The Dairy Industry: Brimming with Potential

India is the largest producer of milk — accounting for about 17 percent of the global milk production. It is also one of the largest producers and consumers of dairy products. Milk production in the country is expected to grow at a CAGR of about 5 percent between 2013-14 to 2020-21. The Indian dairy industry provides opportunities for both domestic and foreign conglomerates/investors for entry and expansion.

About 20 foreign companies have already set foot in India while Indian dairy giants having also invested heavily for expansion. Ashok Malkani examines the dairy industry scenario in the country and the opportunities available in it, and also the steps needed to be taken by small investors proposing to enter the retail dairy market in the country.

Do you feel it is time for a career change? Looking for business that could earn a handsome profit? Well look no further than the white gold – milk.

Milk and dairy products have been witnessing frantic activity in the country since the last couple of years. Dairy firms are expanding while the retailers of dairy products are seen growing by leaps and bounds. Several multinationals and Indian corporate giants have jumped in to the fray. India’s milk production has been increasing and by 2021 it is expected to be equivalent to that of the entire European Union. Amul and Mother Dairy are the two largest players in the Indian dairy market.

India has been, with an estimated 400 million litre per day, is the largest producer of milk in the world. It has also been the largest consumer of milk. During 2015-16, the growth rate of milk production in India was 6.28 percent and the total production of milk attained a figure of 156 million tonnes.

Add to this the fact that per capita consumption of milk in India is, at 97 litres per year, extremely low as compared to other developed countries and you realise why the global dairy industry is eyeing India. In the US the per capita consumption of milk is 285 litres per year, while in EU it is 281 litres per year.

And the reason behind the recent excitement in the Indian dairy industry  is also because of the fact that the Indian consumers, particularly the affluent urban ones, are now consuming more value-added dairy products on an average, than they did a decade or so before. And value-added dairy products are generally more profitable for the dairy industry as compared to the raw milk. Add to this the fact that there is now a growing number of working couples and single men and women with high disposable income and you will readily ascertain the reason for the boost and the logic of why the Indian dairy market is being eyed by the global dairy industry with avid interest.

According to the report by TechSci Research titled ‘India Dairy Products Market Forecast & Opportunities, 2017’, the market for dairy products in India has grown rapidly over the last few decades and anticipated to be growing at a faster rate when compared to the global dairy products market. The report stated that the revenues of India’s dairy products market was expected to be growing at the CAGR of around 5 percent during 2012-17.

According to TechSci Research’s report titled India Dairy Products Market By Product Type, Competition Forecast & Opportunities, 2011 – 2021, dairy market in India was projected to grow at a CAGR of over 7 percent during 2016-2021, due to growing demand for value added dairy products, rising disposable income levels and increasing health awareness among consumers. Changing consumer dietary patterns, rising awareness regarding nutritional values of dairy products, along with growing willingness of consumers to spend on non-conventional dairy products such as yogurts, probiotic drinks, etc., is propelling growth in India dairy products market, observed the report.

“Continuous population growth, liberalisation of trade policies and rising investments in advertising are driving the country’s dairy products market. With new domestic and international players foraying into dairy products market in India, the market is witnessing introduction of various non-conventional dairy products such as flavoured yogurts and probiotic drinks, milk with low fat and cholesterol content, different cheese variants, etc.,” opined the report.

Investments Galore

The Rs. 31,000 crore Amul (2015/16) is investing heavily to hit a target of Rs. 65,000 crore by 2020. But it is facing stiff competition from Groupe Lactalis SA, world’s largest dairy products company, which has acquired south-based Tirumala Milk Products Pvt. Ltd., marking the French company’s entry into the growing dairy market in India.

ITC too jumped into the fray a couple of years ago with Aashirvaad ghee and last year forayed into the dairy whitener market with Sunfresh brand.

Parag Milk Foods has raised, through its IPO last year, about Rs. 750 crore to beef up its operations, while Prabhat Dairy, a year earlier (2015), had raised Rs. 473.89 crore in an IPO for the same reason.

Other activities by some leading companies have been also there. Godrej Agrovet raising its stake in Creamline Dairy by 25 percent, to own a controlling stake of 51 percent; Danone has added to its product line ups and recorded an EPS growth of +9.3 percent during 2016; Nestle, during the same period added new products in the dairy section with a focus on adding value to existing products.

Several global companies are eyeing India as a prospective dairy market, while domestic dairy co-operatives like Mother Dairy and Nandini are expanding their operations.

Demand for VADP

Even today, out of the 400 million litres of milk per day that the country produces, 160 million litres per day (40 percent) are retained by the producers while the other 240 million litres (60 per cent) is available for consumption by those willing to enter the market for value-added dairy products. One may add that out of this 240 million litres, only 70 million litres per day is being utilised by the organised sector consisting of co-operatives like Amul, Mother Dairy and Nandini and private sector players like Nestle and Danone. The remaining 170 million litres per day remain with the unorganised sector.

India has been largely a milk drinking country and penetration of packaged VADP (value-added dairy products) products has been low. But thankfully things are changing…

In the opinion of Brahmani Nara, Executive Director, Heritage Foods Ltd., “Three large trends are driving dairy consumption in India today. With increasing modernisation in cities, there is a large premium on time. So there is an emerging need to find dependable everyday products that were earlier largely homemade. A decade back, this need drove the demand for ghee in south India, where households moved from making ghee at home to buying it in the packaged format. Today, the same cycle is being repeated in curd. I believe that this cycle will repeat in many other products.”

She says that 90 percent of the value added dairy products’ revenues in India come from four product groups, namely dahi (curd), drinkables  (flavoured milk, lassi, chaas, etc.), dairy fat (butter, ghee, fresh cream, etc.) and ice-creams. She claims that while all these businesses are sizeable and growing, curd stands out as a category that is growing at the fastest clip.

The popularity of yogurt is increasing in the country as Jochen Ebert, Managing Director, Danone Foods and Beverages India, said, “Young females who are working find it a good idea to get the yogurt or dahi from outside instead of setting it at home. That means there is an opportunity for commercially produced yogurt in India and we are focusing on that opportunity.”

According to him, Danone was among the first to introduce a series of yogurts in 2009 when its products were accepted only in a few niche stores. Ebert said that “India has a per capita consumption of only 3-4 litres of yogurt as opposed to France, Holland and Germany, which have about 30-40 litre.” The intention of Danone is to share with Indian population that yogurt (or dahi) is a fantastic contribution to their diet.

Ebert disclosed that Danone had innovated and created products with longer shelf lives. Its products, such as smoothies, chaas and lassi, are packaged in ultra-high temperature (UHT) packs.

Avani Davda, Managing Director of the supermarket chain Godrej Nature’s Basket has stated that the variety of milk products had increased so much that during the past year she has had to double her stock. “A couple of years back we had only 700-800 SKUs (stock-keeping units), today we have over 1,200 SKUs,” she affirmed. The fastest moving item on her shelves is probiotic milk. Other fast moving segments, she said, were greek yogurts, fresh paneer, farm fresh milk and nut-based milk.

It may be stated that the Indian co-operatives had, till the last few years, stuck to only basic milk, butter, processed cheese slices and ice-cream, giving the new players an opportunity to fill in the gaps that were easily noticeable due to the increasing demand for new products by the affluent and busy working couples and individuals in the cities of the country.

Improving Procurement Infrastructure

While the Indian dairy market, which has a huge influence on the Indian bakery and confectionery industry, can seem immensely attractive to the new and existing players, one major obstacle for private players is the procurement of milk, which follows a very different path in the country from that of the one followed globally. In western markets, dairy companies depend on large corporate dairy farms and the procurement is done from a single farm. In India, however, they have to aggregate milk from many small sized farmers. This can lead to inconsistencies in supply volume as well as supply quality.

It has thus become a necessity for almost all private dairy players operating in the country to own a procurement network. Thus almost all of them, including new entrants like ITC, today, have their own network on the lines of co-operatives. Even Danone, which for the first five years of its operations, procured milk from Hyderabad-based Schrieber Dynamix Dairy, did set up its own network in Punjab. According to Ebert, this was done because the crucial criteria was to control the quality, quantity and price of milk.

The government, too, appears to have realised the potential in this industry and has come up with some proactive measures to guide investors interested in setting up food processing units in different parts of the country, says the IRC report.

The dairy sector has been liberalised in a phased manner since 1991. Many private players entered the market to set up processing facilities in areas with surplus milk.

According to Rabobank, by 2020 Indian dairy will see estimated supply chain investments of 2bn USD, with a focus on the upstream link. “Strong growth prospects, driven by formalisation of the market and growth of value-added dairy products, will drive these investments. Capital investments will largely be directed towards developing a milk procurement infrastructure in order to source superior-quality raw milk,” the institution observed. It further added that this would entail setting up collection centres and milk chillers at the village level to directly engage with dairy farmers. This will facilitate milk processors to secure greater control of milk sourcing. Organised milk handling is expected to increase to more than 30 percent by 2020, from the current level of 25 percent.

“Growth will largely be driven by cheese, yoghurt, ice-cream, infant foods and UHT milk products. The share of value-added dairy products will increase to 30 percent, from the current 21 percent of the total organised dairy market. In value terms, this equates to a 7bn USD market, up from the current size of 2.5bn USD,” observed Rabobank in 2016, while talking about investment opportunities in Indian dairying.

A growing young Indian population is leading to the increased consumption of branded value-added dairy products. This will push investments in upstream (for superior raw milk sourcing) and in capacity expansion (for manufacturing value-added dairy products). Most of the dairy companies operating in India, whether they be domestic and international, will have to formulate their business strategy with these aspects in mind, observed Rabobank

Succinctly, the dairy sector in the country thus has enormous potential, not only for big time investors but also for those wanting to start small time dairy business. And the further growth of the Indian dairy industry can give an impetus to the Indian bakery and confectionery industry too as dairy products are extensively used in bakery operations.

However, for arriving at success in dairy business, the new and existing entrepreneurs in this business should do prudent costing, which not only entails the cost of raw milk’s procurement, but also the cost of transportation, equipment and labour costs, the cost of rent and the retail margin. To arrive at a realistic costing of dairy operations, all elements involved at each stage of production and marketing have to be taken into consideration.

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