• APRIL 14, 2011

Dairy products: Entry of new competition

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.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407