Billion-dollar Mother Dairy’s new strategies to win back market base and go national


May 15, 2011

Malini Goyal

The Economic Times, May 15, 2011

Beaten on its home turf Delhi, the $1-bn Mother Dairy is crafting a new strategy to win back its base and go national. But the pre-reforms milk co-op faces a unique constraint: a social mandate that means it can’t cut costs or hike prices with the same freedom as competitors.

When you don’t have bottom-line pressures, when you are a virtual monopoly in an industry where new big competitors find it difficult to enter, what do you do? Most company managers would sit back, contented to see the business inch ahead. Till the day they are jolted to find their home base under attack.

Mother Dairy Fruits & Vegetables, a company with a billion-dollar (Rs 4,200-crore) turnover, knows exactly how it feels. It has just been there. For this quiet, staid company, it has been a rather turbulent 14 months.

Last year, the Rs 10,000-crore Gujarat Cooperative Milk Marketing Federation (GCMMF) that markets Amul beat Mother Dairy in the branded packaged milk, Mother Dairy’s main business. And that too in Delhi, Mother Dairy’s home base. It hadn’t seen anything like this in its 35 years of existence.

Heads rolled—its CEO and MD resigned first. By now, the company has seen three top-level reshuffle, has anointed its second head in 14 months and is now busy preparing an aggressive plan to give Mother Dairy the new push.

With a new head, a new goal and a new strategy, Mother Dairy is putting together a new plan to put itself back in the game. By 2014-15, the company wants to almost double its revenue and headcount to Rs 10,000 crore and 9,000, respectively. This will come on the back of an aggressive business expansion. Heavily focussed on the national capital region (NCR), which contributes 75% of its revenues, it hopes to expand to India’s top 20-30 cities, with a focus on the south and west and generate 35% of its revenues outside of NCR.

To meet these targets the company is planning to widen its product portfolio with a bigger thrust on value-added products like ice cream, fermented milk and fruit-based drinks even as it explores new areas like frozen ready-to-eat offerings. "There is a need for accelerated change. A need to become consumer focussed. The work has begun," says Nagarajan S, managing director of Mother Dairy. A graduate in dairy technology and an Indian Institute of Management, Ahmedabad alumnus, Nagarajan honed his skills over two decades in Nestlé, Cadbury and Philips.

It may not be too late. Health and wellness as a product category is witnessing robust growth. Companies of all kinds—Nestlé, Kraft Foods, HUL, ITC and even PepsiCo—are just beginning to get their act together in India. With rising income, the average Indian’s consumption basket is changing—health and wellness products are grabbing a bigger share. For Mother Dairy, Amul’s wake-up call was well timed.

All old companies have a legacy issue. Mother Dairy was born in another era. Created as a subsidiary of National Dairy Development Board (NDDB) in 1974, it was part of Operation Flood to support dairy farmers and boost milk production.

By the 1980s, it became a household name collecting milk from dairy farmers and retailing it in Delhi. From just milk, it slowly expanded its portfolio to ice creams, curd, etc and also expanded beyond Delhi. Dairy product is a difficult business because of short shelf life and complex logistics. And that’s a major reason why the sector is largely dominated by home-grown firms like Amul and Mother Dairy.

So Mother Dairy maintained its form and grip on Delhi, India’s largest dairy market. But it paid a huge price as it was slow in expanding to other markets and introducing newer products, unlike its hungrier and bigger rival Amul. Take ice creams for example. Mother Dairy launched it in 1995, almost a year ahead of Amul. But an aggressive Amul went national and soon became the top brand.

Amul’s foray into Delhi further exposed its problems. The Anand-based firm launched its packaged milk in Delhi in 2005 and last year it overtook Mother Dairy. This is when Amul is more expensive—Amul Gold (full cream) sells at Rs 36 a litre against Mother Dairy’s Rs 33, which was revised to Rs 35 on Friday. Says RS Sodhi, the managing director of GCMMF: "We found gaps in the market. Our better quality and taste helped."

Amul, with its own cooperatives, sells fresh milk in Delhi. But Mother Dairy procures milk from other cooperatives. This led to both quality and quantity issues. To make up for the shortage, Mother Dairy mixed fresh milk with milk produced from powdered milk—impacting taste. Mother Dairy says it is now fixing the problem. The recombined milk, which three years back could constitute up to 40% of total production, will be negligible this year, assures Nagarajan. It is moving fresh milk over longer distances (from Saurashtra for one) and scaling up its own procurement network – that has helped.

Availability of Mother Dairy products has also been an issue. Stocking is a perpetual problem. "It [Mother Dairy] has such a good distribution channel [in NCR]—it has not made great use of it," says Rajan Chibba, managing director, Intrim Business Associate, a retail consultancy firm. Mother Dairy’s archaic supply, logistics and poor forecasting tools were to blame. Nagarajan says stocking is a combination of capacity and inventory management parameters. Work is now on to improve both.

Mother Dairy recently rolled out SAP implementation to link its 11 plants, 45 distributors, 16 packaging locations to track and monitor movement of its products. Its fleet is now equipped with radio frequency identification (RFID) tags. "From milk receipts to their quality, test results and stock status, all data is now available real time," says Annie Mathew, the company’s chief information officer.

Supported by a supply chain consultant and weekly reviews, and enabled by a four-week forecasting tool on SAP platform, Nagarajan hopes "better qualitative and quantitative data will improve stocking". All this is critical as Mother Dairy plans to expand into newer markets and more products.

Last year, Mother Dairy finalised its five-year roadmap. Geographical and portfolio expansion was high on the list. Based on it, in the first round it plans to focus on Mumbai, Bangalore, Hyderabad and by 2015 it hopes to be present in India’s top 20-30 cities.

So far its foray outside has had some success. In Mumbai, where it retails through multi-brand outlets, it claims it is the No. 2 in the packaged-curd segment in three years. "Once the decision is taken they are great at execution," says Chibba.

So what worked? "We cannot offer lucrative trade discounts, so we try to differentiate our product on quality," says Munish Soni, deputy general manager (marketing). On the one hand, their 29-member research and development lab in Delhi—the best in the country, says the company—helps churn out products that are suited to not just Indian but regional tastes. On the other, a manufacturing strategy is helping serve the market better.

Its curd plant is within Mumbai city limits, unlike say Danone’s, which sources from a plant 300 km away. This helps Mother Dairy serve fresher curd. From lassi to chhach, Mother Dairy today produces 3 million litres of dairy products every day and it expects to grow that business at a compounded rate of 30-35%.

The company is also laying a bigger thrust on value-added, high-margin products such as fermented milk drinks like Nutrifit. Its fruit-based Safal drinks are being re-launched in handy, attractively designed, take-away plastic bottles, instead of glass bottles. In ice creams, over the last three years they have enhanced their premium range in tubs from Indian classic, fruits and western classic and even a sugar-free variety. It now contributes 10% of their unit sales. Today they have over 50 different varieties of ice creams, including candies and cones.

Alongside, the company is overhauling its HR process. With 4,000 employees, including 2,500 workers (most of them unionised), it functions like a cooperative. While a driver’s remuneration could be as high as Rs 50,000 a month, officers’ salaries are low by industry standards. "We can never pay the market rates but we are working to re-align our people with our new ambitions," says its human resources head Saugata Mitra. It is casting its net wide to induct fresh talent and is hiring 60-70 fresh graduates annually to beef up the sales team.

Induction of senior managers from outside has made the leadership team younger. The average age of its top 20 leaders has come down from around 54 years five years back to 45 years today. Training programmes for senior and mid-level sales and marketing executives have been rolled out. Nagarajan and the top team are holding regular townhall meetings to update staff on new initiatives and align them to new goals across operations.

Unlike Mother Dairy, most modern companies address the matter of profit and margins head on. On a turnover of Rs 4,200 crore, the milk-maker barely makes any profit. Set up by government-owned NDDB, farmers’ and consumers’ welfare are its priorities. Hence its hands are tied. In early May when Amul raised its milk price, Mother Dairy could not as promptly. Its fresh fruits and vegetable business barely makes any money but with its procurement directly from marginal farmers it is a justifiable business.

To tackle competition and make profits, a typical MNC cuts costs. At Mother Dairy, around 85% of the price earned from consumers is paid back to farmers as procurement price. So there is little capital to play around with. The only way it can make a little more money is by improving operational efficiency, building scale, expanding into newer markets and focusing on value-added products.

Does a liberalised India need a barely profitable Mother Dairy? "Yes it does," says Devangshu Dutta, chief executive of Third Eyesight, a retail consultancy firm. There is a phase when the market grows rapidly and competition multiplies. Consolidation follows even as big retailers enter the fray. They bring down input prices by pushing producers and make the supply chain efficient with some gain for consumers. It has happened in mature markets and it will happen in India too. "Companies like Mother Dairy will have a role to play in keeping balance between producers and the market," Dutta says.

That means Nagarajan and his team will face even greater pressure to expand, capture new territories and deliver more efficiencies.