Delhi Milk is finally out of the woods. Or is it?

Access to cheaper milk may have helped Delhi Milk Scheme turn profitable but a bloated workforce could push it back into crisis again

Till a few years ago, Delhi Milk Scheme's sprawling 32-acre campus near Shadipur bus depot was known more for the stench that came from a landfill nearby than its milk products. The country's oldest government-run milk seller had not turned a profit in 50 years, and its losses had grown so big that even day-to-day operations became difficult to run. Its retailers were distinctly unenthusiastic. Given the wafer-thin profit margins they were given, there was little incentive for them to push DMS products.

Then, surprisingly, DMS pulled back from the crisis. It reported profit of Rs 5.32 crore in 2012-13 - the first since its inception in 1959. The next year in 2013-14, it slipped into loss again, but quickly bounced back with profit of Rs 6.65 crore in 2014-15. While it still has accumulated losses of Rs 800 crore on its books, DMS's financial fortunes seem to be on the mend.

What is setting off the change is a solution to two of its biggest problems: inefficient workforce and high cost of production. DMS General Manager Balbir Singh Beniwal says workers often turned up drunk to the plant and passed their time gambling through the night, causing huge losses for the company. To make errant workers fall in line, DMS introduced a system of random checks of the campus during the night and screening employees' breaths for alcohol. While these measures have managed to eradicate the drinking and gambling problem, Beniwal says the intention is "not to instill a sense of fear among workers, but only to clean up the mess".

On the operations side, its strategy has been all about slashing expenses. The routes taken by DMS's vans every day to deliver milk from the processing plant in Shadipur to depots across the city have been rationalised. Now a van covers more depots, but takes less time. In addition, the cost of procuring milk has been cut by buying milk from private sellers instead of co-operatives which often charge a higher price. According to a senior industry official, cooperatives charge at least Rs 26 for a litre against private milk sellers' Rs 15-18 a litre. The cost difference is because cooperatives have to pay a certain minimum amount to their members and, therefore, their ability to tinker with prices is limited, say experts.

The freedom to choose its own supplier is a big step for DMS. Till a few years ago, DMS didn't have the option to fix its own procurement price. It had to accept the price quoted by government-supported milk diaries and was forced to buy milk from them. After the rules were changed a few years back, DMS could buy milk from any farmer at a price negotiated by it, thus reducing its costs.

Among other changes, DMS has stopped using skimmed milk powder to make liquid milk altogether as this raises the production cost by Rs 10-12 per litre. The company now only deals in fresh milk.

On shaky ground
However, despite these cost-cutting measures, DMS's turnaround remains far from assured. Its biggest problem is its small share in Delhi's milk market. It supplies around 306,000 litres of milk daily. In comparison, Mother Dairy sells over 3 million litres and Amul about 2.6 million litres. Scaling up the business may not be easy, given the tiny commissions that the company works on. Although revised from 70 paisa per packet to 90 paisa recently, it is still short of the Rs 1.50 per packet offered by Mother Diary and Amul. "Though the commission has been raised, it is still too low," says Dinesh Kumar who runs a DMS outlet in Patparganj.

The lack of awareness about the brand may also undermine its growth. "DMS has a fixed clientele, mostly government servants who live in government colonies with DMS outlets nearby. Those working in the private sector and who take house on rent either prefer Amul or Mother Diary as they are more aware of those brands," says Kumar.

Given the low demand and margins, DMS's retailers often stock other products like eggs, grocery items and chocolates apart from milk to shore up their earnings. Some of them even sell milk from rivals like Amul and Mother Dairy.

Beniwal says DMS is ill-suited to play the margin game like private players. "Our option to give commission is limited. Besides, some private milk diaries offer schemes like free half a litre of milk for every 10 litres sold, which we can't. This also limits our marketability," he says.

In the absence of scale, many believe DMS's profit-run may not be sustainable. There are also doubts over long-term operational efficiency because of its bloated workforce. Mother Diary manages to sell over 3 million litres of milk daily with about 1,000 people. DMS, in comparison, sells 300,000 litres and employs 800 people.

In order to solidify its recovery, DMS is looking out for new revenue streams. It has tied up with Bihar's Sudha Diary to diversify its product range. The agreement will allow DMS to sell Sudha Dairy's products like cottage cheese, curd and sweets that it does not produce through its outlets in return for a 3.5 per cent cut on total turnover. A similar tie-up has been forged with Small Farmers Agribusiness Consortium to procure vegetables like potatoes and onions. The vegetables will be bought at a discount and the benefit will be passed on to consumers, says Beniwal. But as with most businesses, its future success will depend on how many customers it can draw to its outlets.