Economic Logic:

By 1997 Hatsun Milk Food Limited (HMFL) was having total 524 franchised outlets of Arun Ice
Cream in southern region. The company was following single tier distribution system to cater
524 outlets, which was holding only 3 to 4% cost in distribution to sales. This franchisee model
was a successful move because with increasing numbers of franchisee a healthy growth in sales
and profit before tax was achieved.

Year 1988- 1989- 1990- 1991- 1992- 1993- 1994- 1995- 1996-
89 90 91 92 93 94 95 96 97
Sales 8.6 27.8 38.4 3637 42.5 55.3 65.6 138.5 184.1
PBT 0.007 0.1 4.2 0.2 2.3 2.7 3.7 18.1 21.3
Franchisees 157 182 250 227 355 404 453 524

With over 700 outlets HMFL had captured more than 85% ice cream market by 1999 in Tamil
Nadu, Karnataka, Kerala and Andhra Pradesh.

The company had already gained loyal customers, captured rural markets, and had tied up with
college canteens and ships so if the company opts for diversification in area of milk products,
the company will not have to search for market to sell the products.

With single channel distribution system and more than 500 outlets, the company would not
require any further investment in terms of sales and distribution.

Demand of ice cream fluctuates with changes in seasons. From available data of sales we can
conclude that monsoons and winters have comparatively lower demand than summers.

Months % of annual sales

April-June 34
July-September 22
October-December 19
January-March 25

So the company can use surplus raw material (milk and other raw material) for production of
various milk products. This will lead to more satisfactory relations with the suppliers of raw
material as the company would be purchasing almost equal quantity throughout the year.