Indian households put on time. Currently over 90 per cent of the wheat
consumed in India is eaten as Roti and other forms of bread. Consequenced, bread making
consumes many hours a week. Consumers buy the wheat grain, sieve it to remove impurities,
and then take it to be milled at the local stone mill or Chakki. This process, which was the only
way of assuring a consistent quality of flour until recently, is labor intensive and time consuming.
Perpetuating this system is becoming increasingly difficult in the larger towns due to changing
lifestyles. These changes, typified by the increasing numbers of nuclear families with working
women, ensure that time is being perceived as a scarce resource. This trend, coupled with
increasing disposable incomes of such families, changing food habits combine to catalyze the
demand for packaged branded wheat products.
The third factor driving the growth of packaged wheat products is the increasing demand
for improved quality and hygiene. The hygiene levels and quality of locally procured grain and of
the local Chakkis leaves much to be desired. Both local organized players and large-scale
players are beginning to educate the consumer about these issues.
The Bakery Industry (Bread and Biscuit)
The industry was regulated by the Government in 1977 78 and was reserved for the
small-scale industry sector that restricted the entry of large producers. The small and
unorganized sector had shared the growth in the industry till 1997 when the sector was
dereserved. In 1998 the market for bread, biscuits and cake was estimated at 3 million tons. In
1998, 80 percent of the bread and 60 percent of biscuit were manufactured in the unorganized
sector. The market for bread is estimated to be growing at 7 percent per annum and that for
biscuits and cakes at entry of the 10 percent per annum. The bakery products market is expected
to be 6 million tons with the entry of the organized sector.
Case - Indian Flour Mill 10
The Firm
The roots to the venture lie in the year of 1980, when Vinod Kumar shifted to
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Panchkula , Haryana where eventually the unit was set up after leaving his job with the Reserve
Bank of India. An expert in the area of corporate finance he set the ball rolling for setting up of the
unit in middle 1979. The unit was completed in 1981 but commenced commercial production in
1982, due to the licensing problems.
The unit was state of the art, using indigenous technology and having a capacity of 30
tons per day. The operations at this time were fairly simple. The firm got wheat from Food
Corporation of India and was paid a milling margin for the processing it at the mill.
The unit kept abreast with the changes in the environment and increased its capacity to
120 tons per day with the deregulation of the industry in 1986. With a view of reaping benefits of
the market economy the management thought that the global integration of the Indian economy
will present a great opportunity in terms of better purchasing power, changing lifestyles and better
demand for products in the global market. The management also thought that, with the advent of
open economy, the market forces would compel the farmer to segregate wheat in terms of their
quality and the industry would graduate towards being more customers oriented. Keeping all
these in view the unit started taking certain strategic steps which they felt would give them an
edge in a competitive but a dynamic market.
Differentiation
The firm tried to focus its energies on differentiating their product offering. The strategy
was focused towards the industrial segment wherein a certain quality of flour was guaranteed.
The unit started focusing on being the best in the region for giving flour to the bakery units. This
gave the unit acceptance in the bakery industry and a few majors like Britannia, Bakemans,
Harvest Gold, Seetha Foods started buying from the unit, for the quality that it produced.
In the industry where there is no segregation of wheat at the farm level in terms of quality
or breed. It took a lot of effort on the part of Indian Flour Mill to find the right blend for the
manufacture of their flour with a consistent the quality. The mill had a team of 6 people who were
constantly in touch with the market trying to know about the quality coming into the wholesale
markets (mandis) and testing it for its suitability for manufacturing the quality of flour promised.
New Product Introduction
With increasing awareness levels of the consumer and changing demand pattern there
were introduced into the market. New products like Wheat Germ and Wheat based Breakfast
Cereals had been introduced. The company in collaboration with Micronutrient Initiative of
Canada started manufacturing and selling fortified Atta.
With the changing attitude of the consumer the company thought it as an appropriate
step to introduce Maida and Suji in consumer packs. The various products introduced were pre
mixes and 3 types of Suji each catering to a specific end use namely Rava for making Upma, Suji
for making Idlis and Cheroti for making Halwa.
Developing Distribution Network
The company understood the importance of distribution and went on to increase its reach
in the market. The company had harnessed around 1500 retail outlets in the states of Punjab,
Haryana and the Cities of Delhi and Chandigarh.
11
Town next to Chandigarh, the capital of the state of Haryana
Capacity Expansion
After its success in the financial year of 1996 97 the company thought of going into the
expansion of its capacity. The capacity was increased from about 120 tons per day to 185 tons
per day. This was done keeping in view the booming market and acceptance of the core product
Maida by the industrial user and being branded as the best manufacturer of flour in the country.
The Future
The time to decide was very less hence Kumar thought of taking help from the report that
was prepared by its Research Bureau (Exhibit 10) in 1998. The Bureau was later closed down
due to huge losses the firm incurred. Kumar was extremely worried as to what his decision should
be and how he should approach to analyze the problem as saw the sun going down on a gloomy
day and maybe for the future of the firm. He was looking at the possibilities of closure of the firm,
relocating the plant, enter new markets as the South Indian market or continue to lobby with the
Government. He wasnt too sure what was in store for him in the future.
Exhibit 1 Map of India
Exhibit 2 Balance Sheet of Indian Flour Mill (in Rupees)

1996*
1997*
1998*
1999*
2000*
Capital
Reserves
Secured Loans
Unsecured Loans
Current Liabilities and Provisions
709460
1085274
11841072
1923935
1531186
8968863
1085274
13335142
1505203
2579971
1787927
1085274
11557242
2578250
2215287
2262699
1085274
7141428
2605250
2017370
2496601
1085274
9424272
2977536
2071423
Total
17090928
27474453
19223981
15112021
18055105
2370505
332402
5201965
8187363
734429
264263
4892899
332402
5990389
12177693
3518291
562779
5301764
332402
7005822
5181438
792717
609836
4202634
332402
5876637
3431654
804491
464202
3973314
332402
4241304
8341504
840310
326272
17090928
27474453
19223981
15112021
18055105
Capital and Liabilities
Properties and Assets

Fixed Assets
Investments
Inventory
Receivables
Deposits and Advances
Cash and Bank Balance
Total
The figures are for year ending March 31, 19XX
Exhibit 3 Income and Expenditure Statement for Indian Flour Mill (in Rupees)
1996
1997
1998
1999
2000
112117714
226827397
102477933
87386457
92846834
Manufacturing Expenses**
Administrative and Selling
Interest and Bank Charges
Depreciation
104281537
4320921
2170230
393880
207881294
5497317
3157992
865913
97059161
3500656
2305461
756333
81558857
2822562
2307582
640074
87215132
3129646
1738638
603711
Total Expenditure
111166568
217402516
103621611
87329075
92687127
951146
9424881
-1143678
57382
159707
Income
Sales*
Expenditure
Profit / Loss for the Year
The statement is for the period of one year with year ending March 31, 19XX. The profit of loss is transferred to the
balance sheet and its effect is on the Capital Account. If the figures for two years dont match that is because partners
might have invested or divested money from the firm.
* The Sales figures includes sales from other sources, which include sales of assets, packing
material etc.
Other Income
269574
277956
488426
888938
325386
73403026
80323051
**Manufacturing Expenses include the cost of wheat consumed during the year
Raw Material Consumed
94131771
188238178
88049715
Exhibit 4 Number and Capacity of Flour Mills

Year
Number
Yearly Capacity
(Million Tons)
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
202
206
211
218
221
232
232
232
232
232
232
232
234
306
310
365
426
454
464
496
557
580
605
623
702
710
750
774
800
812
4.53
5.13
5.41
5.50
5.68
5.95
5.95
5.95
5.95
5.95
5.95
5.95
5.95
7.41
7.49
7.85
8.59
8.91
8.99
9.80
10.21
10.39
11.00
12.89
16.00
16.00
17.72
19.10
21.00
21.80
Exhibit 5 Number of Roller Flour Mills in Different States

State
Number of Mills
Andhra Pradesh
Assam
Bihar
Chandigarh
Delhi
Goa
Gujrat
Haryana
Himachal Pradesh
Jammu and Kashmir
Karnataka
Kerela
Madhya Pradesh
Maharashtra
Manipur
Meghalaya
Nagaland
Orissa
Pondicherry
Punjab
Rajasthan
Sikkim
Tamil Nadu
Tripura
Uttar Pradesh
West Bengal
58
40
58
5
18
2
34
47
15
19
60
27
42
63
1
2
4
19
3
46
10
3
60
2
125
49
Total
812
Exhibit 6 Price of Wheat and Wheat Products as on May 18, 2001 at various locations
Wheat
Maida
Suji
Atta
Bran
Panchkula
650
650
660
620
500
Delhi
580
640
660
570
500
Bangalore
682
1000
1050
NA
NA
The wheat price is for one quintal (100 Kgs) whereas the selling price of products is for 90 Kgs. The wheat
procured contains foreign particles to the extent of 5 8 percent
Exhibit 7 Cost of Transporting Wheat and Wheat Products from Panchkula as on May 18, 2001
City
Delhi
Mumbai
Calcutta
Bangalore
Trivandrum
Price / Cost
(In Rupees)
30
120
120
230
300
Exhibit 8 Structure of Indian Wheat Trade
Located At
Farmer
Farm
Kuchha Arthiya
Village
Pucca Arthiya
Main Mandis
Broker
Towns
Role
Grow Crop
Agent
Agent
Consolidates
produce of local
farmers
Often
finances
farmer and settles
crop against dues
Consolidates
stocks of Kuchha
Arthiya
Links
Pucca
Arthiya
Gets information
from all Mandis
2.5 per cent

Interest (> 36 per
cent per annum)
1 per cent
Margins
1 per cent
Exhibit 9 Cargill in Milling Sector

Internationally, Cargill is one of the largest processors of food grains with integrated operations. In
India, Cargill had a small beginning with sunflower seeds near Bangalore. This was a part of the
arrangement with ITC Agro Tech to whom the sunflowers were to be sold for producing oil. There were
major agitations against the company due to the promised yields not coming through. In some odd cases the
Indian farmers agitated against the prices of the seeds.
In wheat milling sector, it started with a 300 tons per day plant at Ghaziabad, near Delhi, for
processing wheat. As soon as the 300 ton per day plant was operational, the work started on another 500
ton per day plant on the same location with the single objective of feeding the Delhi market and becoming
the most cost effective producer of the same.
Another strategic plant was put into place to take the villages nearby under its umbrella, and start
educating them about better techniques of farming as also providing them with better seeds. The objective is
to simply take them into confidence so that they sell the produce back to Cargill for processing. This would
help Cargill maintain a strict vigil on quality of the wheat milled in its mills and fetch a better price in the
market. Internationally, Cargill operates only in the bulk institutional market and not in the retail market. The
same strategy is being followed in India, and this explains its entry near the biggest flour market of India,
Delhi. Simultaneously it started building up large storage silos for wheat and wheat products so that it can
store enough supplies for one to two months. This coincided with the Government allowing the companies to
set up their own storage spaces for the storage of food grain. Overall, more than Rs.15 crores have already
been invested into the development of the mills.
Exhibit 10 The Research Bureaus Report

The Food Sector in Developed Nations
Successful food companies around the world are typically very large. Indeed they are often
amongst the largest of companies. In stark contrast to rest of the world, Indias food companies are very
small despite India being a giant in food production. This is clearly reflected in the industry structure. Over
75% of food players in India are in the small scale or unorganized sector, the remaining 25%, which the
government classified as the large-scale player, are again quite small by international standards. The
th
average size of top 20 Indian food companies is $ 125 million, i.e., 1/80 of the US Average. The largest
th
food companies in India have revenue of only $600 million, less than 1/30 of Cargill.
The second way that the Indian food chain differs from those in more developed economies is in
terms of the presence of range of different players, all of whom help drive the process of integration and
reduction of inefficiencies. These players include large retailers, branded processors, commodity
processors, transportation companies, co-operative, and agricultural input manufacturers. Indian food chain,
by contrast, reveals that some of the classes of companies are either nascent or altogether missing. The
classes that are missing or in the nascent stage of development include large scale commodity processors,
large-scale retailers and seed companies.
Commodity Processors are an important part of most developed food chains, these are companies
that produce high volumes low value added commodity products such as wheat flour, edible oils, and
processed and frozen meat products, they tend to be amongst the largest food companies in most
developed nations and are rapidly emerging in less developed countries. Large commodity processors,
because they handle very high volumes (e.g. Millions of tones of grains), Invest in infrastructure and system
that have wide spread impact on the development of food chain. In India commodity processors are nascent.
Large commodity processors dominate developed food chains. The most pertinent examples being that of
Cargill and ADM in wheat milling, Con Agra in vegetables, oils and meat processing, Tyson and Gold Kist in
fruit juices and Hudson in poultry processing in United States.
Commodity processors are also playing an important role in less developed countries like Brazil,
Thailand and Indonesia. Thailand is well known for its large poultry producing companies, Indonesia has
some of the worlds largest wheat processors like Bogasari flourmills and Indofood, which in recent years
have invested in ships, docks, Storage silos and automated wheat mills. In contrast, India has few large
commodity processors today. In India even wheat, which in most countries is a sector that is normally
dominated by large commodity processors, has only a handful of players with revenues of over $10 million.
Technology does not Impact Scale and Cost Structure

Roller Flour Milling technology linking with cost structure may vary upto a minimum economic size
capacity of around 80 tons per day capacity. Beyond this capacity level, the technology has very minor flow
variations from plant to plant. By virtue of wheat quality parameters, from different streams, the milling
industry can cater to individual end use. The upgradation of capacities has been done either by replicating
the units or by expanding by adding similar machines with additional equipments in the process. The
expanding capacities however did reduce the costs very marginally, if located with same premises, in terms
of fixed cost contribution. The direct costs were not affected by such expansions since major contributor to
direct costs was energy consumed for processing wheat products. Besides this, manual operations of
loading, unloading, bagging etc. still continue and their costs do not change downwards with increasing
production. The Roller Flour Milling Directory indicates that the daily capacities all across the country have
been from 50 tons per day to 250 MTS per day in a single occasion. The millers also confirmed that the
technology remains the same but plants sourced from different sources indicate different energy
consumption. Plants sourced from the same source even though varying in size have more or less uniform
energy consumption basis, hence operating costs remain the same. The plants are sourced indigenously
and imported from erstwhile Soviet block countries and Europe. Increasing interest burden because of
additional costs one has to bear on imported plants neutralizes the power savings achieved by sourcing it
from foreign sources. The cost of erecting a same size plant through imported machinery was 8 times that of
the indigenous plant.
Growth Patterns in Developed Nations

The growth of the industry in various developed nations have followed quite a similar path. They
have moved from a highly regulated industry environment to a liberalized one, large number of players to
consolidated world level players, changing ownership patterns i.e., from entrepreneurial startups to
professionally managed firms and from small players to integrated food companies.
The US Wheat Industry. The industry in US moved from a highly fragmented to one which is
highly consolidated and profitable. There were distinct phases in the growth of the industry wherein it has
gone on to become the most efficient setups in the world. The wheat value chain is a benchmark for
efficiency in the grain processing industry around the world. The Industry has grown to have players who
have become conglomerates. There was also the buildup of integrated food firms i.e., firms that operate
along the complete value chain i.e., agricultural inputs, agricultural production, procurement and processing.
The industry went through a cyclical process of growth that saw the firms following a similar pattern
and emerging as large players. The pattern followed by the industry was movement from fragmented, to
growing and a mature industry. The strategies followed by the firms were well timed and consisted of efforts
to consolidate by mergers and takeovers, integrating along the value chains, entering global markets and
building infrastructure to reduce wastage levels.
An interesting point comes out that in USA there has been a significant change in the demand
pattern. This had been led by the changing consumption patterns of the consumers. There has been an
explosion in the demand of pasta in some ethnic communities and now the demand is rising for Tortillas Mexican Chapattis and variety breads is rising.
The Canadian Wheat Industry. The industry attracted a lot of attention and in a short period of
time and it started suffering from Chronic over capacities. This made the competition intense and was
primarily dominated by the strategy of undercutting prices and hence suffering huge losses, which
accounted to the closure of a number of mills due to sickness. There was a major shakeout in the industry
as there were large-scale takeovers, which transformed the companies from single unit enterprises to multi
unit enterprises with units situated at various locations in the country. There was a major shift in the kind of
people who managed the flourmills, the management drifted from entrepreneurs to professional managers.
In the past the flour millers were having a short-term perspective, till the time there were entrepreneurs who
became the major players in the industry. With the advent of conglomerates taking over the businesses it
became more of long-term orientation in planning. The industry is in the mature stage of the life cycle and
the competition between the players is on gaining the market share.
The Australian Wheat Industry. The Australian Milling Industry has grown like in any other
developed nation. There were 137 units in 1956, which have come down to 37 in 1998. The Average milling
capacity has also increased from 2.5 tons flour per hour to 8 tons of flour per hour. The consolidation over a
period of over 40 years has helped in reducing the spare capacity and increasing the efficiencies in the flour
milling industry. Today 100 per cent of the flour mills in Australia are privately owned and 90 per cent of the
trade is controlled by 3 companies. The 37 flour mills in the country extract 1.8 million tons of flour per year
over the grinding of 2.35 million tons of wheat per year. The average mill size in Australia is 750 tons per
day that is very close the world average of 850 tons per day. Another feature of the Australian Industry is
that there is a clear-cut segmentation of the market. The flour is consumed in distinct categories which can
be divided into segments as to be used for Bread, Gluten, Pastry Cookies, Biscuits, Domestic and Premixes,
Food Manufacturers and Pasta.
A distinctive but similar pattern emerges in the Australian industry that it went from large number of
players to a market controlled by 3 players and emergence of niche segments which cater to different
demands of consumer and this has been made possible through a well managed infrastructure.
Performance Analysis of Flour Mills in Various Indian Locations

1992
1993
1994
1995
1996
1997
Indian Flour Mill

Cost of Wheat at Mill
Milling Costs of wheat
Financial Costs
Revenue Realized by Miller
287.78
30.82
10.51
324.33
321.45
44.26
12.00
384.69
358.89
49.09
9.68
415.25
386.48
51.09
11.40
453.00
410.80
48.87
10.84
471.50
425.74
51.54
9.53
492.29
Ahmedabad Flour Mill

Financial Costs
285.69
27.31
10.57
329.37
340.21
29.5
10.2
393.78
388.02
28.63
10.19
451.28
413.88
38.1
6.48
471.51
437.63
38.76
5.68
488.21
437.14
35.95
5.28
488.21
Bangalore Flour Mill

Financial Costs
331.65
23.85
8.46
377.97
416.76
22.47
6.03
455.12
457.71
27.24
8.94
514.45
466.94
30.55
9.19
520.32
466.83
41.1
9.8
591.79
553.03
50.26
6.23
583.74
Calcutta Flour Mill

Financial Costs
297.41
34.16
2.09
336.9
396.54
49.64
3.01
461.18
412.18
32.05
2.01
455.95
442.66
35.15
1.93
482.12
460.62
36.49
3.49
505.55
499.44
36.31
2.77
541.44
The figures are for year ending March 31, 19XX. All calculations are in Rupees and for One Quintal (100 Kgs) of Wheat
The production pattern generally followed by the mills is 60 % Flour, 20 22 % Coarse Flour and 18 20
percent Bran. The production of Semolina can be upto the extent of 18 % but the demand is fairly regional or
cyclical. The nature of demand is cyclical in North and peaks up during the festival season that is during the
months of October and November whereas the demand for Semolina in South is fairly regular as it forms a
part of their daily diet. Wheat Germ is a miniscule part of the production about 4 5 Kgs per ton of wheat
milled and is sold at a premium and is generally used by the pharmaceutical companies or as breakfast food
in North India. Flour fetches the best price after Germ, Atta is sold at the price that is very near to the
prevailing price of wheat and Bran is generally the lowest in price.

Indian Flour Mill Final

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This case has been authored by Professor Amit Kapoor and has received the Ruth Greene Memorial

Award from North

Indian Flour Mill

Financial year in India is from April through March

Case - Indian Flour Mill

Case - Indian Flour Mill

Case - Indian Flour Mill

The Market for Products

Case - Indian Flour Mill

The Wheat Market

Gluten quantity and quality

Case - Indian Flour Mill

Indian Wheat Production Top 5 States

Case - Indian Flour Mill

Source: Roller Flour Millers Federation of India

Central Issue Price

Issue Price of Wheat

Case - Indian Flour Mill

Source: Roller Flour Millers Federation of India

Case - Indian Flour Mill

The Changing Situation

Case - Indian Flour Mill

Changing Food Habits

Case - Indian Flour Mill 10

Town next to Chandigarh, the capital of the state of Haryana

Case - Indian Flour Mill 11

Case - Indian Flour Mill 12

Exhibit 1 Map of India

Case - Indian Flour Mill 13

Exhibit 2 Balance Sheet of Indian Flour Mill (in Rupees)

Capital and Liabilities

Properties and Assets

The figures are for year ending March 31, 19XX

Case - Indian Flour Mill 14

Profit / Loss for the Year

Case - Indian Flour Mill 15

Exhibit 4 Number and Capacity of Flour Mills

Source: Roller Flour Millers Federation of India

Case - Indian Flour Mill 16

Exhibit 5 Number of Roller Flour Mills in Different States

Case - Indian Flour Mill 17

Exhibit 8 Structure of Indian Wheat Trade

2.5 per cent

Exhibit 9 Cargill in Milling Sector

Case - Indian Flour Mill 18

Exhibit 10 The Research Bureaus Report

Technology does not Impact Scale and Cost Structure

Case - Indian Flour Mill 19

Growth Patterns in Developed Nations

Case - Indian Flour Mill 20

Performance Analysis of Flour Mills in Various Indian Locations

Indian Flour Mill

Ahmedabad Flour Mill

Bangalore Flour Mill

Calcutta Flour Mill

Case - Indian Flour Mill 21

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