India is the world’s largest raw milk producer and one of the biggest global markets for dairy products. While the participation of international dairies remains relatively low in the country, interest is increasing. Continued rapid demand growth presents a challenge and an opportunity for multinationals stepping up their operations in India – and the growing presence of foreign firms bodes well for the health of the sector itself. Katy Askew reports.
India is the world’s largest raw milk producer, accounting for around 17% of global milk production. The Indian dairy sector has emerged as a strong consumption story and the market is estimated to be worth around US$70bn in annual sales.
According to advisory firm IMARC Group, the market for milk products in India is likely to surpass $163bn by 2017. Forecasts from the Investor Relations Society put growth forecasts at a more conservative, but still substantial, $140m by 2020. Whichever projection you favour, it is clear the market still has a steep growth trajectory.
Given these strong prospects, it may come as a surprise that international dairy companies operating in India are few and far between. Unlike other emerging dairy markets in Asia and Latin America, multinational firms have been slow to make inroads in the country.
Figures provided by Euromonitor International demonstrate India’s largest dairy companies are home grown. The top three players are the Gujarat Cooperative Milk Marketing Federation, the government agency the National Dairy Development Board – which supports and finances milk distribution co-operatives – and Karnataka Cooperative Milk Producers Federation. They have market shares of 15%, 10.6% and 8.2% respectively.
Beyond that, in the top ten companies by market share, only the nutritional unit of pharma giant GlaxoSmithKline has overseas roots. There are foreign dairies operating in India – including Nestle, Danone which operates a joint venture with Japanese group Yakult, and US dairy processor Schreiber. But, taken as a whole, foreign firms have a relatively featherweight presence in the country.
One of the reasons why, perhaps, India has remained off the radar for international dairies is the significant operational challenges presented by the market.
Concerns over raw milk quality and collection alongside a highly-fragmented supply chain make production difficult.
The route to market is no easier. The Indian dairy sector is highly regionalised, marked by poor infrastructure links that make the transportation of dairy products and the development of national cold chain capabilities challenging.
Demand for value-added products also sits at a comparatively small base – making it hard for international players to expand in the higher-margin categories which they favour due to an improved return profile.
Historically, governmental policy on foreign investment and an ever-shifting regulatory framework have served to compound these issues. Milk price regulation and import restrictions have been commonplace.
In short, India is not an easy place in which to operate. It is perhaps even more challenging to secure the near-term return on investment level that multinational companies – and their shareholders – have come to expect.
However, Rabobank analyst Shiva Mudgil tells just-food a number of factors are increasing investor interest in the Indian dairy space.
“Strong demand prospects with formalisation in product categories such as packed milk, curd and high growth of value-added dairy products is triggering the interest of global dairy players. More so when the demand in their existing markets is either slow or stagnant,” Mudgil says.
For this reason, international dairies are becoming more active. Earlier this year, Lactalis won out over rival bidder Danone to secure ownership of local player Tirumala Milk Products for an undisclosed sum.
“Lactalis has entered into India early this year with 100% acquisition of a leading South India dairy player. This has forced other global players to revisit their India entry strategy. Private-equity players have become very active in last five years,” Mudgil continues.
In the field of private equity, IDFC recently invested $29m in Parag Milk Foods, while Cargill Ventures, part of Black River Asset Management, invested $20m in Dodla Dairy.
An influx of international and institutional capital could potentially have a profound impact on the Indian dairy sector.
While India is the world’s largest producer of raw milk, milk production per head is well below international norms. According to data from the UN Food and Agriculture Organization, India’s productivity per animal stands at 987kg per lactation, compared with the global average of 2,038kg per head.
Low productivity can in part be attributed to the widespread use of small-scale farming techniques. FAO reveals “small and marginal farmers” own 33% of the land used in dairy production and 60% of the nation’s herd of female cattle and buffalo. Ineffective breeding programmes, traditional feeding practices and a high cost of fodder all exasperate the problem.
“Low productivity per animal hinders the development of the dairy sector,” the organisation observes.
And of the milk produced, only around 20% makes its way into formal channels. The vast majority is processed at the farmgate.
International investors would bring with them the cash and expertise to address these issues and help improve on-farm performance, boosting productivity and developing a quality milk procurement infrastructure.
The quality aspect is crucial, Preben Mikkelsen of consultancy PM Food & Dairy Consulting tells just-food. The raw milk must be of a high enough quality to be further processed into value-added dairy products that are safe and consistent.
While India is not marked by the type of safety scares seen in markets such as China, Mikkelsen says this could well become an issue for the sector as growing demand results in a proliferation of less reputable companies. “These will be some of the problems they have to face in the future,” he predicts.
Global dairy players are likely to focus on moving consumption up the value chain to higher margin value-added products. Product safety will be an important component of that. As will the product development experience, branding and marketing clout that international players boast.
In order to get these products to Indian consumers, routes to market and cold chain capabilities must also be improved.
Mikkelsen expects international players to have an important role here too. “You will see co-operation between retail chains and some major dairy companies in urban areas where you can supply the demand growth for high-value products from emerging middle class consumers,” he says.
These actions in combination could significantly open up the Indian dairy sector for international companies. The scale of the opportunity on offer, combined with the slow-to-no growth environments that global players face at home, will likely mean there is further interest in the market from multinationals in the next decade.
However, expanding in the country remains costly and time-consuming. There is no quick win to be had in the Indian market for dairy products.