India’s success story on the dairy sector has always been focussed towards procurement, but now the sector as a whole needs to look forward. Focus on marketing of both milk and milk products is the key for growth, as it continues to increase its supplier base. On the back of co-operative model, India has seen success in milk production which is well-documented but can the sector move up to the next level, is the question. Pankaj Joshi answers these question in this report.
Setting the context
In order to understand the sector better, one has to know the various ascepts around it. For instance, India’s milk production stands at 157 million tonnes and industry analysts estimate it to increase by 50 per cent over the next decade. The importance of milk in the agrarian economy can be understood by NSSO data. The data states income from animals constitutes 26 per cent for all farmers with land holding of less than a hundredth of a hectare. The fact that these farmers are part of procurement network (co-operative or corporate model) is the manifestation of the policy followed by the National Dairy Development Board (NDDB) founder Dr Kurien.
When suppliers are marginal and target for growth in procurement is set, the individual supplier must be guaranteed a safety net in terms of fair and assured offtake terms. Such a safety mechanism is either the responsibility of the processor (co-operatives) or the state government. Consolidation in procurement and focus on value-added products makes such a safety net self-sustaining.
As per GCMMF data, since 2002 there has been a rise of 60 per cent in the membership and in the same period there has been an increase of more than 200 per cent in the quantum of milk procurement. This indicates rise in livestock per member and output per animal.
Dr Kurien’s model has always held farmer’s remuneration as sacrosanct. However, the recent report proposing to make NDDB which owns Mother Dairy, an intervention agency for imports of skimmed milk products (SMP), was deemed disturbing. Previously, Mother Dairy had dumped imported SMP in the market, leading to milk prices crashing to as low as Rs 14. Farmers then had come out and poured milk on the streets in protest. However, NDDB currently has denied having any such plans.
Such imports and dumping have dangerous socio-economic implications. It means lower prices for the supplier which will result in reduced investment in animals. The current livestock maintenance suffers, with quality issues as collateral damage. With lesser visibility of quality milk supply, processors invest less in assets and in brand building. On the other hand, consumers face supply shortages, higher prices, fluctuations in quality and other problems. In all this, the market also becomes vulnerable to middlemen who take advantage of price fluctuations.
Presence of private players
The way co-operatives have synthesised themselves into the milk production sector, it would be difficult for private brands to do so. While private players have notched up their presence in all major milk producing states, their plays are substantially regional in nature. Except Nestle (and Danone to an extent), there are no major multinational companies who have created a huge presence in India. On the other hand globally, there are major players in developed markets.
Unlike corporates, co-operatives have a structural advantage in the sourcing area. Phillip Capital estimates that Prabhat has to get 35 per cent of its milk requirement from aggregatorvendors, while for Kwality this is as high as 85 per cent.
However, this is not endemic because Hatsun procures 88 per cent of its milk directly from farmers. Hatsun management estimates that 15 per cent of the milk in its operative areas comes to the company, which indicates a lot of scalability is possible once the procurement system has been established.
One important aspect of co-operatives is the scale of payment where again industry sources say that prices paid to farmers in Maharashtra are on the lower side, compared to Gujarat or Karnataka. Hence, private players can get farmers to switch loyalties more easily. Nestle’s Moga operations have kept the farmer as the centre point, emulating the co-operative model. Also, Hatsun and Heritage have done the same in Tamil Nadu and Andhra Pradesh respectively.
Overall outlook is positive for private players, since conceptually their brands have been accepted and they have created establishments for procurement. A portfolio of products is being built and different categories of clients are being focused by different players. Prabhat Dairy, after building a set of institutional clients, is now focusing on getting a retail market presence as well.
When different products are lined up, it is easier to spread advertising spending. Yes Bank is very bullish on private players. So, it estimates by 2020, private players will surge ahead of cooperatives in terms of procurement (28.93 million against co-operatives handling 23.67 million tonnes). It is only in the procurement and ad spend department that costs can be rationalised by private players. This is necessary for them because their profit ratios are generally lower than the standard FMCG food business.
Overseas, large dairy farms feed global giants like Danone or Nestle, through ownership or contract model. But in India, there are hampering elements for large farms. Firstly the family-labour model followed rigorously, can only sustain a limited herd. Once livestock increases, there will be additional cost of hired labour, still a mindset issue. Secondly, the market for dry (non-productive) cows in India is restricted by the ban on slaughter of cows, which in economic terms means no residual value from the same. Taken in conjunction with lower land holdings, these are factors which would cramp processors from scaling up and make them strongly dependent on their procurement networks.
Brand building & its backdrop
Brand building is costly and time consuming. It needs to be justified by a basket of products. Players need both deep pockets and procurement visibility. Corporate players today do not have big budgets and their margins depend on paying less to suppliers, which as seen earlier can become counter-productive.
Key aspects for building a brand in dairy sector remain the same as for any other – the capabilities in sourcing and distribution as the bedrock, with a differentiation factor which here starts with quality assurance and goes on to positioning and the product basket. While multinationals do have the elements in place, local corporates are still finding their feet.
Like in any growing market, those players who do not become large will be at perpetual risk of marginalisation. When the overall share of the organised sector increases in procurement, and other players are leveraging their procurement networks better, this is also a negative sign. Also, loss of market share is striking, and difficult to recoup.
By itself, milk availability cannot build large brands. Maharashtra is the second in milk collection terms and it has around 80 brands. No brand has grown big in stature, and in the bargain the local state brand (Aarey) has been severely damaged. Incidentally, Heritage too has built its brand in the face of a hitherto strong state brand, namely Vijaya.
Gujarat in terms of milk collection is 14 million litres a day (third overall) and it has three brands. In Gujarat, NDDB is the largest milk aggregator. Its sister concern GCMMF with the Amul brand, has a turnover of Rs 28,000 crore and aims to cross Rs 50,000 crore by 2020-21.
For instance, Amul already stands at 24 per cent of the agricultural GDP. The NDDB along with its affiliates, procures milk from 36 lakh farmer members. The family aggregate of that (approximately 1.5 crore) can amount to a small nation by itself, because only 70 countries/ territories currently have that kind of population.
Size generates success. The Maharashtra government has asked NDDB to take on the task of creating a state co-operative based out of Nagpur. A similar solution is being implemented in Uttar Pradesh, the largest milk producer state.
GCMMF estimates sector growth at 4-5 per cent, and value-added products to grow at double digit rates. Butter is a staple favourite. Then the fondness is for fresher products like paneer and curd, rather than cheese. Fresh products have quicker turnover (so lesser working capital) and lower processing investments. Meanwhile, cheese manufacturing needs a certain amount of investment but anomalously margins are lower. The only visible alternative here is to create different product variants. Among fresh products, flavoured milk variants are also gradually creating a space of their own.
Among corporates, Parag Milk Foods has a high presence in milk and has been increasing its portfolio of value-added products, and the same is the case for Prabhat. The limitation to investment in milk product manufacturing is again brand strength. Even players like Nestle and Britannia tend to depend on contract manufacturing, rather than build assets for all product categories.
In terms of advertising, Hatsun has an adspend of 2 per cent of sales against the benchmark 1 per cent for Amul. Given the challenges individual players face in scaling up procurement and the current chicken-and-egg situation of turnover growth and adspend growth, the value-added market growth for individual brands will predominantly be slow. Milk and fresh products look to be dominant for the next 5-7 years.
Globally, milk prices had a bad time from the end of 2015 throughout 2016. The primary reasons were increase in supply from major centres – New Zealand, the European Union and the USA, and a simultaneous drop in trade to two major markets.
- Exports to Russia declined for political reasons, because Russia decided to curtail imports from Europe on a large scale.
- China too saw a decline in the staple SMP imports, quite contrary to its trend in the 2005-2015 period.
- An indirect reason for the drop in prices was the crude oil price drop and the impact on Gulf nations, who have traditionally been large importers of milk products.
However, in the past three months, prices have recovered somewhat. Interestingly, while the decline in prices hit farmers in the major centres overseas, it was not so in India. GCMMF estimates that farmers in Europe and New Zealand saw decline of 25-30 per cent in their sale prices. In the same period, farmers in India saw a 2-5 per cent rise in the prices. This again is a pointer to the co-operative safety net being effective.
India traditionally has had a marginal presence in the global market. Alongside being the largest producer, it also consumes a lot domestically. Again, stringent food quality standards, non-economic barriers and lack of many cognisable brands have all contributed to this scenario. In the short term, however, Russia is a favourable potential market because of political developments which make India a good supply source.
In other developments, digitisation may yet be a trigger for the sector because it would see producers getting attached more and more with the organised players. Post the demonetisation, Amul opened 5.5 lakh bank accounts in a month. Hatsun already pays all suppliers through bank transfers. While short-term infrastructure issues remain on the ground (ATMs in rural areas need to increase on a war footing), the move will be immensely beneficial for private players looking to increase their procurement networks.
A research report from Ambit talks of NDDB’s co-operative oriented programme focuses on increasing animal productivity through input enhancement (better feed, artificial insemination, farmer education). However, this process is more long-term and by nature will need government support. Productivity increase is vital, since India lags behind global standards even after improvements.
Another critical and neglected aspect of growth, be it basic or value-added segment, is the lack of an efficient cold chain logistics mechanism. Given the recent initiatives of the government, it is more likely to be addressed in the medium term. Once new markets can be penetrated on the basis of such infrastructure, the spend on brand building will be rationalised.
Yes Bank estimates the sector to witness investments of USD1.47 billion over the next five years across all areas, from farm-level infrastructure development for procurement and storage of milk upto processing capacities for diversification into high margin value-added products. While some of it would be from global giants, a good part by necessity must be from the local players, corporate or co-operative. Co-operatives can do so through harnessing the collective strength of their members, who in turn have collective ownership of the assets. Such an approach has two benefits – costs are controlled because extra layers are eliminated, and the process also reduces the chances of leakages and adulteration.
In summation, recent developments in the dairy sector, local or international, are definitely on the favorable side.
The conversion of the unorganised sector share, combined with the natural growth, can more than double the industry size in the coming decade which promises ample growth for individual players in the organised space. Players with long-term vision and focus on procurement as a backbone to their processing and marketing investments are bound to prosper.
Sector in a jiffy
- While current procurement structure is in favour of co-operatives, overall outlook is positive for private players.
- Brand building is costly and time consuming, and players need both deep pockets & procurement visibility.
- Procurement by itself cannot build brands. A range of products is needed to justify the outlay.
- Butter is a staple favourite and recent inclination is towards fresher products like paneer and curd.
- Flavoured milk variants are gradually creating a space of their own.
- India traditionally has had a marginal presence in the global market, but spends on procurement and processing infrastructure is set to rise in the medium term.
Budgetary allocation for dairy development has increased by 25% to around Rs.1,600 crore. The National Dairy Plan Phase I (NDP-I) to handle 24 projects within itself including:
- Focus on animal breeding and feeding practices to improve productivity of low-productive indigenous animals.
- High Genetic Merit Bull production programme to help production of quality semen doses for use in artificial insemination.
- Improvement in fodder production and conservation systems.