Danone's dairy tales: Why the French major gave up on India's market

Why did the French major give up on the world's largest dairy market and what does that mean for other brands in the fray?

A month ago Danone, the world’s second largest dairy player, shuttered its dairy business in India, the world’s largest dairy market. Seven years after it entered the country, the French major said it was cutting its losses in a market that is dominated by cooperatives and private players such as Britannia and Nestle. Where did it go wrong? 

A combination of factors, say experts: India is the world’s largest producer and consumer of dairy but Danone’s dairy business here could not cross 10 per cent of its India turnover. The company’s strategy for the Indian market (marketing and distribution, the premium pricing) was a problem. Besides competition from the likes of Gujarat Cooperative Milk Marketing Federation (GCMMF) owned Amul, Mother Dairy, apart from private players and a proliferation of regional and agile local brands proved to be a big drain on its resources. 

Danone said that while it remained committed to the Indian market (it aims to double its nutrition business in India by 2020), it decided to ‘rationalise’ its product portfolio to allow for accelerated investments and sharper focus on its growing nutrition portfolio which is more than 90 per cent of the business. “In line with this, Danone will discontinue SKU’s which have been making a minority contribution to its overall business in India which include the UHT (ultra-high temperature processing) portfolio and fresh dairy products,” the company had said. Danone’s fresh dairy portfolio in India included dahi, mishti dahi and flavoured yogurts, and the UHT portfolio comprised of milk, buttermilk, lassi, cold coffee and smoothies. 

The company’s dairy business has been flailing for a while. Sometime back the company had closed down the Gurugram office and merged the dairy and nutrition teams in Delhi. A company spokesperson said, “We had consolidated our different businesses in India back in 2015. We had only one business with SKU’s in different categories. The decision we have taken now is nothing more than product rationalisation to focus on healthier and more promising categories.” 

Danone’s exit, however, is forcing many to ask: Is the Rs 900 billion Indian dairy market not meant for foreign players?

Mass, premium or both

Cooperative dairies in India have been in the market for a long time and are present in every segment, mass to premium, today. They also enjoy a set of advantages in the procurement of milk that many private players do not.

The head of a major co-operative said that if one is not present in the mass segment (liquid milk), it is not possible to succeed in this market. “Even Nestle’s dairy business has not grown in many years. Another French player Lactalis (that had acquired Indian firm Tirumala), is still finding its feet despite inheriting the strong base of Tirumala,” he said. 

Shiva Mudgil, dairy analyst with Rabobank, felt that to be a part of the success story in India, global and domestic non-dairy food FMCG companies will have to look at a more cohesive strategy for the space. “Just focusing on your core business or product strengths will not help grow the business as that will only help capture a niche market. Similarly competing with local players in basic dairy products will not be that profitable. By merging these two, a company can achieve scale and sustainable growth,” Mudgil said. 

Limited reach

Danone had entered India with Britannia in 2010. The venture came apart and it decided to go solo. Danone, however, did not go the Lactalis way and acquire the existing procurement, distribution and customer base of a homegrown player. It managed its own manufacturing and distribution. This limited the extent of the brand’s reach. It covered 200,000 retail outlets across 20 cities, but its flagship yogurt was available only in six cities. 
 

“Direct distribution is very expensive. Since they were not present in the mass segment, the volumes never justified the costs. Plus, Indian consumers are still price sensitive. They do not easily shell out 30-40 per cent more for a brand that they don’t know well,” explained the cooperative industry veteran. 
 

Danone was offering hefty margins to retailers. That is the way they work in the West, said an industry veteran. “But, to make it work in India, one needs volumes. While there was nothing wrong with their manufacturing technology, procurement and product quality, (Danone’s) marketing and distribution strategy went wrong,” he added. 

Caught in the cost trap

Usually, dairy products are transferred from the processor to the distributor in cold chain trucks. But, from the distributor to the retailer, in insulated vehicles. Danone used cold chain throughout (direct distribution to retailer) and this led to higher overheads. Plus, they were operating in a niche segment, so the topline did not grow. 

Globally, Danone operates in the cultured products category and nutrition products. They entered the UHT milk market in India. It got difficult as they wanted to build their India business from scratch.  Mudgil said, “Incoming players in the Indian dairy industry have to be cognizant that growing businesses from scratch will take many years to scale up. Partnership with local integrated dairy companies will become a norm in the future.” 

The end of dairy is not the end of the road, however. “We have great ambitions and remain committed to invest and grow through well-established brands such as Protinex, Aptamil, Farex, Dexolac and Neocate,” a company spokesperson said. Still the irony is not lost on anyone: Globally, dairy is the largest business for Danone and in 2016, it accounted for around half of its global sales. Yet it is not present in the world’s largest dairy market.