The Indian Dairy Landscape
Dairy is one of the biggest agri- businesses in India and a significant contributor to Indian economy. It is the largest single agricultural commodity with ~4 per cent share in economy. India is the largest producer of milk globally with an ~188 million MT production in 2019-20. A key factor has been the proliferation of private dairy enterprises that now account for more than 60 per cent of dairy processing capacity in the country. Indian dairy industry has grown at ~12 per cent during last 5 years, with value-added products driving market growth. It is a significant contributor to farmers' income as approximately 70 million farmers are directly involved in dairying. Dairy is the only agri-product in which around ~70-80 per cent final market value is shared with farmers and it accounts for approximately one-third of rural household income in India. It serves wide range of consumer needs too – from protein supplements and health foods to indulgence foods such as yogurt and ice creams.
When it comes to agricultural value chains that can simultaneously deliver on multiple development goals, few agri-products can rival dairy, which improves farmer livelihoods, creates jobs, supports agricultural industrialization and commercialization, and enhances nutrition for the masses.
PRIVATE SECTOR IN DAIRY
The development of India’s dairy sector started through a program called “Operation Flood” launched on 13 January 1970, which was the world's largest dairy development program and a landmark project of India's National Dairy Development Board (NDDB). It spurred a phased, multipronged approach that included tax incentives, food quality standards, subsidies on inputs, infrastructure provisions such as cold chain and electrification. Against this backdrop of broad government support for farmers and allied intermediaries, dozens of private dairies have emerged.
Dairy sector in India is fairly organised to the tune of ~35 per cent compared to fruits and vegetables sector where we see processing levels to be around 3-5 per cent. This increased organised market drives multiple benefits for the sector. We find improved quality dairy products due to adherence to FSSAI guidelines. Good quality products ensure expanded market reach. India exported dairy products worth $ 187 Million in 2019-20.
In the organised sector, private dairy companies are investing in developing an efficient milk procurement network as well as marketing of liquid milk and valued added products. It is noteworthy that the percentage of milk being handled by the private sector has exceeded that of the cooperative sector. This ratio is expected to further increase in favour of the private sector in the coming years.
Some of the major organised private players include Amul, Britannia, Hatsun Agro, Parag Milk Foods, Schreiber Dynamix, Heritage Foods, Tirumala Milk Products, Sterling Agro, VRS Foods, Nestle India and Prabhat Dairy. We observe that means of production and consumption are modernizing as the market evolves toward industrial packaged products and product variety. The rapid growth of private sector shows that the sector is prospering in dairy sector with a focus on value added products.
Dairy may be a national industry, but it is also very much a regional one, with a highly fragmented supply - its industry environment is anything but basic. The fundamental challenge in dairy is maintaining quality and quantity within a diversified supply base. As a perishable, dairy requires more complex supply chain operations and logistics to ensure freshness and safety.
Indian markets with the greatest growth potential are also among the least developed in infrastructure and consumer awareness. Supply chain has become increasingly complex in cities with multiple retail outlets. In metro cities, new value-added segments and alternative products have taken off with surprising speed, intensifying competitive pressures and the need to innovate constantly.
For dairy processors, creating value comes with many challenges. Different product segments yield very different levels of margins. The key to success in dairy therefore lies in finding the sweet spot of growth and margins. It takes an understanding of the market’s unique characteristics and supply-and-demand dynamics to innovate constantly in Indian market. Investment and return potential vary significantly with choice of product-mix and type of processing segment focused on. We observe EBIT margins of ~3 per cent in commodity segments (Milk and SMP) while value added segments such as ice cream, yogurt, cheese and whey show EBIT margins of ~20 per cent.
CREATING OPPORTUNITIES IN DAIRY SECTOR
Dairy sector is dominated by fluid milk with emerging value-added products such as cheese, yogurt, flavoured UHT milk growing at a faster rate than other products. This sub sector of value-added product is completely catered by organised players. Increased consumption of such innovative products and higher organized market is the main reason for growth in this segment.
The main areas that will be the focus for investment in dairy sector are as follows:
1. Upstream supply management: Perhaps more than any other food product, dairy products’ quality depends on upstream factors, from the very first input (the feed given to dairy cows) to supply variability to cold-chain management to shelf life. Substandard quality impacts are severe and can hurt both consumers and the brand. Sound upstream supply management thus calls for securing a reliable, high-quality milk procurement (a special challenge for processors not part of a cooperative). Managing supply quality entails everything from procuring quality milk to instituting rigorous quality controls and training programs. We foresee investment opportunities of the scale of $ 2-3 Billion in this value chain segment.
2. Milk Processing opportunities: Considering that by 2025, Indian milk production will grow to 270 MMT, companies will need to invest in processing infrastructure. Milk can be processed into a range of high-value-added products. This creates huge investment opportunities in the sector to the tune of $ 10 Billion.
3. Downstream supply management: Indian markets pose additional challenges to dairy companies: underdeveloped retail channels and a hard-to-reach rural consumer base. This portrays a rapidly and widely diversifying retail landscape that creates additional challenges and opportunities for the go-to-market strategy for private companies. With the advent of modern trade, direct-store-delivery distribution has gained ground - it is useful for high-velocity products with a short shelf life, and it allows for more frequent deliveries and better control over retail sales. Many companies have found workarounds (Direct-to-Consumer) and other solutions (such as ambient formulations, which can be stored at room temperature), but the need for a secure supply and a reliable distribution infrastructure is still strong. Companies can invest in cold chain at the logistics level as well at the retail level. We foresee investment opportunities to the tune of $ 2-3 Billion in this segment.
Given the complex nature of the dairy value chain, vertically integrated companies can play a critical role in economic development by creating jobs and enhancing farmer livelihoods as well as by improving nutrition for a growing, increasingly urban population.
Government intervention is vital to creating the necessary conditions for private enterprises to thrive, and it can be highly effective when planned with a long-term, full-system approach and that’s why dairy is a priority sector of the government with multiple financial and non-financial support under dedicated fund. Through convergence of various schemes of the Department of Animal Husbandry & Dairying, Ministry of Food Processing Industries, Department of Agriculture, Cooperation & Farmers Welfare, Department of Rural Development and state governments, public investment to further incentivise private investments is being facilitated in the dairy sector.