The man at Amul's helm on milk consumption patterns, the market for cheese and why MNCs can't make inroads into this sector
It’s been five years since R.S. Sodhi, managing director of Gujarat Cooperative Milk Marketing Federation Ltd, better known as the manufacturer of Amul products, took over India’s largest milk cooperative in fiscal year 2009-10. In these five years, the company has grown its revenues over 170%, from ₹ 8,000 crore in 2009-10 to ₹ 21,700 crore in fiscal 2015. Sodhi, 56, who joined the milk federation as a management graduate from the first batch of Institute of Rural Management, Anand, talks about doubling the company’s revenues in the next five years, plans to dominate the cheese market and other expansion measures. Edited excerpts from an interview:
We are seeing a slowdown in the consumer packaged goods sector with companies like Hindustan Unilever Ltd speaking of a rural growth slowdown and deflation. How are you driving growth in such an environment?
In our sector, there is no slowdown. On the contrary, Indians are consuming more milk and milk products. The way we are growing, by 2020 we will be a ₹ 50,000 crore company. Some of this growth is coming from inflation, but a large part is volumes. We are getting double-digit volume growth in all our product categories year-on-year. The new product categories like paneer, cream and flavoured milk are growing at an even faster clip of 20-25% on a volume basis year-on-year.
How are you keeping pace with the demand?
About three years ago, we implemented Project 3E—expansion in processing, expansion in procurement and expansion of distribution. We are investing ₹ 1,200 crore per annum on average to expand our processing capabilities and will continue to invest similar amounts for the next three-four years. We are putting up new plants in Mumbai, Kolkata, Varanasi, Lucknow, New Delhi and other cities.
Our milk procurement has also increased by 9-10% as we have added more farmers, and have also gone to new areas in Gujarat for milk collection and also outside the state to Rajasthan, Haryana, West Bengal and Maharashtra. We have also expanded our distribution reach—three years ago we had 42 sales offices, now we have 60. We are now going closer to the consumers. These offices have facilities for storage.
But we still find popular products like butter and cheese often out of stock...
In cheese, the demand is growing at more than 10% and we are running at 100% capacity. So we are not able to meet the demand. By December, we will double our capacity and also put up a new greenfield project. So, by next year, we will have tripled our capacity. Then we will be very aggressive in cheese. Right now we are not aggressive, so our competitors find it a good playing field. We want to be in cheese what we are in butter. We want to have 100% of the market like we have in butter.
How will you do that?
It’s not like our competitors don’t know how to make butter. But they are not entering this segment because it is not possible for companies to manufacture butter of Amul quality at our price. We have created entry barriers. Companies have to invest in refrigerated vehicles, distributors require cold rooms to be able to supply. This is a huge expenditure that will not be justified if the volumes and scale are not there. After one year, we will become so aggressive in marketing cheese that we will make the business unviable for others in the sector. Our total investment on cheese is ₹ 700 crore in the next one year.
Multinational companies (MNCs) like Nestlé India Ltd and Danone Nutricia India have been trying to make inroads in the dairy sector for a while, but have not yet gained scale. Why?
MNCs have not succeeded as India is a land of cooperatives and every state has its own cooperative, which dominates in the state. The cooperative business model is the opposite of MNCs. We buy our raw material at high prices and sell our finished product at reasonable prices. Our model works on scale. Whereas corporates buy raw material at low price and sell finished products at high prices, rendering them unable to compete with cooperatives. Nestlé is not even one-tenth of our size in terms of market share of milk. They had also tried marketing butter in India and exited from the segment.
A big problem today in procurement of milk is that the younger generation does not find rearing buffaloes and cows lucrative...
That is not true for our farmers. For the last nine years, the average price increase to the farmer is 10%. So farmers are now encouraged, especially the next generation of farmers, to continue farming instead of migrating. It is only the farmers associated with Amul who consistently get higher prices for milk. They are not exposed to the volatility in prices, which happens to most farmers as they are linked to commodity prices. Most dairies are in the commodities business, selling to skimmed milk powder manufacturers. Today, skimmed milk prices are half that of a year ago and naturally that means the money paid to farmers has reduced.
For instance, in New Zealand, farmers are getting 40% lower prices compared with last year. Likewise in Maharashtra, farmers are getting 30-40% lower prices because they were supplying milk to dairies, which were in the commodities business.
At Amul, we are in the value-added business, and our prices have not gone down and hence we have not reduced the prices to our farmers. The prices of our products keep increasing, if we were paying ₹ 36 last year, this year we are paying ₹ 38 and next year we will pay ₹ 40. The price is increasing and 80-85% is going back to the farmer. So he is interested to produce more. With consistently good prices, in Gujarat, more than 8,000-10,000 commercial dairy farms have come up in the last thee-four years. These are today’s youth who have taken a loan of ₹ 15-16 lakh from the bank to buy 30-40 cows or buffaloes and they can start with even one acre of land to get into dairy. Get a milking machine, give the milk to the village milk cooperative society. At the end of the day, after meeting all expenses, a person can earn ₹ 30,000-40,000 per month.
There is a lot of focus on safety standards. How do you ensure quality when procuring milk from millions of farmers?
In our case, we check the milk at four stages—first, when the farmer brings the milk to the village cooperative society, it’s checked. The second check is after the milk is collected and it reaches the dairy plant, after it completes transit. If even one farmer sends adulterated milk, milk from the entire village cooperative is rejected and hence all the farmers in that village are impacted, besides there are penalties. So, it’s imperative for farmers to ensure quality standards are met. The third check is after processing, for fat, sodium, protein. This is before packing. The fourth check is at the time of dispatch where random samples are checked to meet all the quality requirements.
What do you think are the issues in terms of quality?
Companies today are changing ingredients to save costs. They are replacing dairy fat, which is ₹ 400 per kg, with vegetable fat, which is ₹ 15 per kg. However, they don’t declare it properly and then come under the food regulator’s scanner. Companies are worried about bottom line, and keep substituting expensive ingredients with cheaper ingredients. They make claims like buttery taste or cheesy taste and use prototypes instead of the real ingredients. This is wrong, you are bound to get caught.
Health and wellness is a large trend. Can you tell us what this means for your business? Will we see more skimmed and low-fat products becoming popular?
Consumers’ primary preference is taste; health and nutrition come after that. So whatever products we give, if they do not get the taste right then it will not work. So if we look at sugar-free or low-fat products, they don’t even account for 10% of the brand’s revenues. Such products don’t even sell in 1% of our outlets. The demand is so scattered. Meanwhile, brands like Amul Gold, which is high-fat milk, is a topseller. People talk about health, but will eat samosas when they are hungry.