India has been the leading producer and consumer of dairy products worldwide since 1998 with a sustained growth in the availability of milk and milk products. Dairy activities form an essential part of the rural Indian economy, serving as an important source of employment and income. Further notably, India possesses the largest bovine population in the world. However, the milk production per animal is significantly low as compared to the other major dairy producers. Moreover, nearly all of the dairy produce in India is consumed domestically, with the majority of it being sold as fluid milk. On account of this, the Indian dairy industry holds tremendous potential for value-addition and overall development, according to the latest report by IMARC Group, titled “Dairy Industry in India 2019 Edition: Market Size, Growth, Prices, Segments, Cooperatives, Private Dairies, Procurement and Distribution”.
India is the world’s biggest producer and consumer of dairy. In 2018 India produced 186 million metric tons of milk, over 410 billion pounds and 22% of the global production of milk. Almost all the milk produced in India is consumed domestically due to India’s dairy heavy diet. The total milk produced also constitutes of milk extracted from buffalos and buffalo milk is a very important source of milk in many developing countries. In 2011, French dairy company DANONE wanted to expand its dairy business in the Indian market. DANONE opened its own manufacturing or processing division in Haryana and tried to capture a section of the consumers from the population of 1.25 billion citizens. But less than a decade in the dairy business DANONE shut its operations in India.
That same year DANONE made $28 billion worldwide and was in the top three dairy companies of the world. With great success elsewhere however, DANONE still failed in the Indian market. This was because flavoured yogurt and other dairy substitutes make up 53% of its business which was one of the reasons that it failed in India. There are about 75 million dairy farmers in India, most of whom are women who own one or two cows to supplement their families’ income. Nearly half of India’s milk is not sold but consumed by the farmer’s household. This makes India’s dairy industry far more fractured and localized than other countries where DANONE operates. India’s neighbours like France and USA have lesser farmers, but each of these farmers own herds of cattle, resulting in a synergy between local producers and big dairy companies easier unlike the fragmented structure of India’s dairy production. USA is in fact the largest producer of dairy globally. Sourcing milk from these small cattle owners was the first challenge that DANONE faced in India. Out of the 50% produced for the market 36% percent of it is taken by the local dairy vendors and only 8% is available for the big dairy companies, while 7% goes to government run cooperatives. Most of the milk goes to the small local milk vendors in the particular city or state. These local companies have very deep strongholds in the particular areas where they operate, and farmers only sell to them because they possess a commercial understanding with these people, which has been strengthened over decades, resulting in these small dairy farmers only selling to them.
Dairy products do well in the long run and that is what Amul, Nandini, etc. have done; that is build the infrastructure over the years. But even though companies like Amul, Mother dairy and Nestle are huge brands, their share constitutes only a small percentage of the market, even when they have been present in the industry for decades. This indicates that tapping into India’s dairy market is effective but time consuming. One can only imagine the immense amount of effort in contacting hundreds of local and regional dairy producers or individual farmers.
But establishing a separate supply chain all together is very expensive. DANONE tried to bring the cold chain; they brought the supply chain which is how they were trying to source their product. This in itself becomes very difficult to maintain and gets really expensive in terms of cost. The company also focused on the wrong products in India. DANONE pushed plain yogurt and flavoured yogurt drinks which is popular in other countries, for example, in USA or France. In India only 7% of the entire produce is utilized for yogurt whereas most of the dairy consumption comprises of ghee and regular milk. Hence dairy is a product or an industry in India whose price takers are not the big corporations but the small local vendors. The only way to have a significant business in India is if you are selling liquid milk, which is a highly competitive market. However, if you are selling liquid milk while at the same time competing with the local farmers, there is no way you can made any sufficient margins or profits to survive as a business.
In India most of the players that are already in the packaged yogurt business have other business alternatives or diversified products which cushion their bottom line. Also, India is one country where the people make yogurt as well as butter and cheese at home, which is why they do not buy any of these products from the market. People just buy milk and then they process it to get other by-products themselves. And why people process it at home is because it is considered to be fresh, people can do it well and it is available for a cheaper price.
Not all hope for DANONE was lost in India in 2018. At the time when DANONE divested in India the investment department of the company announced its partnership of a $26.5 million investment in Epigamia, an Indian yogurt startup which is popular for the variance in its product line. Investing in Epigamia was a sustainable move for DANONE because Epigamia offers consumers products that add value beyond the plain yogurt that people can make cheaply at home.
Where much of the population uses the old-fashioned method of making dairy products at home, analysts predict that a growing number of consumers will want to buy premade options as the people move into corporate jobs in developing urban centres. There are certain sectors in the urban market where people who are educated or people who are working, do not run their kitchen the way their mothers used to do, so buying these packaged products becomes the only viable option. This trend has been picking up very quickly but still there is a large section of the Indian society, where people will take a very long time to make a shift to readymade, packaged and value-added products. However, the ones who have already made the shift might be a small percentage, but they add up to very large numbers. Even if only 5% people of the 1.35 billion population of milk consumers decide to shift to packaged product it is equal to 67.65 million people which is a very profitable number for dairy companies.
These days, consumers are getting busier, which is why they look for convenience. But Indian consumers still latch onto authenticity. Authenticity and traditions are qualities that will always connect the people of India to conventional methods, in this case, of processing milk and its products. Even though there are certain sectors where people are converting, India’s dairy industry has a long way to go. Meeta Punjabi in her report “India: Increasing demand challenges the dairy sector” notes, “In light of the increasing demand-driven population, higher incomes and more health consciousness, the slowdown in the dairy industry growth is severely worrisome. Based on estimates by the National Dairy Development Board (NDDB), the demand for milk is likely to reach 180 million tons by 2022. To supply the market, an average incremental increase of 5 million tons per annum over the next couple of years is required. In the absence of sufficient increased production, India will need to rely on the world market for imports.”
Due to the requirement of this huge volume, global milk prices will be drastically affected. The dairy farmers should be made aware of the various subsidies that the government sanctions. Focusing on areas for local dairy development has thus become important.
Picture Courtesy- The Quint