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Dairy segment: High on opportunity - Views on News from Equitymaster
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  • Jul 6, 2002

    Dairy segment: High on opportunity

    The Economic Survey of 2001-02 reveals that India has nearly 57% of the world’s buffalo population and 16% of the cattle population. Not surprisingly, India has emerged as the world’s largest milk producer clocking 81 m tonnes in FY01. More statistics show that Indian livestock produced 32.4 bn eggs, 47.6 m kgs of wool and 4.7 m tonnes of meat during the year.

    Milk consumption in India has grown during the last decade at 4% CAGR per annum and the consumption of milk products (other than ice cream, butter and ghee) has grown at 5.1% CAGR. The production of milk variants such as infant milk food, malted food, condensed milk and cheese stood at around 325 THTPA in 2001. (Source: Ministry of Agriculture).

    India has taken enormous strides in dairy development. Unlike other businesses, the segment’s development was spearheaded by the unorganised sector (mainly co-operative societies like Gujarat Co-operative Milk Marketing Federation - GCMMF), largely because of government policies. It is one of the few cases where the government can take credit for the development in the sector. From milk production, the sector looked ahead to enhance value by processing the milk into other forms like ghee, yoghurt, butter, cheese, malted power and milk powders etc. Here too, the co-operatives or more accurately, Amul, has led the market growth. Despite the heavy success enjoyed by Amul, less than 15% of the milk produced in India is processed currently.

    The total consumption of milk and milk products at market prices stood at Rs 1,020 bn as per the Economic Survey 2001-02. Despite the immense potential, private investment took some time to really perk up this segment. The reason being, Indian households are closely knit and the percentage of nuclear families and working women is very low. Therefore, while the market itself is one of the largest in the world, the penetration of packaged and branded products is abysmally low. People prefer homemade or fresh products, which are cheaper than branded products.

    However, over the last couple of years, private players have started taking enormous interest in the sector, with many MNC’s already testing the waters. Their efforts have been aided by the fact that urban India is showing a marked shift towards ready to eat food. With urban incomes increasing, and urban consumers squeezed for time, they are slowly demanding more of the products they consume. Also, the hygiene factor is facilitating growth.

    Annual growth in these branded products range from 5-15%. The fastest growing products in this segment are butter & cheese (8-10%) and dairy whiteners (10-15%). All other products are growing at 5-7%. Overall, GCMMF is the market leader in this segment. Its brand Amul controls 75% of the branded butter and cheese market. Nestle is the market leader in infant foods (Cerelac), with a 78% market share.

    The segment that has seen the most action in recent months is the milk and curd segment. The milk segment itself is worth a measly Rs 1.5 bn currently. Local co-operatives call the shots in this segment. Seeing the vast potential, Nestle and Amul both have launched branded plain milk and yogurt. The yogurt market is at a nascent stage (1 m litres per day), dominated a by local vendors. Britannia too is one of the keen contestants in this segment, but somehow it has lost the initiative to the aforesaid two majors.

    It is estimated that the US$ 70 bn Indian food processing industry is set to double by 2005. Increased demand for packaged milk, and Indian dairy products, including paneer, khoa and curd (yoghurt), is expected to drive the growth of processed dairy products in India. The massive size of the industry and faster growth in the processed milk segment is generating interest in the segment from a large number of companies. Companies like HLL and Nestle have identified this sector as their growth drivers in the 21st century. Infact, Nestle’s milk products & nutrition division has recorded an 11% growth YoY in FY02, in contrast to the general downturn in the FMCG industry.

    Co-operative’s pricing advantage
    (Rs) Amul Nestle Britannia
    Butter (100 gm) 13 14 13
    Butter (500 gm) 63 65 65
    Cheese (400 gm) tin box 72 - 80
    Sliced cheese (200 gm) 43 - 48
    Condensed milk (400 gm) 36 43 -
    UHT milk (1 ltr) 22 24 -
    Milk powder (500 gm) 66 87 72
    Curd (200 gm) 8 10 -
    Curd (400 gm) 14 18 -
    (Prices as on July 6, 2002)

    But despite the opportunities, it should be kept in mind that the dairy business would remain an inherently low-margin business, due to the competition from co-operatives' like Amul (which operate with minimal profit motive). With the co-operatives' ability to undercut and still be able to deliver quality dairy products, big companies like Nestle, HLL and Britannia may struggle to find profitability in the initial years.



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