India's poor road network and lack of investment in cold chain infrastructure have long challenged the country’s dairy industry, highlighting the value for companies of undertaking the tough task of establish their own milk collection.

"Dependence on contractors for milk collection leads to a high level of compromise on the quality of milk," Kuldeep Sharma, founder of New Delhi-based dairy industry consultants Suruchi Consultants, says. He says with collection points thinly dispersed in rural areas and summer milk supplies often being scarce, hands-on control over milk collection makes sense.

Siva Nagarajan, managing director of Indian dairy company Mother Dairy Fruits & Vegetables, says these difficulties are compounded by hot ambient temperatures, which makes sourcing competency crucial to ensuring milk quality. "The question is how well you are able to assure milk availability," he tells just-food.

This is particularly challenging given what a study from the Associated Chambers of Commerce and Industry of India (ASSOCHAM) said is the country's "concentration" of milk production in pockets of the state. That is good news for companies based in areas with burgeoning dairy sectors, such as Andhra Pradesh, Rajasthan, Kerala, Karnataka and Gujarat. However, other states have much lower dairy production, for instance northern states such as Jammu & Kashmir, or Himachal Pradesh. This, together with the high cost of transportation in India's under-financed infrastructure has led to increasing disparities between states in terms of per-capita milk availability, according to the ASSOCHAM report.

What is needed is more investment, ASSOCHAM argues. "It is imperative for India's dairy industry to streamline its value chain processes and integrate the smallholder dairy producers…to improve the overall performance of the industry, more so as they possess inherent strengths like low production costs, lower liabilities and limited liquidity risk."

Industry experts have long criticised a lack of government aid in building cold chain infrastructure. However, Nagarajan says the dairy industry should be building the supply chain by itself. "We do not want the government to run the dairy business in any way," he says.

Nagarajan adds companies have not been attracted to the cold chain business because it has been unprofitable. However, improvements in technology and techniques could change that equation, he suggests. "Some cold chain companies have come up, like the [newly] listed company Snowman Logistics, that have the ability to stick together a system," he says.  

Meanwhile, new entrants in the dairy sector are enhancing milk processing capacities. Indian FMCG group ITC, which will begin operations at its first milk processing unit by the end of this year, has also decided to set up electronic-testing equipment at its milk collection centres. It has also set up partnerships with banks so that it can pay farmers electronically, a company spokesperson told just-food.

However, such modern technology solutions will have teething troubles. According to Sharma, who helps companies set up village-level collection centres and wider procurement centres, banks are not generally ready to work with farmers, and corruption rears its ugly head, even in the banking system. "In most parts of the country, farmers find it hard to get money out from the banks as some middleman charges money," he explains.            

Meanwhile, sales distribution also faces similar problems. "Because of the widespread small mom-pop shops," Nagarajan says, "companies need a two-, three- or four- tiered distribution system to reach out to each of the outlets."

Nagarajan says the small size of such shops meant dairy companies also need to be smart about pricing, taking account of problems faced by retailers due to the constant shortages of coins and small currency notes. Odd number values can make retailers give credit to their customers or keep money as an advance, creating bookkeeping complications.

As the use of credit cards is almost non-existent at typical Indian dairy product retailers, Mother Dairy launched in August a special smart card for cashless payments. Working with the State Bank of India, its cards will be used at 500 outlets selling its products by the end of this year. 

Mother Dairy's focus on small stores is partly a reflection of the slow growth of modern retail stores that could boost processed dairy products sales through wider display spaces. Organised retail expansion is not keeping pace with the growth in demand for dairy products, and eventually something will have to change, Nagarajan says. "The whole system will change over the next three to five years," he asserts. However, how the various components of this transformation - modern retailing, online retailing, and the cold chain – will play a role "is not very clear", he concedes.

So far, even exclusive ice cream chains have struggled in India. "The whole of the Indian ice cream market would not be more than US$500m,” Nagarajan notes. 

Rabobank, in a report published last September, called upon foreign dairy companies to start operations in India. However, at the same time, it also warned "the Indian dairy market is complex, particularly for foreign players and past failures indicate that getting the strategy and timing of entry right, is challenging".

Foreign companies have been targeting India. Among them is Fonterra, which opened an office in the market in New Delhi last year.

Hamish Gowans, general manager of Fonterra in India says that "although New Zealand only produces 2% of the world's milk and India is one of the largest producers and consumers of dairy in the world, there are some strong similarities between the two countries' dairy industries". These include the importance of the dairy industry to the national economy; the involvement of entire families in dairy farming; co-operative collection structures; and the huge potential of the industry.

Indian companies are also welcoming foreign capital in the local dairy industry, with some believing investment could help the sector's infrastructure. "Let them bring their money; technology; buy [milk] from Indian farmers; process it; market it in India or export it - we welcome it," Rupinder Singh Sodhi, managing director of Gujarat Cooperative Milk Marketing Federation, which owns the Amul brand, tells just-food.