Dean Best

BRICs and beyond: Lactalis enters India's promising - but challenging - dairy sector

By Dean Best | 27 January 2014

Demand for dairy in India is booming - but supply can be constrained by under-developed distribution

Demand for dairy in India is booming - but supply can be constrained by under-developed distribution

India has, particularly when compared to its neighbouring emerging market rival China, been the subject of much less attention from multinationals in the dairy sector.

China's dairy industry has seen a wave of investment, with international players continuing to invest. In the last six months, just-food's dairy pages have reported on moves from WhiteWave Foods, the US group, Japan's Meiji Holdings and Dutch dairy giant FrieslandCampina to name a just a few. And that is over and above the ongoing focus the likes of Nestle and Arla Foods place on China.

Put next to China, there has been far less investment in India's dairy sector, which is not as developed as in its BRIC counterpart. Nestle's first milk processing plant opened in India in 1959. US group Schreiber Foods is another international investor in India's dairy industry and its B2B business in the market is seen as a success. Beyond that, there has, according to industry watchers, been little action.

However, earlier this month, Lactalis, the French dairy group and the third-largest processor worldwide, confirmed after months of speculation it would enter India with the acquisition of local group Tirumala Milk Products.

The deal, struck for an undisclosed sum, had been rumoured since the summer. In November, Tirumala confirmed Danone had made a bid for the business but it was Lactalis that won out.

Why could Lactalis have decided to enter India? The company did not return a request for comment but industry watchers argued that, for all the challenges in India with sourcing and distribution, the country's dairy sector does have potential.

"The Indian dairy market is expected to register at CAGR of 10-12% over the next three to five years. The overall size and growth potential in the market makes it highly attractive," Pinankiranjan Mishra, consumer products leader at Ernst & Young's Indian arm, tells just-food.

"Moreover the current productivity of the sector and consumption of processed dairy products is also low. There is an opportunity to create value in the market through improvements in these areas."

Other analysts agree. Euromonitor senior food analyst Ildiko Szalai forecasts slower growth than Ernst & Young but believes India does offer promise for international dairy companies.

"India is a very dynamically growing dairy market, forecast to expand by 5% CAGR over 2013-2018 according to Euromonitor, and much less competitive by local players than for example China," she says.

Liquid milk accounts for the majority of India's dairy market. Sales of products like cheese, yoghurt and ice cream remain low but are gaining in popularity as incomes in India rise. The development of India's organised retail sector, as well as the foodservice industry, is also fuelling growth of these kind of products.

India's farming sector is far less developed than in the West and even compared to fellow emerging markets like Russia and China. However, there have been moves to by local co-operatives or privately-owned processors to build more formal sourcing and distribution networks, which helps build a more formal supply chain in the country.

"India is emerging as a good story right now for global players," Shiva Mudgil, assistant vice president for Rabobank in India, tells just-food. "Of course China is the front-runner but you can say India is also emerging as a growth story." 

Mudgil declines to comment directly on Tirumala but says its base in the south of India would have attracted international suitors. The south of the country is, Mudgil explains, one of India's three key dairy regions, alongside the north and west. However, there are, he argues, more integrated players in southern India.

"South India has, compared to other regions, good players in terms of having their retail presence and in terms of linking to the farmers," Mudgil says. "They are more integrated players with better owned sourcing mechanisms to the farm level and also in terms of retailing their brands. That's one of the key points in favour of south Indian players."

The Rabobank analyst says the "key" challenge for a dairy processor - domestic or international - with ambitions to expand in India is sourcing and distribution. Demand, he argues, will take care of itself. Supply is the major concern, which makes India's existing more integrated processors attractive for those looking to tap into the country's growing appetite for dairy products.

"Sourcing from milk from small farmers is a very challenging task," Mudgil says. "There's no continuity of quality throughout the season. We have seasonality. Getting good quality of milk in the same quantity is a challenging task when you actually have to set up your own infrastructure. It's very capital intensive to set up your own infrastructure at the farm level. That's the major issue for all the major players in India. That's one of the key concerns whenever global players look at India; they want to be sure of how to get their supplies. Most of these players have the experience of getting milk from farmers with herds of 150, 200 cattle, which is the case in Europe and the USA. In India, small farmers will have two or three cattle. It's a very fragmented base and you need to set up that much infrastructure to cater to that requirement. It will take money and quite a lot of time setting up that infrastructure. Large-scale dairy farming is still a few years away from being successful in India."

Lactalis's new acquisition is seen as one of the leading players in the sector when it comes to distribution.

One dairy industry analyst in India tells just-food Tirumala has one of the better distribution networks in the sector - and has a solid retail presence. "Because of their existing capability to source milk direct from farmers and also to sell products in the retail side, they are well ahead of the curve comp to many other players," the analyst says. "There are similar kind of players - like Creamline in southern India and Parag in western India but [Tirumala] are still best of the lot in that way."

So, for Lactalis, which has through organic growth and acquisition attained interests in emerging markets from eastern Europe to South America and South Africa, its purchase of Tirumala does offer potential.
However, should Lactalis and Tirumala have national ambitions in India, more investment will have to be made. The country's cold chain - from farm to store - is, Mudgil says, still "in its infancy".
Moreover, sales of cheese, yoghurt and ice cream, seen as "value-added" products in India, remain small, even if growing. Liquid milk, which Mudgil says accounts for "60-70%" of "most" Indian dairy companies' sales, is a very competitive and price-sensitive market.

Nevertheless, Mudgil believes international players like Lactalis will look to take part in the consolidation of India's fragmented - but growing dairy market. 

"In the last couple of years, I have seen a bit of consolidation happening. This will bound to happen in the future. Regional players aspiring to become national will go on buying smaller companies in other locations within India. Third, because of all this, they are in need of capital, which is where private equity and a strategic investor like Lactalis comes in."

And, for all India's challenges, industry watchers suggest it has the experience to make a success of its investment in India.

"To Lactalis advantage, it has acquired and integrated a huge number of companies across very diverse markets," Euromonitor's Szalai says. "Although the company is privately held and does not share financial information, from the speed of acquisition/integration of new assets it can be assumed that these are profitable ventures. The company seems to have the financial and managerial experience to successfully integrate Tirumala into Lactalis."

Sectors: Dairy, Emerging markets, Mergers & acquisitions

Companies: Nestle, Danone, Lactalis, FrieslandCampina, Arla Foods, Meiji Holdings, Schreiber Foods, WhiteWave Foods, Tirumala Milk Products

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