Brahmani Nara, Executive Director at Heritage Foods Ltd, speaks to Progressive Grocer about the trends in India’s dairy industry, the sector’s trajectory, and the major initiatives taken by her company in its pursuit of becoming a pan-Indian dairy player. “Heritage has clear national aspirations and is currently testing its milk products in Mumbai and Delhi. We will continue to grow our revenues in south India by driving brand penetration in our core markets and consolidating our business in new markets,” she says. As per its Vision 2020 agenda, Heritage Dairy division is expected to reach Rs. 4,100 crore in turnover @ 23 per cent CAGR, which it hopes to accomplish with the launch of new value-added products in the days ahead.
Which are the emerging dairy trends to watch out for in the Indian market?
In today’s India, three large trends are driving dairy consumption. With increasing modernisation in cities, there is a large premium on time. So there is an emerging need to find dependable everyday products that were earlier largely homemade. A decade back, this need drove the demand for ghee in south India, where households moved from making ghee at home to buying it in the packaged format. Today, we see the same cycle repeat in curd/ dahi. We believe this cycle will repeat in many other products, which today are being made from milk being bought in a packaged form, like flavoured milk. We are seeing a growing demand for products that at its core are essentially Indian concepts. Examples are the resurgence in the demand for cow ghee and the trend towards local ingredients and tastes. This trend is serving as a huge driving force for the innovation pipeline at Heritage.
What are the products in your portfolio?
Our milk products include curd, butter milk, lassi, paneer, doodhpeda, milk cake, flavoured milk, ghee, SMP, PT butter, cooking butter, UHT milk, sweetened condensed milk, ice-cream and frozen dessert.
Which are the products with maximum demand in specific markets?
Nationally, four product groups contribute to 90 per cent VADP (value-added dairy products) revenues for the industry. These are curd/ dahi, drinkables (flavoured milk, lassi, chaas, etc.), dairy fat (butter, ghee, fresh cream, etc.) and ice-creams. Heritage has a presence in all of the above categories. While all these businesses are sizeable and growing, curd/ dahi stands out as a category that is growing at the fastest clip. India has been largely a milk drinking country and penetration of packaged VADP products has been low. VADP innovation is yet to largely happen.
Which are the new products that Heritage Dairy is placing its bets on?
Heritage is guided by its company credo “Health & Happiness”. The company’s innovation pipeline is led by the belief that new products should have strong value propositions for the consumer. It is this belief that make the company credo come alive. The categories that we want to focus on should find mass acceptance and should break through the barriers of affordability & access to the larger population.
What is the sales contribution from your different milk products and how do you see their growth ahead?
VADP currently contributes about 25 per cent of our total revenues for FY 16. By 2020, Heritage plans to almost double this contribution. What is the marketing and distribution strategy for your dairy products? Unlike other Food and FMCG companies, the Dairy Go-to-Market (GTM) is significantly different. The distribution needs for different products vary vastly.
Heritage’s current GTM is led by four different verticals:
• Everyday Milk & Products (e.g. milk, curd, etc.) needs a large scale operation spanning twice a day with the focus on speed and agility so that markets and consumers receive the freshest products. Here it is important that there is a sealed cold chain to prevent any deterioration of the products.
• With the ice-cream range, the demands are quite different. This requires work on asset management, chiller purity, restocking and managing a sub-zero cold chain.
• Thirdly, with ambient products, the endeavour is to build a working relationship with retailers with the focus on building width and depth in the relationship. This is closer to the FMCG model, which is focussed on building a pipeline for existing and new product placement and delivery.
• The fourth GTM model is to have a parlour network, which has exclusive dairy products’ distribution of Heritage foods.
Heritage largely follows a franchise model, which are deeply subsidised till the franchisee can find a foothold and break even. While exclusivity is one of the benefits of a parlour model, there are other significant advantages. Heritage parlours are the testing ground for new products, for measuring the response to new products and keeping a close watch on critical shifts in the market. It also provides for a first hand relationship with consumers, which helps us in crafting products better. They also are part of a larger social cause of providing an entrepreneurship opportunity. Finally, parlours also offer a great branding opportunity.
Which are your bigger markets and what has been the sales growth like?
The average industry growth rate of fresh milk volumes is approximately at 7-8 per cent. Heritage has been growing consistently faster than the industry. While our bigger markets remain in south India, we are currently expanding our footprint to large markets like Mumbai and Pune in the west and Delhi and Punjab in the north.
Why is it that apart from Amul, no Indian dairy player has been able to scale up nationwide. Can Heritage reach there someday?
Expanding milk presence nationally is a slow and arduous process. Unlike FMCG, for every litre of milk sold to a consumer, procurement needs to be built to ensure a steady supply. Amul built its national image on the back of products (e.g. butter) and has been in the industry long before most private dairy players. Heritage has clear national aspirations and is currently testing its milk and milk products in Mumbai and Delhi. We will continue to grow our revenues in the south by driving brand penetration in our core markets. In new markets, Heritage is looking to consolidate the dairy business. For instance, we recently acquired Reliance Dairy’s milk procurement business. Our focus is to make the availability of our milk and milk products nearer to the consumers through our exclusive parlours, which are run by the franchisees and have been able to compete very well in the marketplace.
What is holding back global players from entering the Indian dairy market?
The key reason as to why global players have not been able to find a foothold in India in the dairy segment is because the right-to-win and competitive advantage comes from being able to set up and grow procurement of good quality milk by sourcing directly from the farmer at a scale that makes it cost efficient. Unlike other global markets, milk procurement in India is decentralised, making it very difficult for large global players to enter and establish sourcing quickly.
What is your current milk handling capacity and how do you see it growing?
Heritage currently collects about 18 lakh litres per day, growing at about 10 per cent CAGR in the last 10 years. Two core beliefs drive procurement in Heritage. Firstly, the procurement of milk has to be as close to the market as possible. This ensures the freshest milk for consumers by cutting down the time that milk travels. As a result, Heritage’s investment in production hubs is relatively higher. Today we have about 14 distributed state of the art, production hubs which process milk. This is relatively a large number of production hubs for the volume of milk that Heritage collects. Secondly, almost all our milk is sourced from 3,00,000 farmers directly from villages across seven states in India. While this process is arduous, the benefits are many. Direct sourcing ensures better control over the quality of the milk procured. The benefits are also directly passed on to the farmer.
How do you see the prices of dairy products trending in the days ahead?
The procurement prices of dairy have been largely stable with minor inflation. We expect that trend to continue from a national perspective. However, from a regional perspective, there might be acute changes in certain markets depending on a variety of factors like local weather conditions, etc.
What capital are you investing to ramp up capacity and build infrastructure?
In dairy, investments are broadly in three different buckets:
• Procurement, which is largely about building a foolproof cold chain and procurement centres with the capability to measure quality at different stages accurately
• At the processing level, investment includes not just building capacity but also improving the level of processing and building packaging capability, which is critical in driving milk shelf life and improving product delivery
• Front-end investments include building a brand franchise and driving sales and distribution Heritage is a leader in south India in the first two buckets. The philosophy is that if we build a strong supply chain in procurement and milk processing, the resultant quality will drive the front end. But now with our national aspirations, there is a significant increase in investment in the third bucket as well.
What have been your initiatives in bringing more farmers to your fold?
This is an ongoing process and has many legs. Some of the larger initiatives that we have been taking for the past 25 years are as follows: When Heritage began its operations, one of the key issues which marred the dairy industry, especially in South India, was that the farmer did not receive timely and accurate payments. Heritage consistently has worked towards making payments in a timely and accurate fashion for the milk procured. We have installed milk analysers at every procurement centre to measure the quality of milk. This is the most transparent method to measure the quality of milk in front of the supplier and make payments accordingly. We believe this initiative is the most important part of our relationship. Heritage also has significantly attempted to bring down the cycle time for payments. This has been made possible because we had planned for the financial inclusion of Heritage suppliers and opened bank accounts long before the demonetisation era.
Today, Heritage’s payment policy is the gold standard, which most players in industry are striving to achieve. Heritage won the Golden Peacock Award for corporate governance in the year 2016, which is essentially an endorsement of its transparency in processes, from farm to folk. The other large contributions are for building an enabling environment to encourage dairy farming. Diary farming’s biggest inhibitor is the lack of credit or start-up finance with farmers.
Heritage is a facilitator for tie-ups with banks to provide credit to farmers to buy cattle, etc, and also to drive down the risks of the business by insuring the cattle. Heritage strives to bring down the large cost heads for the farmer in running his dairy business. To drive this initiative, Heritage launched a new division called VETCA (short for veterinary care), the primary focus of which is to provide subsidised feed to the farmer. Heritage also provides free veterinary care at the door step of the farmer. There is also a larger insurance cover and hospitalisation facilities extended to the farmer and his family.
Moreover, Heritage pioneered Heritage Institute of Milk Sciences, which is an initiative for information dissemination on the cutting edge dairy farming technology to the next generation of farmers. At Heritage, we believe that the farmer is not just a partner in the business, but also a part of the larger Heritage family. All these initiatives work to build dairying as a viable option.
How do you see the dairy market in India developing for value-added products?
Milk and milk products have become a one-stop solution for the health and nutrition needs of Indian households as they are a lead carrier of essential nutrients. The FSSAI has now allowed fortification of milk. Heritage believes that milk has a large role to play in solving the problem of malnutrition. With the passage of time, there will be a significant segmentation in the milk category with products introduced for meeting the specific nutrition needs and also to help the country fight the scourge of malnutrition.