Danone's dairy tales: Is Rs 900 bn Indian market not meant for foreign cos?

Why did the French major give up on the world's largest dairy market and; what does that mean for other dairy brands in the fray?

A month ago, the world's second-largest dairy player Danone, shuttered down its dairy business in India, the world's largest dairy market. Seven years after it entered the country, the French major said it was cutting its losses in a market that is dominated by cooperative dairy players, Britannia and Nestle. Where did it go wrong?

A combination of factors, say experts: India is the world's largest producer and consumer of dairy but Danone's dairy business here could not cross 10 per cent of its India turnover. The company's strategy for the Indian market (marketing & distribution, the premium pricing) was a problem. Besides competition from the likes of Gujarat Cooperative Milk Marketing Federation (GCMMF) owned Amul, Mother Dairy, apart from private players and a proliferation of regional and agile local brands proved to be a big drain on its resources. 

Danone said that while it remained committed to the Indian market (in fact it aims to double its nutrition business in India by 2020), it decided to 'rationalise' its product portfolio to allow for accelerated investments and sharper focus on its growing nutrition portfolio, which is more than 90 per cent of the business. "In line with this, Danone will discontinue SKU’s which have been making a minority contribution to its overall business in India which include the UHT and fresh dairy products," the company had said. Danone's fresh dairy portfolio in India included dahi, mishti dahi and flavoured yoghurts, and the UHT portfolio comprised of UHT Milk, buttermilk, lassi, cold coffee and smoothies. 

Danone’s dairy business has been flailing for a while. Sometime back the company had closed the Gurgaon office and merged the dairy team with the nutrition team in Delhi. A company spokesperson said, "We had consolidated our different businesses in India back in 2015. We had only one business with SKU's in different categories. The decision we have taken now is nothing more than product rationalisation to focus on healthier and more promising categories." 

Danone’s exit, however, is forcing many to ask: Is the Rs 900 billion Indian dairy market not meant for foreign players?

Mass, premium or both
 

The co-operative dairies in India have been in the market for a long time and are present in every segment, mass to premium, today. The head of a major co-operative said that if one is not present in the mass segment (liquid milk) in the Indian dairy scene, it is not possible to succeed in this market. "Even Nestle's dairy business has not grown in many years. Another French player Lactalis (that had acquired Indian firm Tirumala), is still finding its feet despite inheriting the strong base of Tirumala," he said. 

Shiva Mudgil, dairy analyst with Rabobank, felt that to be a part of the success story in Indian dairy, global and domestic non-dairy food FMCG companies will have to amalgamate what they want to do to differentiate from others and what they should do to compete with domestic dairy companies. 

"Just focusing on your core business or product strengths will not help grow the business as they may only capture niche market. Similarly competing with local players in basic dairy products will not be that profitable. By merging these two, a company can achieve scale and sustainable growth," Mudgil said. 

Limited by a small footprint
 

Danone had entered India with Britannia in 2010. The venture came apart and Danone decided to go solo. It, however, did not go the Lactalis way and acquire the existing procurement, distribution and customer base of a homegrown player. It managed its own manufacturing and distribution. It covered 200,000 retail outlets across 20 cities, but its flagship yoghurt was available only in six cities. 

"Direct distribution is very expensive. Since they were not present in the mass segment, the volumes never justified the costs entailed. Plus, Indian consumers are still price sensitive. They would not easily shell out 30-40 per cent more for a brand that they don't know well," explained the cooperative industry veteran. 

Danone was offering hefty margins to retailers. That is the way they work in the West, said an industry veteran. "But, to make it work in India, one needs volumes. While there was nothing wrong with their manufacturing technology, procurement of raw milk and product quality, for Danone in India, their marketing and distribution strategy went wrong," he added. 

Caught in the cost trap
 

Usually, dairy products are transferred from the processor to the distributor in cold chain trucks. But, from the distributor to the retailer, in insulated vehicles. Danone used cold chain throughout (direct distribution to retailer), and this led to higher overheads. Plus, they were operating in a niche segment (primarily in yoghurt-curd category), so the topline did not grow. 

Globally, Danone operates in the cultured products category and nutrition products. They entered the UHT milk market in India. It got difficult as they wanted to build their India business from scratch.  Mudgil said, "Incoming players in the Indian dairy industry have to be cognizant of the fact that growing business right from scratch will take many years to scale up. Partnership with local integrated dairy company will become a norm for incoming strategic in future." 

The end of dairy is not the end of the road for Danone however. "We have great ambitions for our business in India and remain committed to invest and grow through well-established brands such as Protinex, Aptamil, Farex, Dexolac and Neocate," a company spokesperson said. Still the irony is not lost on anyone: Globally, dairy is the largest business for Danone and in 2016, it accounted for around half of its global sales but it is not present in the world’s largest dairy market.