Shaken And Stirred
Ajita Shashidhar April 15, 2019
When Godrej Industries subsidiary Godrej Agrovet picked up a 25 per cent stake (increasing it to 52 per cent in 2018) in the Andhra Pradesh headquartered Creamline Dairy in 2015, the intent was to be a significant stakeholder in the then Rs 80,000 crore organised dairy industry, which was estimated to grow at 15-16 per cent year on year on the back of value-added products. Segments such as milkshakes, yogurts, cheese and paneer, after all, offer high margins, while in liquid milk, margins are wafer thin.
The dairy industry, over the past few years, witnessed the entry of a host of private companies such as ITC and French dairy major Lactalis. French yogurt maker, Danone, was also bullish about India consumption and set up a milk procurement and processing centre in Punjab. Homegrown food company Britannia Industries went back to the drawing board to rethink its dairy strategy while ITC preferred to play a slow and steady game. All these companies had national ambitions and were set to outwit cooperatives such as Amul, Mother Dairy and Nandhini, which had been ruling the Indian dairy market for decades.
Four years later, Balram Yadav, MD, Godrej Agrovet, is thankful that he did not take his dairy business beyond the five southern states. The dairy arm of Danone exited the Indian market in early 2018. And while Lactalis has made a few big-ticket acquisitions (having acquired Indore-based dairy company Anik for Rs 452 crore and Prabhat Dairy for Rs 1,700 crore), it has restricted itself to a few regions.
The organised dairy market is a Rs 1,00,000 crore market (the overall market is Rs 5,67,000 crore), growing at 10 per cent, but profitability has been low and the value-added growth story hasn't panned out as expected. "We have been shaken. We have never lost money but have lost profits. Profitability in the last two years has come down to 2.5 per cent from 4 per cent, which is a big hit," says Yadav of Godrej Agrovet. Creamline Dairy made a profit of just Rs 9.29 crore on a revenue of Rs 1,157 crore in FY18. The Rs 1,554 crore Prabhat Dairy made a profit of Rs 47.28 crore while the Rs 1,918 crore Parag Milk Foods made a profit of Rs 74.48 crore.
"The dairy growth story, especially that of value-added dairy products, hasn't played out expected," agrees Rajesh Srivastava, Chairman and Managing Director, Rabo Private Equity, which had invested in Prabhat Dairy.
While Danone's failure was due to the fact that it bet heavily on a single niche category (yogurt), for the others huge margins and profits in a short term did not come through. "We have realised that dairy is a difficult category. It is very commoditised, particularly in liquid milk, and government dairies call the shots. Their decision making is determined by the government, so sometimes they will increase prices at the farmer level to support the farmers, which is good, but not increase the prices at the consumer level. They compress margins so that inflation doesn't go up. The private sector suffers because it too has to then pay more and get less from the consumer. The margins vanish," says Godrej Agrovet's Yadav.
In fact, several private dairy companies have been complaining about local cooperatives not allowing them to procure milk. Cooperatives say the private companies are unwilling to remunerate farmers and so the farmers stay away. If a cooperative pays a farmer Rs 30 per litre of milk, private players pay only around Rs 21, says an industry insider. "The moment the procurement crosses 1,00,000-2,00,000 litres a day, you are seen as someone who is taking away all their (cooperative's) milk and there will be conflict," points out a Mumbai-based dairy entrepreneur.
India's dairy business model is different from other countries', says R.S. Sodhi, Managing Director Amul. "The world over, farmers, processors and marketers or retailers get one-third each. In India, farmers get 80 per cent of the revenue. That's why most private players, especially the global companies, fail. Most of them are not interested in supporting the farmers; they want profits. There are profits in this business, provided they are in the volume game. However, the appetite for profit shouldn't be too large either."
In this business, the margins are 6-7 per cent in the best of times, and while value-added products offer upwards of 15 per cent, India is still a predominantly liquid milk consumption country. Offering only value-added products to a retailer will not work. If the company has liquid milk as well, then retailers are more willing. "If you are a new player, providing many value-adds may hinder scale and affect the supply chain and logistics. To get some degree of stability in the supply chain, it is important to focus on pure diary business. It may take time to generate returns but it will help stabilise the business," points out Harsha Razdan, Partner and Head (Consumer Markets), KPMG.
Liquid milk remains pre-dominant. "Fresh liquid milk comprises two-thirds of the Indian dairy market. Given this scale, it will continue to be a significant driver of market growth, and an important part of the portfolio for most dairies. In parallel, building an array of longer-shelf life products is beneficial, as apart from providing potentially higher margins, they allow you to balance the vagaries of raw milk supply across flush and lean seasons," explains Dhyanesh Shah, Principal, Eight Roads Ventures India, which has invested in Bhubaneswar-headquartered Milk Mantra.
The dairy industry has been witnessing a milk glut due to 1,60,000 tonnes of surplus skimmed milk powder generated by dairy cooperatives which they couldn't export due to a global dairy slowdown. This has led to a drop in milk procurement as cooperatives sell the excess powder to private dairy players, many of whom prefer buying skimmed milk powder at a much cheaper rate from cooperatives than procure milk from farmers. This has led to a close to 50 per cent dip in milk prices. "Milk procurement has come down by 5-7 per cent and many of the traditional farmers want to exit the milk business," says Samarth Setia, CEO and Co-Founder, Mr Milkman, a milk distribution start-up.
In the short run, private dairy companies have benefitted as the fall in milk prices has reduced their procurement costs. "Discounting in dairy products has increased. In cheese, milk or ghee, all brands are offering heavy discounts," says Amul's Sodhi.
But the situation has changed. Powder prices have increased from Rs 140 (earlier they were Rs 250 per kg) to Rs 175 per kg. "All the players who have come into this business seeing hefty gross margins will not find the business lucrative when milk prices go up and the MRP does not increase in the same proportion," says Sodhi, who expects more private players to exit the business once milk prices stabilise in the next one year.
In fiscal 2020, milk prices are expected to increase. According to a Crisil report, there has been a sharp decrease in skimmed milk powder inventory in the past few months which could lead to an increase of Rs 1-2 a litre in domestic prices over the next few quarters. This is expected to improve the sector's operating profitability by 30-40 basis points.
Since January 2019, prices have increased globally by about 20 per cent, from an average of $2,000 per tonne. This is expected to continue for two-three quarters, which will allow Indian dairies to liquidate their skimmed milk powder inventory. According to Crisil, the inventory is likely to reduce 25 per cent by March 2020. It expects domestic milk production to grow at 3-4 per cent in fiscal 2020 compared with a compound annual growth rate of 6.5 per cent in three fiscals through 2018. "That's largely because of lower investments by farmers in cattle due to rising maintenance costs and no correction in farm gate prices (price at the farm, excluding transport and other costs). This has constrained returns and led to lower cattle availability," says Anuj Sethi, Senior Director, Crisil Ratings.
Serious players understand that dairy in India is a long gestation business and have devised strategies accordingly.
Having spent 22 years in Amul, Lactalis India Managing Director Rahul Kumar is well versed with the nuances of the Indian dairy business. "About 75 per cent of the milk we produce is consumed as milk. The core product in India is still liquid milk sold in pouches," he says. Kumar also understands that collecting milk across the country is unviable. Out of the 300 million litres of milk that the country's largest dairy company, Amul, collects every day, only 15 per cent is procured from outside Gujarat. This makes the dairy business by and large regional in nature. That is why Lactalis has opted to acquire only regional dairy businesses, be it Tirumala in South, Anik in Madhya Pradesh or Prabhat Dairy in Maharashtra.
Milk, according to Kumar of Lactalis, is the starting point. Efficient procurement along with building brand equity is crucial. Trust has to be first built with a milk pouch, he says.
ITC, which announced its dairy foray close to five years ago, too, has restricted its dairy products sale to southern and eastern states. Its maiden dairy product, Aashirvaad Svosti Ghee, for instance, is available only in the southern states, whereas its fresh dairy products, Aashirvaad Svosti pouch milk, curd and paneer are sold in Bihar, where it has a procurement and processing facility, and in the adjoining West Bengal. The focus has been to first get the products right in the smaller markets it is operating in. "Aashirvaad Svosti pouch milk is pasteurised using a 'taste-up' process that makes the milk consistently richer, thicker and tastier. Our ghee, for instance, is prepared using a process called 'slocook' which enhances its natural aroma," says Hemant Malik, Divisional Chief Executive (Foods Division), ITC Foods.
"It will be a region-focussed play in a measured manner. To expand and gain regional presence, strategic acquisitions may be required," says Razdan of KPMG.
Mumbai-headquartered Parag Foods has taken its brand Go national in three years. The Rs 1,500 crore-dairy company gets 80 per cent of its revenue from value-added dairy products. The 25-year-old company used to be a regional player. Plus, it ensured that its milk procurement was in place before it started with value-added products.
Devendra Shah, Chairman, Parag Milk Foods, says that even when a brand goes national, it has to have a regional strategy. "The 29 states have different operational issues; they have different distribution systems. In the South, you have to give a regional touch in terms of flavours; in Bengal, one has to market the hardest during Durga Puja. One needs to have a separate strategy for every region," he says. While products such as ghee and milk powder do well in the East, it is dairy whiteners and cheese in Kerala and flavoured milk in Jammu and Kashmir. "You need to find out in which market which type of product needs to be targeted. You can't carpet bomb the entire country with just two-three products," says Shah.
Kumar says Lactalis, even globally, believes in cashing in on local consumption trends. "In India, value-added products begin with products like curd and ghee. Most markets won't even understand what ghee is. We decided to acquire Anik, which is known for its ghee. Similarly, the market for paneer is much bigger than for cheese. We are investing heavily in paneer and ghee plants along with liquid milk."
Britannia Industries is another big player set to aggressively grow its Rs 400-crore dairy business to Rs 1,500 crore in the next couple of years. It has set up a milk procurement facility in Ranjangaon near Pune from where it collects around 30,000 litres of milk per day. "Since we are late to the party, our advantage is that we get to do business from a clean sheet base. We are actually focusing on the first principles of dairy farming, by making sure that the farmer is doing dairy farming in the right way. That is giving us good yields," says Venkat Shankar, Head (Dairy), Britannia Industries. The company has identified four segments - cheese, milk-based beverages, yogurt and fresh dairy and dairy whiteners. However, unlike peers, Britannia's strategy would be to procure and produce at one place and distribute across the country. "Britannia brings huge advantage in the front-end selling system. We reach a wide universe of outlets directly and that gives me huge traction at the entry point. The strategy would be to more efficiently leverage our sales system," says Shankar. He is confident that with its distribution muscle and R&D capabilities, the company will be able to pull off a successful long-shelf life dairy products business. In fact, selling liquid milk is not on Britannia's radar as that requires a different distribution system.
The Rs 25,000 crore value-added dairy products industry is set to outpace liquid milk sales by 2021, as per a Crisil report. Every dairy company aspires to be a key stakeholder in this.
When Lactalis acquired Tirumala in 2014, only 2 per cent of its revenue came from value-added products; that has now become 10 per cent of the Rs 4,000 crore revenue. The goal, however, is to take it to 30 per cent.
Similarly, Godrej Agrovet has invested Rs 80 crore in setting up an ultra-high temperature (UHT) line in Hyderabad where it manufactures flavoured milk, milk shakes and yogurts. Value-added products contribute around 28 per cent to the Rs 1,300-odd crore business and the plan is to take it to 50 per cent in the next couple of years. "Once that happens, it will bring stability, because the drivers of the business will change dramatically. Marketing, branding and product building will be the new drivers; we would like to procure milk and convert it into excellent quality products rather than sell bulk quantities of milk," says Yadav.
If value-added products continue to have immense potential, why are there murmurs about the segment not growing as per potential? Nestle, for instance, launched Greek yogurt a couple of years ago. It didn't catch on as this is a niche category and didn't have a sizeable market. The same goes for categories such as probiotic products, smoothies, gourmet cheese, etc., which are too niche. Companies which invested in them burnt their fingers.
The categories that have done well are the traditional Indian products such as paneer, ghee, curd and cheese. The biggest learning for most value-added product manufacturers has been to invest in products that can be scaled up. While milkshakes is just a Rs 500 crore-market, flavoured milk is a Rs 2,000-crore category. Similarly, ghee is a Rs 30,000 crore category, while cheese is a Rs 3,500 crore-category. Paneer is worth Rs 10,000 crore, and growing robustly. "It is very important how we define value addition. If we introduce western dairy products into the market, we are looking at a much smaller scale. But if it is value-added products that an Indian consumer opts for, such as curd and paneer, then there are large volumes," says Sunil Reddy, Managing Director of the Hyderabad-headquartered Dodla Dairy. Dodla forayed into curd four years ago and that already contributes about 20 per cent to the company's total sales volume.
In India, value addition is also happening in liquid milk. While the bottom of the pyramid consumers are getting used to loose milk packed in a pouch, at the upper end, farm-to-home milk is gaining traction. This is milk sourced from a single farm and is priced anywhere between Rs 60 and Rs 90 per litre. Brands such as Pride of Cows, Sarda Farms and BlissFresh are prominent in this category. Even this kind of milk has scope for further value addition.
"I am shortly going to launch A2 milk or Gir milk, which contains more fat and protein. By not having that product we have lost (the sale of) 300-400 litres of milk," points out Rajesh Singh, Founder, BlissFresh. Singh claims that Mumbai alone consumes 20,000 litres of premium milk per day.
Shah of Parag Foods says Indian consumers are willing to pay a premium for good products but nothing much is being done in terms of creating new categories to grow the market. "We have always juxtaposed what is available in the western markets and it hasn't worked. If we had cheese which had jeera or chillies or more familiar flavours, it could have worked," points out Alpana Parida, Managing Director of design-led brand consultancy, DY Works. If masala chhaachh is doing so well, Parida wonders why no one has thought about masala dahi, which has salt, chilli, black pepper and jeera, which one could put in a raita. "When we look at probiotic curd, we wonder if we should spend that kind of money on it, even though dahi is a ubiquitous solution in India for an upset stomach. So, rather than calling it probiotic, why not call it 'super digestive dahi'? It could have a far higher acceptance," she says.
The Indian dairy companies have been too busy fixing business models and innovation and market development have taken a backseat. However, the dairy business is a long gestation business and patience is the rule of the game. "Indians would be drinking milk even after 100 years," says Yadav of Godrej Agrovet.
The private dairies, with their marketing and brand-building acumen, have a better chance to succeed when it comes to value-added dairy products. But the bigger question is how many private players will win the game of patience.
With inputs from E. Kumar Sharma