Most of the milk produced in India is consumed at source by the country’s largely vegetarian population. The demand for milk and dairy products is growing at a higher rate than the rate of production growth. The government of India estimates that the demand for milk will be about 180 million tonnes by 2022.
This increasing demand is mainly coming from India’s emerging middle class, which is causing frequent price rises, and has led to an increasing interest in dairy production as a commercial activity.
India’s dairy sector is made up of millions of farmers, the vast majority of whom milk fewer than five animals. From the enquiries that Zenith International receives from entrepreneurs in India, it’s evident that regardless of the number of animals owned, these farmers are looking at producing milk commercially and are looking for land and investment options to set up modern production facilities.
When coupled with economic growth and a growing population, this is set to change the face of the Indian dairy industry in the coming decades.
During Zenith’s market assessment undertaken in India, Zenith met with major public and private sector dairies. Amul Dairy is the undisputed leader in the industry, and it was observed that if Amul introduces a new product or an innovation to the market, it’s very likely that other dairies will follow suit.
Mother Dairy is following closely and even competing with Amul for regional market share within the country. These two top dairies under the National Dairy Development Board realise the need to bring about change in the way milk is handled in India, and both have access to funds to make capital-intensive investments that are deemed prudent.
Private sector dairies are growing by leaps and bounds mainly because their primary focus is on non-fluid dairy products (butter, cheese etc.) which are sold in-country as well as exported to many other countries. The majority of capacity expansion that happened recently was for the private sector dairies substantiating the importance of private sector dairies. Hatsun, Kwality, Paras, Parag, Heritage, CavinKare etc are the leading private sector dairies.
Fluid dairy products account for 46% of dairy consumption in India. When it comes to non-fluid dairy products, clarified butter, better known as ghee, accounts for 27% of consumption, followed by butter and yogurt at 7% each. Condensed milk, powdered milk and cottage cheese (better known as paneer) are the next popular categories at 6.5%, 3.5% and 2% respectively.
The retail sector is booming, with the national government lifting the ban on foreign direct investment in multi-brand retail in September 2012. Foreign retailers will have to source almost a third of their manufactured and processed goods from industries with a total plant and machinery investment of less than US $1m.
Foreign retailers will have to invest a minimum of US $100m, and put at least half of their total investment into so-called ‘back-end’ infrastructure such as warehousing and cold storage facilities. This requirement has to be met within three years of a retailer setting up shop. The aim is to meet one of the key justifications for opening the supermarket sector to foreign players, revamping the country’s crumbling infrastructure and unclogging bottlenecks.
In August 2013, the government raised the cap on foreign direct investment in several sectors from 49% to between 74-100% – yet another measure to attract capital inflows to support a weakening rupee.
At the moment, the sales of fresh dairy products through modern retail is negligible mainly because of the severely underdeveloped cold-chain. The reform is expected to bring about drastic changes to the way milk and other fresh dairy products are distributed in India.
When it comes to consumers, the high income elasticity, coupled with the growing affluence of India’s population, suggests that there is a strong likelihood that the milk and milk products consumption will grow at a healthy rate (in the range of 8-10% annually).
Demand for processed and packaged dairy produce in urban centres is going to see a phenomenal growth due to the growing population with a higher disposable income and greater health consciousness.
As the consumer expenditure on milk and milk products is increasing, the consumption preference for other byproducts such as butter, ghee, paneer etc, is also on the increase. Consumers are also aware of food safety issues related with the current ecosystem of dairy distribution and fresh dairy products such as milk and curd (packed in pouches) in particular. Hence, consumers are increasingly interested in safer options.
Overall, innovation and new product development will remain of the essence, and companies that invest in such innovations will see higher growth than competitors. At the same time, producers will have to be mindful of consumers’ sentiments attached to milk, and their high sensitivity to price.
Esther Renfrew is a senior analyst at Zenith International. You can contact Esther using Twitter.
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