Dairy sector : Show me the money

It is an interesting time for the dairy industry globally. India is the world’s largest producer of milk in the world. Milk acts as an insurance policy for the farmer’s cash flow in India . It not only contributes almost one third of total value added by agriculture but 5% to Indian GDP also. It provides both financial and nutritional security to almost 80 Million rural households.As per one of the studies published a few years back, one rural household sells milk to three other homes in rural India. In simple words it is a model inclusive activity which empowers women at farms and nurtures cooperative movement.

In a recent presentation on the last 9 years progress in the dairy sector by DAHD, I found the following infrastructure development under three schemes . These three schemes are NPDD, AHIDF and DIDF. Most of the implementation has happened in the last 4-5 years. There has been an addition of 15 mill LPD of total milk processing capacity. The milk chilling capacity in BMC has been increased by around 7 mill LPD. India has got additional milk drying capacity of 265 Metric ton per day along with 1 mill LPD of other VADP . Isn’t it remarkable? My compliments to the government and policy makers.

Inflation is not letting the climate to change for dairying

Dairy industry is living under inflationary pressure now. There are many kinds of inflation which are in action.I am not talking about the one which we learnt in our Economics classes.

Shrinkflation :Shrinkflation is the practice of reducing the size of a product while maintaining its sticker price.

Greedflation : Greedflation refers to the situation where corporate greed drives inflation

Heatflation: How global warming contributes to a rise in prices

The industry is using different kinds of iterations to support these three kinds of novel inflation. Firstly it is moderation of size of packaging which has already led to sell milk upto 125 ml , buttermilk upto 250 ml and flavoured milk upto 85 ml per pouch at Rs 10 price point. This is shrinkflation.

Adulteration is the second strategy to nurture Greedflation. One just needs to add vegetable oil and vegetable proteins in Paneer, ,cream, cheese, butter, ghee , Khoa, etc. Two thirds of our dairy market is still unorganised so it keeps inflation under control. The beneficiary is able to compete with pure dairy product manufacturers and offers the same products at cheaper rates. Its a win-win situation.

Heatflation is managed normally through deliberations made by the stakeholders from plant based segments. They have enough funds to talk bad about dairy because of high margins. Our dairy sector doesn’t even have funds to talk good about milk. These plant based activists keep the temperature high , and sentiments negative about milk and milk products at all global forums.

There is something wrong somewhere

This situation forced me to think that there is something wrong , somewhere. Current scenario will force the sector to wither over a period of time. The biggest question was to find out the profitability of the dairy sector. I picked up five of the largest listed dairy companies from India and put them against the global giants. We found a clear gap in the scale in which the dairy corporates of the world are performing vis a vis our star companies.

One thing became visible that our scale is too small against these global giants. We have large players in dairy cooperatives like Amul, Nandini, Milma, etc but those cooperatives are well acknowledged and supported by the government. Amul is an anomaly and now doing very well on its own but still cooperatives have a different way of looking at the bottom line. They are farmer centric on one hand and consumer centric on the other hand and thus their objectives are more social than commercial. A corporation has to perform against all odds and meet the expectations of the shareholders too.

Interestingly , Hatsun Agro has outperformed almost all the large listed FMCG operating in dairy in the last 3-4 years in stock markets. Then I thought of looking at the operating profits of these companies. I was thinking that the global companies might be having huge operating profits as their return to farmers is not as high as 75-85% in the Indian scenario. I found that barring few companies most of the other global leaders were having somewhat similar returns.

We could clearly see that even with the similar EBIT, the global companies have more financial bandwidth in absolute terms than their Indian counterparts. Second learning remains that the companies which have strong R&D like Nestle, Saputo, Danone are having a higher level of operating profits. Yili is another case which is one of the largest dairy in Asia and has recently won or remained finalists in 18 categories of the world dairy innovation awards. Their operating profits are also in double digit.

Show me the money

This analysis reminds me of a classic movie from 1996 “Jerry Maguire ” in which Tom Cruise is constantly faced with players asking “Show me the money”. The material costs of our companies is leaving us with less than 20% of the total revenue. We have to cover all manufacturing expenses, logistics , channel margins, returns, warehousing, promotion and market returns within that. I just forgot to mention company’s profitability also. The moment someone tries to enter into modern trade, E commerce or direct to home then beware that there is an additional demand of 10-30% of margins over and above the general trade margins. I am not sure how much the ONDC will be helpful for the current dairy players to earn through e channels.

We feel proud in saying that the dairy value chain pays back the most to the Indian farmers. I have three questions for all the stakeholders and policy makers.

1. The sector is paying 70-80% to the dairy farmers but is the farmer happy or making money ?
2. Is the processor happy in giving enough product quantities with integrity to his consumer at current levels of market prices ?
3. Is the profitability or value addition in our product mix sufficient for the processor to meet the ever increasing costs of doing business including cost of finance?

I feel we need to rethink the way dairy business is getting done in India as well as outside India. We may have to build margins to compete in the forthcoming channels of distribution as well as to beat the heat of global warming ( which is really high for the dairy sector currently). We are required to innovate and act fast to find that money. So start asking each one of your team members to ” Show the money ” .

Source : A Dairy blog by Kuldeep Sharma Chief editor dairynews7x7.com