Lead Story

The milky way

How Danone is differentiating itself in the Indian dairy market

Devendra Shah was at his dairy plant in early 2007 when he was informed that an executive from Danone India wanted to speak with him. Intrigued at what a competitor could possibly want, Shah — chairman of the ₹880-crore Parag Milk Foods — answered the phone and was taken aback when asked whether senior officials from the world’s biggest yogurt maker could call on him. He said yes, and a couple of days later, two top Danone executives made the trip to Manchar, 60 km from Pune. They spent the better part of the day at the facility that houses India’s largest cow farm and Asia’s biggest cheese factory but their focus wasn’t on milk or cheese. “The conversation was about what Danone could do with the yogurt market in India,” recalls Shah. 

If he was surprised at being asked for advice from a rival, Shah saw that as no reason to hold back, especially since his brands (Go and Gowardhan) were yet to launch flavoured yogurt. “I told them it was important to sell yogurt the way they would sell ice cream — the consumer should have to use a spoon.” Unlike in Europe, where yogurt drinks are immensely popular, in India, points out Shah, “yogurt needs to be scooped with a spoon”. 

It’s not known whether the Danone executives took Shah’s word to heart but when the French company launched its yogurt in India, it was in a cup, to be eaten with a spoon. The other, drinkable yogurt-based products — lassi and smoothies — followed only later. 

In the three years since its launch, Danone India has expanded its portfolio pretty rapidly, in keeping with the way most multinationals in India do business. The company now has five products (with multiple flavours) in the milk and yogurt space, and operates in a ₹2,513.5-crore segment of the ₹33,200 crore organised dairy market (see: Crème de la crème). And even as growth in Danone’s home region of Europe is weakening, Euromonitor predicts that 95% of the global dairy market’s growth from 2011 to 2016 will come from emerging markets. So, India is clearly important to the €21-billion foods major — in fact, it has a presence in the country across all four of its business streams, from water and fresh dairy products, to baby nutrition and medical nutrition. 

But, at the same time, Danone is clearly a latecomer to the Indian dairy market. Amul, Mother Dairy, Nestlé and Britannia have had decades to establish themselves — they have formidable distribution muscle and their brands are deeply entrenched across the length and breadth of the country. New Zealand’s Fonterra has just made its solo entry in India after breaking off its joint venture with Danone’s erstwhile Indian partner, Britannia. Then, ITC is planning a foray into dairy, while Reliance Retail has Reliance Dairy Foods. There is also a multitude of regional brands that are equally strong in their home territories. What is Danone doing to stand out in this crowd?

A set market

Jochen Ebert first came to India from Saudi Arabia in 2006 and stayed on for three years. He returned in early 2012 as managing director of Danone India but in two stints here, hasn’t really picked up the local language. There’s one four-letter word in Hindi that he knows really well, though: dahi. Indians may distinguish between dahi and yogurt (the former being the plain variety we make at home, the latter bought from stores in small plastic tubs, in flavours such as banana, strawberry and vanilla), but for Ebert, the dahi universe includes all forms of fermented milk — curd, yogurt, lassi, chaas and smoothies. “We are a yogurt company and we want to increase the per capita consumption of dahi,” he declares. Right now, per capita consumption in India is a  meagre 2.3 kg per year, of which just 300 gm is of the packaged, store-purchased variety. Back in Danone’s home, the French spoon up 25 kg of yogurt every year. The numbers across the rest of Europe are equally high: 23 kg in Holland and 24 kg in Germany. “If per capita consumption increases to even 8 kg here, you are talking of a lot of business to a lot of people,” Ebert grins.

Certainly, as urban lifestyles change rapidly, there’s a growing acceptance of store-bought curd. Indeed, Danone estimates that although the average per capita of packaged yogurt is 300 gm, it is skewed heavily toward urban India, where the figure is likely to be closer to 1 kg (and near zero in rural India). The number of working women, singletons and students staying away from home is rising in big cities, most of whom, points out Ebert, have reasonably high disposable incomes and are short on time. For them, the convenience of prepared yogurt available on demand is an unbeatable proposition. “The 300 million urban population, which includes working women and university students is my market,” says Ebert. The biggest plus — consumption of dahi is a habit ingrained from childhood in most Indians, so it becomes a necessary part of the daily diet. 

According to market estimates, some 100 tonnes of packaged, branded curd is sold across India every day. Danone’s share of that is still minuscule — about 5% — although packaged curd is believed to account for 70% of the company’s ₹100-crore turnover. Established players such as Mother Dairy, Amul and Nestlé take away the lion’s share of the market (see: A small serving). These brands are also present across the spectrum of dairy products in India, which makes it even tougher for Danone to carve out a niche for itself. “I don’t really care much about competition,” says Ebert. “After all, we are a much smaller player than Amul or Nestlé.” He cites a recent instance when a colleague told him that Nestlé had dropped the price of its 400 gm dahi offering, from ₹45 to ₹40. “I heard him out and asked what the next topic of discussion was,” Ebert adds. “Honestly, we are here to launch better products and need to focus on that.” 

Right now, though, new products aren’t on the agenda — no butter, cheese or paneer, the staples of any dairy company in India (although the company does sell ultrahigh temperature, or UHT, milk in Tetrapak cartons). Ebert states quite firmly that Danone is a company that primarily makes fermented products. “In any case, we did not expect to be as quick in launching new products as we have since we entered the market in 2010,” he says. Danone is also being conservative in extending its presence across the country. So far, the company has established itself in only five big cities — Delhi, Mumbai, Bengaluru, Hyderabad and Pune — and doesn’t plan on adding a sixth in the near future. “This is a complex market,” defends Ebert.

Premium and proud of it

A fan of “indovation” — a portmanteau word for innovation for the Indian market — Danone has introduced products developed especially to cater to local tastes. These include lassi and chaas. “Dairy is an extremely local business. The problem of spoilage aside, tastes vary widely across countries and sometimes within countries, as well,” points out Pankaj Ghemawat, professor of global strategy at IESE Business School, Barcelona. He adds a caveat: “The challenge is coming up with smart combinations of global and local since, if Danone localises everything, it won’t have any advantage over competitors such as Amul.”

But even though it’s launched popular desi products just like its rivals, the company is clearly not even trying to take on the big players at their own game, which would involve a big basket of products and presence at nearly every kirana store. Instead, Danone is playing the premium card, differentiating itself on the quality platform. Its products are also priced higher than the rest of the market: Danone’s lassi, for instance, sells at ₹20 for 150 gm, where Ebert estimates local dairies would sell the same quantity at ₹15. “We are convinced quality products will find takers,” he says emphatically. That’s another reason the company is in no hurry to extend its presence nation-wide — in fact, even in the cities where it operates, it sticks mainly to modern retailers where more affluent, quality-seeking consumers are likely to shop.

Parag Milk Foods’ Shah says a pan-India presence isn’t necessary given Danone’s positioning. “The Kashmir to Kanyakumari footprint is important only if you have a mass product in the dairy segment,” he points out. At the same time, mass is certainly easier to handle than premium, as Shah knows first-hand. Two years ago, Parag launched a premium milk brand, Pride of Cows, priced at ₹75 a litre (regular milk sells for around ₹30 a litre, while UHT milk costs about ₹50 per 1 litre carton). Not only is the milk sourced from a different herd (3,500 Holstein Freisian cows), the brand is also not handled by the company’s regular distribution network — it moves directly from the farm to depots in Mumbai and Pune before being delivered to the consumer’s doorstep. “It is not an easy model to execute, though it is now obvious to us that the consumer is willing to pay a premium for quality. In fact, we think it is far tougher to satisfy the rich consumer in India today,” Shah adds. 

Raising the bar

For its part, Danone is going the extra mile to ensure it meets customers’ — and its own — quality standards. The company has created its own distributor model, which is quite different from the usual producer-distributor-retailer network that most dairy companies use. Here’s how it works. Most of Danone’s production is outsourced. Milk — all versions, including slim and UHT — and packaged curd are manufactured at the Schreiber Dynamix Dairy facility at Baramati, Maharashtra; fresh products such as lassi and flavoured yogurt are made at a company-owned factory at Rai, Haryana. 

The cold chain, though, is entirely owned and operated by the company. “Irrespective of where the products are made, we use our own cold chain and distribution,” points out Ebert. Danone’s fresh products leave the factory in trucks owned by the company to be stored at its own warehouses (one in each city where the company sells). “The trucks maintain temperature of 4-8 degrees Celsius to ensure quality. From the warehouse, our trucks move the products to retail outlets where we have our coolers,” he adds. The fleet of 70-100 trucks makes up to four trips a week to retailers in the five cities. “Our logistics costs must be twice as high as competition,”
Ebert guesses. 

Certainly, the costs seem prohibitive. Ebert declines to share numbers but market sources say each chiller costs Danone ₹10,000-12,000 — and the company is said to have distributed at least 3,500 across India. In addition, the company pays dealers up to ₹500 every month to house the refrigerator. Then, the running cost of each truck is a staggering ₹80,000 per month. 

That’s not how other companies operate. Their products are delivered in simple, distributors’ tempos. Amul uses only third-party distributors, says RS Sodhi, managing director of the Gujarat Cooperative Milk Marketing Federation (GCMMF), which owns the Amul brand. “We work on wafer-thin margins of 3-5% net in fresh products. If we had our own distribution network, costs will go out of control,” Sodhi points out. The second and more important reason is that an owned distribution will work if a product is available only in a few cities. “The moment you want to have a pan-India approach, you cannot control everything in all regions. In that context, it makes sense for us to outsource distribution.”

Parag’s Shah uses two distribution models: the conventional producer-wholesaler-distributor-retailer and producer-own distribution system (comprising trucks, tempos, vans and motorcycles)-end consumer. The latter is used for the premium Pride of Cows brand, where Shah says he cannot take the risk of the product getting spoiled or not reaching on time to the homes of his limited but important clients. “To have its own distribution network, a brand needs premium pricing as well as adequate volumes. We can’t do that for our mass brands because it is too expensive,” he says. “The USP of having your own distribution is clean and fresh products and consumers will willingly pay a premium for that.” 

Still, when consumers aren’t even aware of the extra effort and expenditure in ensuring freshness, does it translate into market share? Danone insists that the company’s promise is of quality and that’s what is providing. Retailers, meanwhile, say that the branded chillers do help sway consumers towards the brand since it makes the brand top of mind when they’re in the store — the jo dikhta hai, woh bikta hai principle of retail. It helps that Danone also offers higher margins than its rivals. According to a supermarket owner in a Mumbai suburb, the margins on Danone dahi are ₹9-10 on an MRP of ₹45. Nestlé offers ₹7-8 on a retail price of ₹40, while Amul provides just ₹2-3 margins on an MRP of ₹35. “Our move has paid off,” reiterates Ebert. “We are the largest sellers of dahi in Pune and the second or third-largest in Mumbai.” 

Interestingly, where Danone is spending hand over fist on its distribution network, it’s following a need-based approach to shelling out cash. Which means the company is perfectly happy to do away with some things other companies in the FMCG space may consider hygiene if it doesn’t see the need. Earlier this month, the company spent some serious money on advertising, signing on Karisma Kapoor as brand ambassador for a campaign with a new tagline, “Only Good Gets In”. But here’s the shocker — Danone didn’t hire an agency for the creatives — its in-house marketing team and a production house, Illuminations Productions, produced the film by themselves. “We knew what we wanted to show in the ad and just shot it,” says Ebert. 

Upbeat about value-adds

Will Danone’s premium-only strategy and focus on high-end products rather than just milk (which makes up 77% of the market) work? “Even today, 70% of milk is sold loose and we see a huge, untapped opportunity to convert loose milk into packaged milk,” says Kandarp Singh, managing director, South Asia, Tetra Pak. Still, dairy companies point out that it’s better to be an “anything except milk” rather than an “only milk” player, given the low net margins in the business. “At best, polypack milk will offer you 2-3% net margins and it will be difficult for any player to remain in only that segment,” says Sodhi. The other challenge in the business is ensuring a good backward integration model. “Issues such as milk procurement are tricky. It is easier for a cooperative like us since profit is not the objective unlike the case of the private players,” he points out.

If that’s not a worry for Danone, given that it outsources production, the company’s product portfolio too may be an inspired choice. Parag’s Shah concedes that being in the yogurt business (he has products like packaged curd and fruit yogurt) is a good idea. “Margins are a healthy 12% and it is certainly a lucrative market to be in,” he adds. 

Girish Nadkarni, partner, IDFC Private Equity, agrees that the big opportunity lies in the value-added segment, which includes cheese, flavoured yogurt, dairy-based drinks and so on. “A category like cheese has been growing by 14% and is driven by high demand from quick-service restaurants such as Pizza Hut,” he points out. IDFC Private Equity, in September last year, invested ₹155 crore in Parag Milk Foods for an estimated 20% stake. The real opportunity for the private sector, says Nadkarni, comes from the fact that the sector is mostly unorganised with Amul being the largest player. “There is not very much that the state cooperatives have managed to do in the value-added product segment and this is the big opportunity for new entrants,” he says. 

Large retailers, too, are upbeat about the market for value-added products in the dairy space, especially yogurt. “The fact is that this category did not exist five years ago simply because there were very few chillers available. Modern retail has allowed large players to successfully sell products such as flavoured yogurt and packaged curd,” says Future Group CEO, Kishore Biyani, who owns the Big Bazaar chain of supermarkets. Biyani is convinced that modern retail will continue to open up new opportunities for companies in the packaged foods space. “Companies that can sell hygienic products will thrive and consumers will be willing to pay for it,” he says. More importantly, Biyani sees the move to packaged foods as a game changer. “Once you [the customer] adopt this category, you will never go back to the traditional way of preparing the food. This is true whether you buy curd or garlic paste,” he declares. 

Set, not stirred

It is not as if Danone’s run in India has been a cakewalk. Far from it. And the troubles weren’t only about the company’s history of bad blood with the Wadias (see: Danone in India). For a company that’s just three years old, Danone India has already had its misses. The big one is related to its interest in the base of the pyramid. The experience in Bangladesh with Grameen Bank was a trigger to try something similar in India. There, the French major launched Grameen Danone, a community-based business model that would offer affordable nutrition to malnourished children. Incidentally, it was Ebert who oversaw the operations there, and that project was meant to be the foundation for what was planned in India.

In October 2011, Danone announced the creation of a separate business unit (Danone BoP India) that would create products aimed at that section and launched its first product, Fundooz, at the time. A food brand for school children, the product was priced at ₹5 for 70 gm. 

It was a Catch-22 situation. The challenge in executing a BoP model well, as Ebert points out, lies in bringing in volumes quickly. To do that, though, you need to advertise, which will lead to increased costs and, ultimately, higher prices. “We soon realised that the category was not well-established like confectionery, which is what children really like,” points out Ebert. The Tetrapak version of Fundooz, manufactured at the Rai plant and priced at ₹25, is still around, although the BoP version has been withdrawn. Ebert says he and Danone have learnt a valuable lesson from the experience: first establish the mother brand before launching subsidiary brands. “For now, the BoP plan in India is on the backburner. The focus is very much on dahi,” he says.

The other project that bombed was Creamix, a stirred yogurt positioned as a dessert snack. Launched in September 2011, it was priced at ₹20 for 100 gm. “We thought the Indian consumer would like it. Obviously, it was a mistake,” confesses Ebert. The potential in the stirred yogurt market came from the fact that at least half the market worldwide was not set dahi but stirred. “It was not a product the consumer was expecting and we were a little too early with it,” he says. Creamix has retreated from the field, perhaps to return to battle some other day.

For now Danone is focusing on the existing product portfolio, which Ebert considers a formidable arsenal. Indeed, even in its group companies in India, Danone doesn’t do too many new launches, preferring to sweat the ones already in the market. Yakult is perhaps an extreme example. Yakult Danone, a 50:50 JV between Danone and Yakult Honsha of Japan, has just one product — probiotic health drink Yakult, which was launched in India in 2007. But in a very niche market (Amul has the only other product in India), Yakult is the leader. Similarly, Nutricia Baby Nutrition will continue working with the existing brands in its portfolio — Farex and Protinex, among others — for the foreseeable future. “The phenomenon of fresh milk products takes off exponentially at one point in time in any market. I don’t know how long that will take in India but we will do all we can to make that happen,” he says. Interestingly, he speaks of how yogurt consumption has taken off in a big way in a large market like the US. “Per capita consumption was 5.6 kg five years ago and is almost 10 kg now. There is no reason why something similar can’t happen in India,” thinks Ebert.