Dairy industry in India is not for the milksops. It is a tough market that has baffled even biggies like France’s Danone, which shut shop after seven years, and New Zealand’s Fonterra, which exited a JV after a similar period. The biggest challenge has been the highly fragmented supply of milk; on an average, a dairy farmer here owns maybe two cows or buffaloes (a fraction of what a US farmer owns at 200-plus). Imagine a stickler for processes, like an MNC, organising this crowd (like a maitre d’hotel trying to manage a rowdy pub). It’s not pleasant. Perhaps, young companies with a flexible approach and powered by technology can do better.
After all, the dairy market is growing at a healthy pace. According to a latest IMARC Group report, titled Dairy Industry in India 2020, it is predicted to grow at 16% CAGR between 2020 and 2025, from Rs. 10.527 trillion to Rs.25.491 trillion.
Enter milktech start-ups. First came those that manage supply chains and act as marketplaces, such as Daily Ninja and Supr Daily, but they struggled on their own and were finally acquired by BigBasket and Swiggy. Now there is the second wave of start-ups, ones that have a deeper engagement with the market. They are selling not others’ but their own milk brands in a farm-to-home model (sourcing from the farmer and delivering at the buyer’s doorstep). The three big ones — Akshayakalpa, Country Delight and NutriMoo — sell premium milk to discerning urban buyers.
By having a larger control over the product, such start-ups offer the buyer transparency, convenience and affordability, the three growth drivers to build consumption at scale, according to Harsha Razdan, partner and head - consumer markets and internet business, KPMG India. In fact, he believes that they have the advantage to deliver these three factors better than e-grocer platforms. “An optimised farm-to-home supply chain enabled by technology for apredicatable daily subscription business has a high probability of viable unit economics,” says Razdan.
Country Delight was started by engineers and IIM graduates Chakradhar Gade and Nitin Kaushal in 2015. But, the first steps towards the start-up were taken in 2011, when the duo wanted to start a milk delivery-based business model. For that, they opened a farm as a part-time venture to deliver good-quality milk to customers. Unfortunately, the venture didn’t work and Gade realised that the business model had to be reworked, and thus he began working on it full-time in 2013. The first two years went into establishing sourcing and production facilities for milk, after which Kaushal joined full-time in 2015.
They noticed that there has been no innovation in the liquid dairy industry for long. One example they cite, to illustrate this stagnation, is the testing done by tasting the milk at the village level. “Imagine - the milk delivered to your doorstep is checked on the judgement of someone who has tasted it,” says Kaushal. In contrast, the start-up runs the milk through 70 tests for impurities and toxins and even submits a regular report on the quality of milk to buyers.
This level of quality checking is made possible by their sourcing strategy, of turning hyperlocal. Their mission also attracted interest from investors, with the start-up raising $15 million from Orios Venture Partners and Matrix Partners India. “Country Delight has understood the Indian middle class and has gone to great lengths to build their supply chain,” says Rehan Yar Khan, managing partner at Orios.
Unlike how the bigger brands source from many, scattered farms up to a thousand kilometres away, Country Delight delivers within 100 miles (161 km) radius of farms. To trade in better quality, they pay the farmer 20% more than big brands do and charge 5-10% more. The start-up claims to fulfil 3.3 million deliveries a month. “We were completely bootstrapped till 2017 and the company has grown over 3x YoY since,” says Gade. As a result, Country Delight clocked Rs. 650 million in FY18, Rs. 1.85 billion in FY 19 and are expecting to make Rs.3.50 billion in FY20.
Like Country Delight, sourcing is also crucial to NutriMoo. Born out of friendship of 40 years, NutriMoo was founded by Amit Sharma and Ajay Kumar Yadav in 2016. The idea for entering the milk space came from Yadav, whose extended family has deep ties in milk trading in western Uttar Pradesh, to the tune of few hundred thousand litres. This gave them a head start in the business.
Operated by the duo’s company Credence Whole Foods, NutriMoo assures its clients fresh, hormone and preservative-free dairy and whole-food products procured from handpicked farms. Over the past three years, the start-up has seen its revenue grow 10x, from Rs.44 million in FY18 to Rs.147.7 million in FY19 and Rs.420 million in FY20. It has got its supply-side right by establishing several village-level collection (VLC) centres in western Uttar Pradesh, where their partner farmers deposit milk daily. From there, the milk goes to the chilling centres, from where it is taken to their dairy unit in Baghpat, UP, which has a processing capacity of 50,000 litres per day.
It is this stress on quality that led Akshayakalpa to freeze on dairy farms that have 25 cows and not more. Founded in 2010 by Shashi Kumar along with Dr GNS Reddy, who was the vice-president of Bharatiya Agro Industries Federation, the milktech company began by training farmers to produce high-quality milk. They researched on the optimal number of cows a dairy farm should have and realised that any less than 25 meant the farmer can’t make a good profit, and any more than that, would affect the quality of produce because care given to each animal would suffer. “Only once that backend process was complete, we came to the market,” says Kumar. They created an online platform through which people could subscribe and pay upfront. It worked. They charge 100% more than the regular milk brands, and sell around 41,000 litres of milk to close to 45,000 to 50,000 households every day. For the past two years, Akshayakalpa has been profitable. They clocked around Rs.650 million in FY20 and their FY19 revenue stood at Rs.290.5 million.
“We don’t collect milk. We produce milk. We work with and invest in a farmer for two years. We don’t expect anything from them in that period,” says Kumar. Today a farmer who works with them delivers 200 litres of milk a day. The start-up had begun as a charitable venture of rural entrepreneurship programme, where young urbanites help those in villages make a living out of agriculture, and soon morphed into a for-profit business. Kumar had been working in the telecommunications industry for 17 years then, 13 of that in Wipro Technologies, before he volunteered for this programme.
High-quality milk is not everyone’s cup of tea, so these start-ups have smartly stuck to dense, urban centres to look for their clients. Country Delight operates primarily in the Delhi-NCR, Pune, Mumbai and Bengaluru, Akshayakalpa sells only in Bengaluru and Chennai, and NutriMoo’s primary market is Delhi-NCR. A lot of people in urban centres still take the milk from their local doodhwalas, and these start-ups are also organising and training these small farmers. “We are focusing on these cities because high density areas are an important component of our economics… The opportunity to grow in these cities is endless. We are hardly at 1% share in Delhi right now,” says Country Delight’s Gade.
Hemendra Mathur, co-founder of ThinkAg and venture partner at Bharat Innovation Fund, says that these models can be successful only if they stick to high-density areas. This is because, with their hyperlocal operations, the cost of delivery could be high. He estimates it could even go up to Rs 10-20 per delivery. Going closer to their target audience “optimises the delivery costs across multiple customers,” he says.
This geographical tether limits their market share, and so does their premium pricing. Satish Meena, senior forecast analyst at Forrester, says that their pricing won’t get them very far in the rural markets. “There are only seven Tier-I cities, and given their pricing, the start-ups have to nail their operations near big cities only which limits operations geographically,” he says. Basically, the pricing doesn’t allow an Akshayakalpa to directly compete with Nandini or a Country Delight against the likes of Amul and Mother Dairy.
“Since these won’t make prices affordable because of their high margins, they will have to diversify their operations and expand to other bigger cities,” explains Meena. But, Mathur does not think that all start-ups have it in them to grow root in multiple cities. “Very few of them have successfully expanded in other cities,” he says. “For this, they have to find a way to replicate their supply chains across cities, and I haven’t seen much action on the portability of this model.”
The way then may be to sell more, differentiated products to the same household, since it is established that they have the purchasing power. As a result, apart from milk, the companies have also ventured into other dairy and non-dairy products. Currently, Country Delight services 13 SKUs, across milk, eggs, bread and dairy products. “We want to become a whole foods brand,” says Gade. They are considering non-dairy items such as eggs and bread, and are working on getting fresh fruits and vegetables, all under the same brand. Akshayakalpa boasts of 39 SKUs in organic foods, such as milk, curd, paneer, ghee and butter. Like Country Delight, they too are going for fresh fruits and vegetables next. In Delhi, Country Delight does 70% of their business from milk and 30% from non-milk products. They are yet to launch the non-milk products in other cities.
NutriMoo, which aims to be an FMCG brand, found a market opportunity in honey. They have a fully automated 70MT per day processing capacity plant in Sonipat, Haryana from where they produce four different flavours of honey. In April and October last year, the company received funding from Times Group’s Brand Capital and Indocan Honey of Rs.65 million and Rs.47.5 million respectively. “The partnership with Indocan Honey was strategic as well, and it included access to bee farms which they own,” says Sharma. The start-up also sells curd and ghee, and plans to venture into cheese, cereals and butter next year.
Mathur says that building supply chains for other products is a “hellish task”. Though he says that building scale is an outcome of multi-city, multi-channel and multiple-product strategy, India already has a good retail infrastructure in most cities. Except for the cities and suburbs that have come up in the last 8-10 years, everything is available within 500 metres, he says. How can start-ups outdo that? Razdan believes cross-selling can help brands grow with healthy net margins, but his concern is that it will take a while for these farm-to-home companies to win the loyalty of potential customers. “This is mainly due to the inherent mistrust consumers have on traceability and authenticity of the produce along with value-for-money considerations,” he says.
Mathur says, “To be honest, I am not sure it’s a very investible model. For VCs, it is important to demonstrate scale. Presence in one city does not cut it.”
Country Delight says that it is happy to grow slowly. “We run our unit economics based on what we need to survive for business, without any external capital,” says Gade. The other two have more definite goals. NutriMoo is eyeing Rs.1 billion in revenue by FY21, while Akshayakalpa has newer geographies in sight — of southern and western metros of Pune and Hyderabad. “We want to set up small farming clusters in and around cities, and only then move into these markets,” he says.
With such small steps, they have managed to thrive in an industry that has cowed down MNCs. You have to admit, it’s pretty ‘dairy’-ing of them.