Which came first: Cow or Cash cow?

Disclaimer: This article contains intolerable amount of lactose, reading this may cause indigestion

“If you want to compete in India’s Dairy sector; you don’t."

- Lac Tao Tzu, The Art of Milky War

A while back, I met a guy who said he is ‘Lactose Intolerant’. “A Lactose Intolerant Indian human mammal?” I exclaimed. “Yeah”, he shrugged. Took a selfie with him, one for the history books. I also felt a bit sorry for him; being the milk-loving nation we are, the usual reaction towards Lactose Intolerance is similar to the one given to mental illnesses- “It’s all in your head”.

India is the world’s largest producer and consumer of milk. Had the sector had the same charisma around it like tech, you would have found at least one startup founder who would pity you when you inquire him about the TAM (Total Addressable Market a.k.a the tech bro version of Market Size), smirk, point towards the sky, and declare, “That is the limit!!!”

A country that has dethroned China to become the most populous in the world. A population that swears by consuming milk and its derivatives for its nutritional needs. Dairy- a sector that provides sustenance and livelihood for a chunk of the population. Milk- a commodity that is abundantly available, has multiple derivatives, and together they are essential raw materials for a host of packaged and non-packaged foods.

And yet.

Dairy has remained the Achilles’ heel for most FMCG companies.

Dairy is one of the most cutthroat nooks of the FMCG world and rightly so. Take a look at Danone, one of the largest dairy companies globally. Danone entered India in the year 2010. Despite its global success, it could not replicate the same in India- partially shutting its shops less than a decade later in 2018. Even Nestle, the world’s second-largest dairy company, has restricted itself to value-added packaged dairy products.

India’s dairy sector can be divided into 3 broad segments in terms of offerings- Milk (accounting for ~ 65% of the consumption basket), Traditional value-added products – Butter, Ghee, Paneer, Khoa, Curd and Skimmed milk powder (accounting for ~ 30%) and Emerging value-added products – Flavoured milk, Ice cream, Yoghurt, Cheese and Whey (accounting for ~ 5%).

While Milk and Traditional value-added products have historically garnered a larger lion’s share in the overall dairy consumption, it is the Emerging value-added segment that has grown at a faster rate- both in terms of volumes and prices. Likewise, the latter also offers higher EBITDA margins. However, despite the value-added segment fetching higher margins and pricing power, the high capex requirement means that this segment delivers comparatively lower ROCE than liquid milk.

The organised dairy sector works on a procurement-based model, wherein the players source milk directly from farmers and provide them with technical assistance and other support services. Thus, allowing them to tap into the existing wide network of farmers and provides for efficiency and scalability of operations.

The cattle ownership model on the other hand, involves substantial investment in infrastructure and working capital in the form of cattle feed, veterinary services etc. One of the model's most challenging aspects is the life cycle management of cattle itself. Further, while globally, non-milking cattle are sold off to slaughterhouses, wherein the players recover 50-60% of their initial investment, the cultural and regulatory restrictions around the same in India mean that the cattle have to be sold off to gaushalas or to small farmers at a lower price making cattle ownership unviable.

Competition

In terms of the competitive landscape, about ~ 40% of the milk produced is self-consumed. Of the remainder that is processed, the unorganised sector dominates with a ~ 60% share while the organised sector (Co-operatives and private sector) account for the rest. Even in the organised sector, it is the cooperatives that have the upper hand. For instance, the Gujarat Cooperative Milk Marketing Federation (owner of the brand Amul) alone controls one-third of India’s fresh-milk market, half of the cheese industry, and more than four-fifths of the butter market. 

So, what makes the sector so challenging to enter into? Firstly, comes the very nature of liquid milk itself- the low shelf life and low margins in liquid milk makes it economically unviable to transport over long distances. Thus, making Dairy primarily a regional play. Likewise, the fragmented nature of production means that one has to convince scores of farmers to send liquid milk to collection centres from where it is transported to one or more of your factories. The same requires the players to gain the trust of the farmers and build a strong procurement network- something the Cooperatives have excelled at.

The Cooperatives have been successful in developing a wide network of storage and chilling centres at the village level including door to door collection across many villages. Further, a few state governments also offer subsidies to farmers on supplying milk to their Cooperatives giving them an upper hand over the private players when it comes to milk procurement. The very reason why in many states the cooperatives reign supreme viz. Gujarat (Amul), Karnataka (Nandini), Andhra Pradesh (Vijaya) and Tamil Nadu (Aavin).

The low differentiation of dairy products and complexities involved in the procurement and supply chain management combined with the low margin of error makes dairy a business too difficult for the private players to make it work. Thus, a majority of them restrict themselves to a few differentiated value-added offerings that offer higher margins.

Reliance’s Ambitions

Therefore, when reports first mentioned Reliance’s ambitions to enter the dairy space, it seemed a bit counterintuitive. Especially considering that this is not the first time Reliance has burned its hands in the dairy sector. It had earlier entered the dairy sector in 2007, eventually shutting shops and selling its dairy biz to Heritage Foods in 2018.

However, Reliance is dead serious about getting it right this time. It has already roped in RS Sodhi- former Amul Managing Director in an advisory role. While it has been clarified that he is supposed to build Reliance’ fresh fruits & vegetables vertical, his hiring does provide an insight into Reliance’s bigger plans for the dairy space.

Reliance has the ambition to be an FMCG major, and it sees dairy as a vital piece of the jigsaw puzzle. However, unlike its usual all-out approach, it is treading cautiously this time. Its focus is on value-added space- curd, ice creams, flavoured yoghurt etc. which provide higher margins and scope for differentiation. It is already scouting for acquisitions in the value-added space and is set to launch its ice cream under the ‘Independence’ brand in the state of Gujarat.

While Reliance has been aggressively expanding its FMCG portfolio, the question of whether it will dominate the dairy space will hang on its ability to leverage its retail and quick delivery supply chains. With the economics of quick delivery being called into question, we might even witness a Big Basket type daily delivery model from Reliance. Having acquired Milk Basket in the year 2021, the said strategy fits well into Reliance’s playbook. As per The Ken, Milkbasket which operated separately since its acquisition by Reliance, is now being integrated with Jio Mart. Likewise, the Reliance Retail stores are also being utilised as warehouses for Milkbasket. Further, the Big Bazaar stores would also be made available to Milkbasket in the coming months.

With the dairy incumbent Amul now scaling up its portfolio to become a food and beverage company, the FMCG sector in India is preparing itself for a showdown in the coming years. Whether Reliance will take the throne or hang up its sword? Only time will tell. For, it has taken a road less travelled by, and maybe that would make all the difference.

Author: Sree Hari

End movie credits:

Edits: Amay Solanki, Tushar Khandelwal, Arnim Dhakad, Kunal Talwar, Hanu Bansal

Consumer Avengers: Yash, Mitali, Akhil, Amul, Arnim, Chirag, Shashank, Mukund, Pranav and Nakul.