Danone India: Fortifying Business For Tomorrow
It is a little after 8 am on a warm summer morning in central Punjab. We are at the door steps of Sardar Gurdev Singh, a former sarpanch of village Sherpur Kalan — situated in the historic city of Jagraon, on the outskirts of Ludhiana. The front room of his single-story house, located in a narrow by-lane of a modern village, houses a large milk storage-cum-refrigeration unit imported from Germany. At one corner, is a small milk-testing apparatus. The room has 24x7 power-supply and air conditioning, unlike the rest of the home. These are special measures taken by Danone India, a part of the French multinational food-products corporation headquartered in Paris. Globally, the €22-billion Danone is recognised for its dairy and water business. In Punjab, its focus is on inculcating some of the global best practices right at the very beginning of its small but growing dairy business — milk collection. In Jagraon and the surrounding villages, there are 8,000-plus milk collection centres like the one operated by Singh exclusively for Danone India.
“Farmers start coming at 5:30 am with milk. We collect, weigh, and test milk on the spot for fat-content and other quality checks. We then store it in a large 1,000-litre imported collection unit,” says Singh who is guided by a small team of veterinary doctors and specialists on rolls of Danone India. “Weekly payments are made to farmers for their milk. Every step is automated. The price, quantity and quality of milk are all transparently recorded in the computers,” says one of the Danone’s specialists accompanying me to the collection centres.
As we drive out of Singh’s house towards another village called Pandori Jattan in Firozpur district, some 40 minutes from Jagron, Phalgun Triwedi, director, Quality, Danone India, explains the significance of quality milk and the tests involved. “Milk passes through more than 25 stringent quality tests including tests for adulteration, antibiotics and aflatoxin before it is accepted for manufacturing,” he says.
At Pandori Jattan, we meet Nirmaljit Singh, a cattle breeder with over 100 cows of American lineage. The cows produce high-quality milk twice-a-day that is collected by a fleet of GPS-enabled milk tankers and transported to Danone India’s Lalru plant — some 150 kilometers away, near Chandigarh — and to the Rai factory in Sonipat, Haryana. At Lalru plant, the milk is used for making infant products, while fresh dairy products are manufactured at Rai factory. These plants together, along with one near Dehradun, Uttarakhand, cater to markets across northern India for Danone. Farmer Gurdev and Nirmaljit are among the thousands who are actively supported and promoted by Danone India.
“Our milk teams at Jagraon work very closely with farmer communities and help them improve farming practices and subsequently the milk quality in the region,” says Rodrigo Lima, managing director of Danone India, who travels from Mumbai once every month to meet the stakeholders in the supply-chain. “The Danone team creates awareness and empowers farmers on good farming and dairy practices such as aflatoxin control, fodder management, mastitis control, and clean milk produce,” says Anil Tomar, company’s operations director. “As part of our Make in India strategy, most of our products are made in India in our manufacturing sites. Most of our ingredients are also sourced locally. Milk is one of the most important ingredients and to source it, we have established collection centres in Jagraon, Punjab,” adds Tomar.
Why So Much Trouble?
“We have to maintain uniform international standards for our high-quality dairy products as we do anywhere around the world. Plus, we are building the infrastructure for the present and the future. We cannot compromise on the quality,” says Lima. “I try to visit our plants in Rai and Lalru as often as I can. I visit Jagraon too, whenever I can, to interact with the farmers and the team,” adds the mild-mannered, soft-spoken Brazilian who came to India a couple of years ago. Lima’s mandate is clear: Grow the Indian market without compromising with the European quality and standards. “We are on the way to double our India business by 2020,” he adds. This means by 2020, Danone India may cross the sales turnover of Rs 1,500 crore. So why is India such a big focus area? “Because India is one of the fastest growing markets in Asia, and has been identified as a strategic business unit, along with Africa, as we see high growth coming from these geographies,” says Pierre-André Térisse, executive vice-president India and Africa. But how can the company double its business in less than 40 months? We will come to that in a bit. Before that, it is important to understand why India operations make any sense for this global food multinational which is also the biggest producer of yogurt in Europe. It is true that the India operations today, generate only a fraction of its global revenues. So what is it that is motivating the French MNC to bet big on India? Perhaps, it feels the need to challenge the likes of Nestle, another global MNC that is well entrenched in India for over 100 years. Or the lure of fast-growing middle-class that is willing to pay more for quality products. Incidentally, Nestle India too has its own milk collection centres across Ludhiana.
The Beginnings
Within a short span of seven years, Danone in India has generated over Rs 750 crore in revenue amidst competition from well-established global and domestic names including GSK, Nestle, Amul, Mother Dairy and others. It has pumped in over Rs 1,800 crore in investments, with more underway.
After the acquisition of Wockhardt Group’s nutrition business in 2011-2012 for about $356 million (Rs 1,576 crore at that point in time), Danone India formally entered the baby food and medical nutrition market with brands such as Dexolac, Farex, Nusobee and Protinex. Today, these brands are helping Danone India grow at a healthy 20-plus per cent growth rate every year. Together, with the dairy business under Danone Food and Beverages India and the nutrition business under Nutricia International, they are pushing sales revenue in a big way. Also, unlike the past arrangement of 2012 where each business had a different head, today Lima is the chief of a unified Danone India, which at some point may be called as Danone Nutricia. Lima was elevated from the ranks of general manager to MD, when he replaced Laurent Marcel, who has moved to New York as the MD of Danone Manifesto Ventures.
Lima says the company’s ambition is to double the business in India by 2020. This means, the company will have to scale up from 250 cities to 400 at least. Also, it will need to be present in 2 million stores. Currently, its products are available across 2 lakh stores. On the product side, the company will launch seven new products within 2017; besides the three new products it has so far launched this year. Lima says e-commerce is growing at a fast pace for Danone with Amazon being the biggest partner. “By 2020, it will account for 10 per cent of our total revenue. Also, we are aiming for 5-10 per cent market share in family health-food-drinks (HFDs) segment with Protinex Grow,’’ he adds.
Now the company is gearing up for its seven new launches that will include line extensions, new flavours, global products as well as local innovations. “We have already launched our global infant formula brand Aptamil, protein supplement Protinex Grow and Greek yoghurt in the value-added dairy category which is our key differentiator,” adds Lima. Next launch will be Neocate, prescribed to infants with cow milk allergy. Due to regulatory glitches, Danone could not launch this product earlier. Now food regulator FSSAI has allowed its entry, the company says. But all this expansion will have a cost? The company is expecting additional funds to be approved for its India expansion plans as the Rs 1,800 crore investments made in the past seven years have virtually been exhausted. “Even without additional funds, at 20-25 per cent annual growth rate, we are on track to double the India business,” says Lima.
Numbers Speak
In 2015-16, Danone’s Nutricia International — housing the Early Life Nutrition (ELN) and Advanced Life Nutrition (ALN) business — generated sales revenue of around Rs 510 crore representing an increase of around 20 per cent over the previous year, according to data available with the Registrar of Companies. The data shows that the ELN business recorded a growth of 8 per cent, while ALN clocked a 40 per cent growth, riding on the growth of brand Protinex. The company recorded operating cash profits of around Rs 15 crore before depreciation. However, for the full year, the numbers showed losses to the tune of around Rs 90 crore. That is because India is still in the investment phase, says an insider.
Danone Food and Beverages, the other company housing the dairy business, contributed another Rs 80 crore or so. Of course for 2016-17, Danone India claims an even better results for both entities, thereby jumping to Rs 730-750 crore of combined revenue. During FY16, the company received equity of Rs 80 crore for Gold Project, part of Rs 150 crore investment plan to upgrade the Lalru plant. Since then, the capacity of the plant has been increased from 6.2 kilo tons per annum (KT/pa) to around 10 KT/pa. As per the RoC data, the baby nutrition category contributed 68 per cent to the turnover of Nutricia for FY16, while medical nutrition did the rest. Even the dairy category is growing in high double digits. Therefore, the company is clear that the future business in India will grow by growing the baby food, medical nutrition and the dairy business, which at the moment contributes around 20 per cent to the overall kitty.
The size of adult nutrition segment is around Rs 400 crore with Protinex boasting of 47 per cent market share in the segment, the company says. In the baby food market, as per Nielsen retail audit MAT SEPT 2016, the urban market size for infant formula is Rs 1,290 crore. Here, Danone India has a 12 per cent market share with brands such as Aptamil, Dexolac & Farex.
Says Himanshu Bakshi, director of marketing for Protinex: “Independent research show that 80 per cent Indian adults have a protein-deficient diet. An equally high proportion of consumers are completely unaware of this deficiency. Danone started aggressive consumer engagement initiatives to improve awareness around protein relevance in daily diet. It has worked well.”
Globally, Danone’s water business is the third-largest in the world, generating nearly €5 billion in revenue. But there is no concrete plan to enter the water business in India currently. “We want to focus on our existing business. We feel there is still a lot of growth potential for us in both dairy and nutrition business,” says Lima on why the company isn’t inclined to enter the water business in India. But not so long ago, Danone India used to sell flavoured water B’lue, and mineral water Qua through a JV with the Narang Group. But the partners called off the JV after they got into a legal battle. It was widely reported.
Dairy Push
While baby food and nutrition segments are driving the growth story for Danone India today, it is gradually investing in milk and supporting infrastructure for a robust business tomorrow. Take for example, the Greek yogurt and regular yoghurt market. Danone India is bullish on both fronts as the size of the organised (branded) yogurt market in India is rapidly expanding. Today, it is pegged at around Rs 6,500 crore, virtually seven times the size recorded in 2008. Danone is also big on UHT (ultra high temperature) processed milk because this category has also expanded rapidly. It is pegged at around Rs 3,700 crore or nine times the size compared to 2008. Same goes for flavoured milk, which has swelled to Rs 3,250 crore or more, virtually eight times the size in 2008. In 2008, the size of the yogurt market was pegged at Rs 896 crore, while the size of UHT milk and flavored milk was reported at Rs 414 crore and Rs 430 crore, respectively, according to a recent report by financial advisory services firm Alvarez and Marsal. “The challenge for dairy lies in logistics and supply chain. We are steadily expanding it,” says Lima. India also caters to neighbouring countries such as Bangladesh, Sri Lanka and Nepal. “Apart from Sri Lanka, we are now exploring other counties for export possibilities. We are also planning to increase our manufacturing foot print in south this year,” he adds. Clearly, Lima is posted in India with a mission to set up and grow Danone’s global best practices for tomorrow. With backing from Paris, Danone India may just set in motion a high-growth trajectory that makes it one of the significant players in the India market very soon.
FACTS
* Rs 1800 crore - Total Investment made in India by Danone
* Rs 150 crore - Invested to upgrade Lalru Plant
* €30 billion - Organised dairy market by 2020
* €5.65 billion - Market size of value-added dairy products in India
* 34 per cent growth - In the market size of packaged yogurt in India by 2018 due to rising awareness
* Danone to fortify UHT milk with vitamin A and D2 n Rs 400 crore - Size of adult nutrition segment
* 47per cent - Market share of Protinex in adult nutrition segment
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