The Diary Industry in India has evolved from net importer of milk post-independence till 1970’s to self-sufficient in milk production due to white revolution or operation flood. It transformed India from milk deficient nation to largest producer of milk surpassing USA by 1998-99. By 2014 India’s milk production constituted 17% of the total global production.

Dairy industry in India majorly constituted retail products like milk (powdered and concentrated milk), cheese, and milk based ice-creams, yogurt and creams. Of all the products ice-creams share a distinct market segment consisting of milk and non-milk ice-creams.

Of the total milk produced 46% is consumed as fluid milk followed by ghee (26.7%), butter (6.7%), and curd (7%). Yogurt, ice-cream, cheese constitute miniscule proportion of total consumption in India as opposed to global market where consumption of cheese is 27% of the total production followed by yogurt (15.4%) and spreadable fats (11%). This difference highlights the difference in consumption patterns of milk products in India from world.

Total revenue generated by diary Industry has been growing at the rate of 8.8% per annum as supposed to milk production rate of 4.2% which emphasize on the steep increase in prices YOY. The rate of increase in demand is 8% which is twice the rate of production creating gap between demand and supply which might be another reason for steep growth in price realization from diary industry.

Out of the total production of milk only 20% was handled by organized sector. In the organized dairy industry the co-operatives handle 60% volume share and the remaining by private players. Unorganized sector mostly consists of small farmers distributing milk to villages and urban households. Buffalo milk constitutes 56% of the total milk production and is preferred by Indian customers for daily consumption due to high fat content. Unlike India world milk production is primarily cow milk.

Organized players derive 80% of their revenue from pasteurized milk and 20% from value added products. AMUL GCMMF is the largest player in organized sector commanding 35.8% market share. Other competitors include global giants like Danone, Nestle, Mondelez and Indian players Parag, Britannia etc. All these players are confined to processed milk products segment which is expected to grow to 30% of the total value of organized sector by 2020.

Inspite being the largest milk producer in the world Indian diary exports are 5% of the total production as of 2015. Skim milk products, Ghee and butter are the major Dairy exports from India to destinations like UAE, Bangladesh, US and Philippines. Majority of the demand of butter and ghee comes from NRI’s living abroad.

The strengths and weaknesses of dairy industry highlight the internal aspects and threats and opportunities expose the externalities and suture prospects.

Strengths: India being the leading producer of milk is self-sufficient in milk production. Per-capita availability of milk is 302 gr as in 2013. India being fast growing economy the annual expenditure on food is rising and a fair share of that is accounted for dairy products.

Stringent food safety laws and monitoring institutes like FSSAI has decreased the incidences of adulteration. This has also increased the demand for quality and packaged milk increasing the opportunity for organized sector in India.

Strong successful co-operative movement in dairy industry is the pillar to its success. It has created the opportunity for economies of scale in milk procurement and distribution helping the producers to get more realization for their produce and consumers get the advantage of quality, availability and low price.

Strong support from government institutions in setting up co-operatives in the Anand model across all states. Supporting rural households by providing cows and buffaloes and supporting them with veterinary care by setting up 50 dedicated veterinary training and education colleges. These are supported by more than 25 institutes dedicated in training human resource about dairy technology. The government support was quintessentially important in increasing the productivity of dairy industry in India.

Weakness: The productivity of cattle in India is 8-9 times lower than other dairy developed nations. This is mainly because of reliance on local breeds and mainly buffaloes for milk production. This also increased the production cost of milk production giving advantage to global players. Milk production is subsidiary activity of more than 75 million Indian farmers with average holding of 1-3 animals each. They practice traditional farming and do not have enough training in modern dairy techniques aggravating the problem of productivity

As 80% of the production is handled by unorganized sector where milk collected is directly sourced to the consumer. Lack of efficient cold chain, storage facilities has reduced the lifetime of milk and increased the incidence of perishability thereby increasing supply chain losses

Lack of proper planning by government in recording, feed demand, animal health, milk production and productivity related data has affected the policies in India.

Access to quality milk across India is still a problem as 80% of the retail channel is still under unorganized sector.

All the milk co-operatives registered are not able to sustain themselves due to insufficient infrastructure, low participation from local farmers and indulgence of political parties and bureaucracy.

Opportunities: Indian diary market is poised to increase at the rate of 8% YOY in revenue. The demand for milk is also increasing rapidly at 8% creating more opportunity for milk production. The budget expenditure on dairy products has increased between 12% to 42% across middle income and low income people which is a positive sign for the industry. Also for predominant vegetarian population of India milk is the main source of protein supply. With increasing disposable income and raising awareness on health benefits of milk is presenting opportunity for phenomenal growth

There is a large scope for organized sector in milk processing as 80% of the sector is unorganized and the urban population is increasing rapidly creating more demand for quality and processed milk. Also India has the highest population overall and also in the working age bracket increasing the overall adult consumers.

The opportunity for value added products is only 20% of the organized sector. This is poised to increase due to untapped potential of indigenous milk products like chaach, lassi and dahi. There is enormous scope of innovation and technology development to tap into this market.

Threats: Indian diary industry is not open to imports in certain types of milk products. Push for free trade under WTO norms would affect the restrictions and Indian market may see imports from countries who are efficient in production at cheaper prices than domestic produce reducing the attractiveness of industry as a whole.

Major milk producing states Rajasthan, Gujrat, Andhra Pradesh see a lot of fluctuation in rainfall which is necessary to produce fodder for the cattle. This adversely affects milk production for longer periods

Understanding drivers of dairy industry from present and future will help us identify the opportunities in technological development, investment opportunities, infrastructure development which lead to overall development of dairy industry

Drivers In the year 2020Sociological Food safety and hygiene

Changing consumption pattern (seeking more variety) Favorable demographic change Convenience and health consciousness Availability and exchange of information Consumer autonomy Consumer service & satisfaction

Technological Integrated cold chain solutions Mechanized large dairy farms High yielding breeds to increase productivity Fodder and feed technology Packaging technologies Probiotic dairy products / product innovations

Economical FDI/private investments in dairy sector Increase in export revenue Economies of scale due to large scale operations/ large farm size Low cost of skilled human resource Enhancement of retail channels Free trade agreement Competition among domestic and foreign players

Environmental Organic milk and milk products Reducing carbon footprint from diary Renewable energy from dairy wastes

Political Interference of cooperatives / political parties Prominence of diary in food security policies of government Efficiency of National Dairy Development Board

Porters 5 forces

Threat of new entrants

Co-operatives has economies of scale both from supplier’s side and buyer’s side. The core feature of working with co-operatives in embedded into the business model. The procurement of milk is consistent and the brand ‘AMUL’ has good reputation among buyers as their Indian brand increasing customer loyalty and commanding brand preference. Its technological innovations like milk powder from buffalo milk has made it competitive among world players. The barriers of entry are high as the procurement is hard due to high switching costs of working in co-operatives. The capital requirement to setup plant is also high and geographical spread of India takes long time to establish. The government policies also support co-operative milk unions restricting the entry of private players into the industry.

Power of suppliers

As the suppliers are owners of the co-operatives they command greater power on the procurement and distribution of milk across India. Also Government has regulations against exploitation of co-operatives increasing the power of suppliers from medium to high

Power of buyers

As milk has less differentiated product the switching cost of the buyer is low. There are large number of buyers spending considerable amount of budget on dairy products. The spread of buyers is also evenly distributed and have low bargaining power.

Threat of substitutes

46% of the value of organized Indian diary industry is fluid milk which is un-differentiated where there is no threat of substitutes in the mass market. Differentiation only exists in high end market with different composition of fat and protein.

The threat of substitutes is high in value added products. More due to changing preferences of customers towards ready to consume foods

Brand image of AMUL is high among the organized players downplaying the threat of substitutes to a large extent

Rivalry among existing competitors

Rivalry in the fresh milk segment is mainly between the state co-operatives of Gujrat, Karnataka, Tamilnadu, and Andhra Pradesh through their brands AMUL, NANDINI, VIJAYA.

GCMMF plays stiff competition from players like Britannia, Nestle, Danone, Kwality, and Parag in product categories of milk shakes, butter, cheese, Yogurt, milk creams and ice-cream segments.

Exit barriers in the industry is high as there is large fixed costs investment in procurement, processing and supply chain establishment for dairy industry

As the differentiation is low. There is fierce competition in establishing brand image to create differentiation in image in terms of quality and variety.

Recommendations

Expansion through retail chains or partner with retail/ foreign players

Amul should expand through franchised exclusive retail channels across India along with expansion in conventional channels of organized and unorganized retail.

By setting up exclusive stores we can push the sales of umbrella brands like milk shakes, sweets, bakery items thereby selling more products of high contributing margin.

This will also help create awareness among the consumers about the products available under AMUL brand which will help us move high value items.

The mix and availability of products can be exclusively maintained as per local preferences and differentiation in products can be achieved at the same time

This will help capture the 80% unorganized market easily by providing exclusive products at easy dispense of customers. Also, this would increase entry barriers for new entrants in the market by creating network of supply chain which is hard to replicate in the market which is highly undifferentiated in terms of product variety and availability through private retail channels

By this way bargaining power of B2B buyers reduces and hence we can pass on the benefits to the co-operatives and increase the profitability of the company

This will help us reach wider geographies with limited presence in milk availability due to deficiencies in supply chain

Expansion in non-co-operative way

Co-operatives are only successful in Gujrat in milk due to caste composition, Economic situation and political structure which cannot be replicated across other states. This is evident from the failed intervention of National Dairy board in setting up ANAND like co-operative models across all states in India.

As milk production and co-operatives is state subject following the same structure in every state may not work in long term due to different agrarian structure, infrastructure difficulties in procurement of milk, educating farmers about best practices, creating support services of veterinary care, feed availability to farmers is associated with high fixed costs in setting up co-operative and maintain it

Procurement of milk as private entity from other state co-operatives will make AMUL independent of the state co-operatives law. Switching costs of farmers can be increased by paying high price for quality produce. This is possible for GCMMF being a non-profit entity. Also extension of support services in state of Gujrat will increase the loyalty of suppliers thereby ensure consistent supply of milk

Also being a part of co-operative across state will make it imperative to procure all milk which needs high investments in terms of increasing processing capacity, infrastructure development and human resource training. This can be avoided by procuring milk directly from co-operatives