Future Group, Fonterra drawing up plans to enter India's dairy market

The focus will be the value-added segment, a market that has just been vacated by Danone

For international dairy brands, India has been an attractive destination, but challenges related to supply chain and distribution networks have ensured it is also the graveyard for quite a few. Take Danone, the Euro 24-billion French food giant, which failed to scale up despite being in the market for over a decade-and-a-half. 

The over Rs 300 billion Future Group knows this market is not for the faint-hearted. But it has quite a lot going for it. With 22 million square feet of retail space in more than 250 cities across the country, it can offer a very competent launch pad for any brand scouting for an opportunity in the Rs 5 trillion market.

That is precisely what global dairy nutrition company Fonterra is banking on. The Kishore Biyani-owned group and Fonterra are drawing up plans to enter India’s milk and dairy value added products market with a bang. Perfect timing too, given that Danone has just left an empty slot when it packed its bags. The company’s exit after a decade of struggle just goes on to demonstrate the challenging and competitive landscape that the dairy market represents. To succeed in the industry, a player needs not just technical know-how, it also needs deep pockets and a well-oiled infrastructure and logistics network. 

Coming back to the 50:50 joint venture between Future Group and Fonterra, together the two plan to launch their first batch of products in the market by mid-2019. The JV aims to corner 5 per cent market share over the next five years. Notably, the JV marks the re-entry of Fonterra in Indian dairy market. The New Zealand-based dairy exporter had exited its first JV with Wadia Group entity Britannia in 2009. While Future and Fonterra are busy firming up their product and distribution strategy, Amul and Mother Dairy are unlikely to sit back and watch the battle unravel. The Future-Fonterra combine will also have to contend with local players such as Prabhat Dairy, Parag Milk Foods and Nandini some of which nurture pan-India ambitions. 

“As a fast moving consumer goods firm, we want to get into and be present in critical categories,” says Ashni Biyani, managing director, Future Consumer Limited (FCL). “Dairy is truly a billion dollar opportunity for us. It is a category that cannot be ignored as it gets into homes multiple times throughout the day. We are looking at creating new categories and habits in the dairy segment. On the product front, the focus would be on value added products and innovations.”

FCL’s plan aligns well with the huge potential the segment represents. Look at the numbers. The overall dairy market, currently valued at Rs 5 trillion according to Edelweiss Securities, is transforming from just plain liquid milk to a VADP (value added dairy products) market and from unorganised and local to more of a structured and branded market. The premium dairy product market currently holds a 8-10 per cent share of the organised dairy business and is expected to grow at 6-8 per cent year-on-year, and reach a share of up to 20 per cent by 2021. 

According to industry experts, the FCL and Fonterra JV is a win-win proposition for both. The tie-up gives FCL access to a wide range of world-class dairy products that Fonterra boasts of. The latter owns well-established brands such as Anchor, Anmum, Anlene, NZMP and Farm Source among others. Its portfolio spans value-added products like flavoured milk, yoghurt and cheese etc. Industry reports suggest the value-added product market will increase the share of the organised dairy industry to 26 per cent of the overall market by 2020, against 22 per cent in 2016.

While Fonterra failed in its first attempt, its second outing might be more fruitful. Pranesh Misra, chairman and managing director, Brandscapes Worldwide, says, “Fonterra knows the product category and consumer preferences very well. It has health-focused offerings targeted across age-groups — kids, women and aged. In India, having such a portfolio is a going to be an advantage as the competition is less intense in the health space.”

Biyani says at present FCL is working closely with Fonterra to identify brands and products that can be introduced. To begin with, the JV will bring brands from Fonterra’s international stable and work with a clutch of third party manufacturers to get the final offering on shop shelves. Eventually, the partners are keen on setting up their own manufacturing facilities in the country. 

The JV will roll out its products in a phased manner and the first stop will be the markets in the south. Misra says Future-Fonterra’s south-first strategy could be driven by two factors. 

In comparison to their counterparts in north, studies have shown that consumers in the south are far more open to consuming health-oriented dairy products. The second reason could be that the JV intents to leverage Fonterra’s manufacturing base in neighbouring Sri Lanka. The southern market’s proximity to Sri Lanka could help the JV keep a cap on logistics costs to begin with. Fonterra also has a strong presence in countries like Thailnd and China.

On the distribution front, FCL and Fonterra have a clear advantage over rivals. Future Group has multiple store formats such as Big Bazaar, Easyday and Nilgiris among others, and it also commands a strong logistics network that feeds these stores. To top it all, it has a loyal consumer base to fall back on. Biyani says it takes strong partnerships to win in large categories and hopes to learn from Fonterra’s strong focus on research and innovation, in-depth knowledge about milk tools to come up with the right portfolio for the Indian market.