In 2012, Drum Food International's Rohan Mirchandani, who started the ice cream brand Hokey Pokey, bought himself a one-way ticket from New York to India. He wanted to put his idea, born during his years at Wharton, to the test. Four years later, Drum Food has seen two rounds of funding worth Rs 15 crore and notches up sales worth Rs 2 crore every month. By June, it will be ready with its second brand, Epigamia, a range of Greek yogurt.
Drum Food has an impressive list of investors backing its plans since last year. On board are Helion Venture's former managing director, Kanwaljit Singh with his private investment firm, Fireside Ventures, TPG Growth's country head, Vish Narain and Shripad Nadkarni, ex-Coca-Cola executive and now director of MarketGate Consulting. What made them put their money on the brand?
A big draw is the premium dairy segment that Drum Food is looking at. The branded dairy space is around Rs 20,000 crore, according to market estimates. Of this Rs 6,500 crore comprises value-added products and thus, is the space that most private dairy players are focused on. Mirchandani says, "The way to go would be premium value-added dairy products. These would allow us better margins (more than 12 per cent) than dairy staples and let us invest in the supply chain (which is important given the large amount of wastage that occurs). The large scale players compete heavily on margins but premium players won't have to."
Drum Food used a similar strategy for Hokey Pokey, which is available in 600 retail stores in seven cities, apart from the nine parlours it owns. Initially, 50 per cent of the founders' (there are three other co-founders besides Mirchandani) investment was used in setting up the ice cream factory, 25 per cent on personnel, around 6 per cent both in inventory and in logistics and 13 per cent in parlours. It has been serving milkshakes at the parlours for some time now, apart from its trademark handmade ice cream concoctions.
Many felt that it was but a matter of time before the company launched brand extensions to deepen its market penetration. With 40 per cent of the total funding in the second round going into creating Epigamia, things seem to be playing to plan. A new facility for yogurt is being built until which time, it will be outsourced. Sixty per cent of the funding will be spent on expansion and supply chain. As with Hokey Pokey, Epigamia will be priced at Rs 35-35 for 90 gm, at a premium to basic flavoured yogurts available in the market. Greek yogurt is considered to be more gourmet with lower fat and higher protein than plain yogurt.
So what are Drum Food's chances? Nadkarni says, "The key play in the value-added segment is not a cost play but a bandwidth play." Many large players tend to forget that. "What Hokey Pokey and Epigamia are doing is differentiation. Many of the larger dairy players are big in staples. But value-added products are a brand play, not a supply chain competency play. Amul has succeeded mostly when it has leveraged its supply chain, which is in dairy staples. It has struggled in categories such as flavoured milk and chocolates" Nadkarni says.
But going premium would mean that Epigamia may find its way to the table only twice or thrice a week and this would impact sales. But Mirchandani says, "When we tested the Greek yogurt, we first went with the typical mango and strawberry flavours. People loved it but they still saw it as a healthy dessert with say, once- or twice-a-week consumption. But then it struck us that yogurt is in our everyday consumption." So they tweaked the formula. The yogurt will now have flavours like imli chutney (tamarind chutney), khatta meetha (sweet-sour), mint raita to mimic the way Indians like their dahi, besides the usual flavours. In such products, a company's core competency needs to be its understanding of consumers, says Nadkarni.
But yogurt would also have a shorter shelf life than packaged ice cream. Mirchandani says that he is working on new technology that could help. As for building a strong supply chain like the big players have, Drum Food may not need to reinvent the wheel. Nadkarni says, "In the value-added market, dairy is an input but you don't necessarily have to build the entire supply chain because the raw materials are available off the shelf. Modern trade has also helped as these chains are looking out for newer offerings, and likely to support high quality new brands. So, they favour of startups with premium products." Can Hokey Pokey play David to the Goliaths in the dairy business?