Mumbai: Dairy firms are experimenting with various sourcing strategies as they begin an expansion spree, providing clues on how to enter new geographies in India’s fragmented milk market.
South Indian dairy companies are moving into north Indian markets with a combination of acquisitions and painstakingly slow moves.
“We are not a firm that has ever wanted to expand too fast,” said Prasanna Venkatesh Jayaraman, associate vice-president of marketing at Chennai-based Hatsun Agro Product Ltd. The maker of Arokya Milk and Arun ice-cream has recently expanded operations to Solapur and Sangli districts of south Maharashtra.
“We started with south Maharashtra because it could be catered to from our plant in Belgaum (Karnataka),” Jayaraman said. “On the ground, there are agents who will collect milk from farmers in the area and bring them to a company’s collection centre. That does not let you control the supply of milk. Instead, we waited and slowly built a network of milk farmers of our own.”
Hatsun now has its own network of 5,000-6,000 farmers who come to the company’s milk collection centres in Solapur and Sangli. The firm took nearly a year to scale operations up to this level.
In contrast, Telangana-based Heritage Foods moved quickly into north India by acquiring Reliance Dairy, part of Mukesh Ambani-led Reliance Retail Ltd. A known brand in the region, Reliance Dairy gave Heritage access to about 150,000-200,000 litres a day in sales, along with five new north Indian markets—Punjab, Uttar Pradesh, Uttarakhand, Madhya Pradesh and Himachal Pradesh.
“We completed acquisition of Reliance Dairy in mid-April and are now trying to understand how to integrate the businesses better,” said Brahmani Nara, executive director of Heritage Foods. “We also got two new brands—Dairy Life and Dairy Pure.”
For Heritage Foods, too, all strategies are built to secure sourcing. “We are locally procuring milk as close as possible to our (go-to) markets to supply the best and freshest milk,” she said. “We will focus a lot more on dairy value-added products, and are already a formidable player in curd, where margins are higher and the market is growing.”
Value-added dairy products bring much needed margins to the sector where milk and other daily use, high value goods sell on wafer-thin margins. One firm that entered the market with value-added products is PepsiCo India, which launched its Quaker Oats brand of oats and fibre-fortified milk in two flavours in May. “We are outsourcing all manufacturing to Schreiber Dynamix”, Deepika Warrier, vice-president of nutrition category at PepsiCo India, had said in May.
For multinationals, who have always found it hard to break into India’s fragmented, regionally varied and cooperative-dominated milk market, third-party manufacturing can come as a relief. Schreiber Dynamix Dairies Ltd is a dedicated dairy products manufacturer, but also makes PepsiCo’s Tropicana line of juices in India and counts other leading dairies, including the National Dairy Development Board (Mother Dairy) and Danone SA, among its clients.
All three strategies for expansion have their own advantages and problems but there is a lone common thread among them—sourcing.
“At the base level, sourcing and procurement (of milk from farmers) is scattered in India,” Harminder Sahni, founder and managing director at retail advisory firm Wazir Advisors said. “The common theme (for all dairy businesses) is who has access to the farmer. Cooperatives have a definite advantage over multinationals in acquiring farmers.”
Cooperatives such as Gujarat Cooperative Milk Marketing Federation (GCMMF), which owns Amul, dominate the Indian dairy market with its direct access to farmers. However, private Indian and foreign firms struggle to get similar access. In such a situation, acquiring a brand helps. “That is also a good strategy for someone who does not have access to procurement,” R.S. Sodhi, managing director of GCMMF, said. “It takes time to contact farmers and they will supply milk only to a brand they trust.”
In fact, Sodhi says building your own direct network of farmers take a very long time. “It took Amul 70 years to do so,” he said, adding GCMMF now has 3.6 million farmers in its procurement network who supply milk to Amul’s collection centres directly.
“You have to meet milk farmers, convince them, then set up milk procurement centres. All this takes time.”
However, the payoff can be huge because in the long run, and it helps control quality and costs. “In our collection centres, we electronically weigh the milk and test it in front of the farmers,” Jayaraman said.
However, for multinationals with little time to attack the Indian dairy market, it makes sense to defer to third party manufacturers as PepsiCo has done.
“If you want to expand rapidly, you will need acquire a brand or procurement (such as an existing dairy farm),” an analyst with an equities brokerage firm said, requesting anonymity.
“But you need to have a good brand that will support the procurement or capacities you will acquire.”
This acquired procurement helps reduce the timeline and allows companies to focus on designing their products. PepsiCo’s Warrier said that while Schreiber Dynamix produces the company’s Quaker Oats milk, the recipe and soluble oats technology is patented by the multinational.
Yet, milk supply would no longer be in the company’s control in such a situation. “For any dairy, how will you control costs?” Sodhi said. “You are in the hands of these (companies) while you are building a big business.”
In India, every dairy firm’s expansion decision will be a trade-off between rapidity and controlled sourcing of milk, the lifeline of all dairy businesses from packaged milk to value added complex products.