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Dairy products: Entry of new competition

Apr 14, 2011

One of the fastest growing niches in the FMCG market is the milk and product segment. This space is dominated by Amul, Nestle, Britannia, Mother Dairy and a host of other local players. While the competition is intense, the scope of growth in this market is drawing in more players. The latest to enter this market is Danone, the erstwhile promoter of Britannia.

The company
However, at this stage let us give you a bit on Danone's background. Founded in 1919, Groupe Danone or Danone is a French food products company. Its turnover in 2009 stood at EUR 14.9 bn. The company's products range includes fresh dairy products, bottled water, baby nutrition and medical nutrition. Danone is the number 1 in fresh dairy products and number 2 in water and baby nutrition products in the world in volume terms.

Danone marked its independent entry in India in late 2009. The company launched three products - chocolate smoothies (Choco Plus) in Hyderabad, plain yogurts (Danone Dahi) and a range of flavoured yogurts (strawberry, mango and vanilla), in Pune and Maharashtra. The yogurt market is estimated at Rs 5 bn. Of this, only Rs 250 m constitutes the organized market while the remaining is unorganized. Moreover, the per-capita consumption in India for dahi and yogurt is at 0.5 kg while in European countries the average is around 30 kg. This means there is ample scope for growth. Furthermore, with the rising price of milk, (55% point to point increase since Jan 2007) it makes sense for the company to launch curd and yogurt as opposed to plain milk as these are value added products. This strategy seems to be working as the company has grown by 50% YoY and claims to have a 19-20% market share in modern trade in Mumbai and Pune. This is just after a year and a half of operations. Currently, the company is concentrating on increasing its presence in the modern trade and is present at around 230 retail chains.

Future plans
Going forward, the company wants to go pan India. However, it is restricted by not having a supply chain in place. Danone has several blockbuster products for which it sees potential in India. These include Activia, a fermented dairy product, Actimel, a probiotic dairy product, Danacol, which is a cholesterol-lowering dairy product and Evian, mineral water. While all these have potential for strong growth, the company has not indicated what it plans to launch. Danone also plans to target the base of the pyramid consumers. For this, it plans to launch a project in the second half of the year. This project would look at affordable products from factories at various points. To further root itself in the Indian markets, Danone plans to invest about Rs 3.3 bn over the next few years. Danone is also considering acquisitions to grow its business in India. While the company has the products and the technology, the company is lacking in a distribution channel. Hence, the company may look at potential joint venture or buyout which would help it build up a distribution capability.

What we expect?
The entry of Danone in India spells bad news for companies like Britannia and Nestle. Britannia has been looking to expand its product offering. For this it entered into the dairy business. The company already has a curd and flavoured milk offering. Nestle's milk portfolio contributed about 44% of the company's CY10 sales. The milk portfolio includes (although a small percentage) yogurt and curd. As the market is growing, the sales of these companies would not be affected by the entry of Danone. However, to capture market share, the profitability of Britannia and Nestle would be affected.

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