Network Past Issues

The Indian dairy industry: a perspective

Sumit N. Saha

Nestlé’s Asia Chief admitted recently that the company had made mistakes in the way it approached the Indian market by ignoring consumers in the country’s massive middle class over the last decade. Its strategy to target the mass market with entry-level products like cheap noodles has led to its playing catch-up with an emerging affluent segment. Having languished in the emerging middle class segment the company is now scurrying to plug the gap. This gap-plugging is not simply an emergent strategy; it’s an error in the assumption part of its B-plan, the most crucial element of a business plan.

 The rising economic power of India, also the world’s biggest dairy product consumer, is likely to spur a huge change in how and what people consume. Consumers, by droves, have been forecast for change to packaged white milk from loose milk in the decade of 2020. Last year, 51 percent milk consumed in developing countries was bought “loose” and 49 percent in packages. Sales have been forecast to reach a tipping point in 2014 with around 55 percent white milk sold in packages. An incline towards 70 percent is expected by 2020. Loose milk is typically sold in India, Pakistan, Sri Lanka, and Bangladesh. The sight of milkmen transporting unpasteurized milk in metal cans on their bicycles or mopeds is pretty common in these countries.

It is estimated that much of the white milk is already sold packaged in India’s largest cities- Bangalore, Mumbai, Delhi, Mumbai, Chennai, and Hyderabad. In the countryside, however, loose milk is still the norm. Yet that too is changing – fast – with the rural population flocking to cities in search of jobs, money, and opportunity. The conversion from loose milk to packaged milk is already underway and it’s going to accelerate in the times to come. People now have more money and less time at their disposal with most living closer to city grocery stores than dairy farms. This is not mere geographical transition of a consumer base but a transitional proposition for future consumer behaviour.Indian urbanization has a bias towards Americanization, the trend appearing in different time lags in different cities. With growing sophistication and higher disposable incomes, a sizeable consumer base is going to follow American food consumption patterns (with a minor tweaking of Indianization in flavour, for example).

Milk consumption patterns in the US reveal an interesting trend. While fluid milk consumption there shows a steady decline every year two growth segments are significantly visible in yoghurt and cheese yields. In 2012, milk production was up by 4.5 percent in the US with 80 percent of the milk headed out to cheese producers. High protein levels are required to prepare cheese. Of all the milk proteins casein, which makes up around 80 percent of cow milk, happens to be the most important. As per the original formulae developed by Dr. Van Slyke a minimal casein protein to fat ratio is at 0.7. Yoghurt, which is currently enjoying a growth spurt, also needs high protein yields for thickening purposes. Obviously, protein development is very important for the economic health of dairy producers.

The Indian market is about to follow the same trend as the US. First, it will evince a sequential acceleration in packaged fluid milk consumption. This progression is likely to continue till the government succumbs to the pressure of granting increased sociological premium in the context of migration rendering countryside agriculture and livestock management sustainable, liquid milk being a mass market product. After this point consumer market behaviour will follow the US trend patronized by a savvy middle class consumer base. This consumer base will demand more and more value added products including cheese and yoghurt. To serve this market, massive infrastructure investments are required. But the critical point is assuring a steady flow of milk with an adequate protein yield. Otherwise, the overall equipment effectiveness (OEE) of these investments will be too low to even serve the cost of capital. Some big Indian corporate houses sitting on big cash have been investing in relevant infrastructure without an assured base of milk flow just to give a “dash to their cash”. The assumption part of their B-plan could become a subject of empirical validation in future. The recent acquisition of Tirumala Milk Products of Andhra Pradesh by the world’s largest dairy product maker Le Groupe Lactalis of France showcases the upcoming strategies of global companies targeting the Indian market. Companies like Hutson Agro Ltd are vulnerable to this type of big-ticket acquisition.

These companies know that India’s emerging middle class is a fact, not a fallacy and it has been acquiring a stable milk flow. After sometime, they will fortify their backward integration on an assured market base. Given the present exchange rate of the Indian rupee they will find themselves in a huge comfort zone in the context of capital infusion in backward integration. Cattle management will occur via infrastructural development and by providing balanced cattle rations to ensure adequate protein in milk yields, which is most critical to the production of valueadded dairy products. This consumer shift may also effect a change in the pricing of milk components with an upward price bias for MSNF (Milk Solid Non- Fat). At present, the price of MSNF is two-thirds of milk fat. We may see the price weight shifting towards MSNF not just to serve an upcoming market but also to incentivize the proper nutrition management of cattle. The forward integration- infrastructureinvestment may turn out be “bad capital” if not supported by a parallel “good capital” investment to ensure protein content in milk in the area of backward integration.

Foreign companies’ ‘sudden grip of our domestic milk flow’ (as in the Tirumala case) and their subsequent strategies related to producing value added products by ensuring cattle nutrition is likely to help them optimize their “ not-so-big” infrastructure. This would result in lower net earnings for domestic private and cooperative players in the medium to long term for sub-optimal capacity utilization.

The two major points I want to make here are that one, organized dairy players in India must invest in animal nutrition to ensure adequate protein yields while optimizing the capacities of their invested infrastructure. Two, a customized approach to the emerging middle class consumer is a prerequisite for volume expansion of the dairy business. This consumer base demands goodness, pleasure, benefits, and cool mimicking the US consumer trend. This trend, currently emerging, may tweak the pricing of milk components for dairy farmers.

Investments are needed to serve these two areas of the industry. If not, India’s domestic dairy industry will soon resemble the global pharma industry that has been predominantly investing in chronic disease management ignoring investments in antibiotic discovery that could pose risks in future.

Email - snsaha@amuldairy.com