'Irreversible' Consumer Trends To Help Sustain Amul’s Pandemic Gains, Says RS Sodhi
As India went into lockdown amid the Covid-19 pandemic, consumers across the country made a rapid, “irreversible” shift towards branded, affordable dairy products. This shift is what will allow the country’s largest milk procurer to sustain pandemic-induced growth and even increase market share, according to Amul's RS Sodhi.
Gujarat Cooperative Milk Marketing Federation Ltd., which markets dairy products under the Amul brand, has increased its market share in butter, cheese, paneer, ghee, milk, curd, buttermilk and even ice creams and chocolates, the managing director told BloombergQuint’s Menaka Doshi in an interview. “I think this increase in market share is not only because of the brand or the products but is also more because of the availability.”
“Amul was visible, Amul was available and Amul was affordable too.”
One of the reasons for the shift towards branded products was the pandemic and subsequent urge to buy trusted, immunity-boosting products—an image the brand is largely associated with, according to Sodhi. This trend from commodity to unbranded to branded is irreversible, he said, adding that only a phenomenal increase in prices can reverse the trend.
It’s up to us how to not only retain consumers but also attract more because the tipping point has come.RS Sodhi, Managing Director, GCMMF
The bulk of shift towards branded products has come from Tier-II and Tier-III cities which are purchasing small packs worth Rs 5, Rs 10 or Rs 40. Urban consumers on the other hand, have shifted towards larger packaging during the pandemic to reduce the frequency of orders. “You’ll see little demand increase in bigger packs but much more increase in demand in the smaller packs without changing the price,” Sodhi said.
While sales fell by 50-60% for categories like skimmed milk powder and white butter, those products only make up for 10-15% of the company’s revenue. The remaining products that brings in 85-90% of the company’s sales are still seeing high demand and growth. The only difference is that a 30% growth in the case of ‘paneer’ (cottage cheese) or cheese category during those first three four months of the pandemic has now reduced to 20%, Sodhi said. “But it’s still much higher than the previous year.”
Sodhi expects to see a 12-13% growth across different products and segments on average in the third quarter of the ongoing financial year. This is likely to sustain in the fourth quarter as well, he said. The company doesn’t plan to change product pricing at the moment.
Procurement & Pricing
Amul is procuring 12% more milk from India’s rural farmers, compared to a year ago, Sodhi said. When compared to 2018-19, however, the levels are flat.
Demand, on the other hand, has grown 15-18% over the last two years. The sudden increase in demand versus the same amount of supply led to an increase in prices in 2019-20 because of which many consumers shifted to purchasing loose milk, Sodhi said.
The trend flipped during the lockdown since small dairy farmers were at the mercy of large cooperatives such as Amul to buy their milk. For instance, cow milk procurement prices in Maharashtra, which were as high as Rs 32-33 per litre in March before the pandemic, fell to Rs 21-22 in April and May. Even now, when there is excess supply, prices have managed to crawl up to Rs 27 per litre and will likely go back to Rs 33 by March 2021, Sodhi said.
The procurement prices will increase, but also let me tell you, consumer price isn’t going to increase because when milk procurement prices go down, nobody reduces the milk prices to consumers. So, at Rs 32-33, you can afford selling at the current milk price without incurring a loss.RS Sodhi, Managing Director, GCMMF
Addressing the ongoing farmer protests against the farm bill, Sodhi said that organised agricultural produce is good for the farmer, consumers and the country because it instils competition.
It’s “nothing but competition instead of a monopoly company,” he said.
Even within the dairy industry, there’s enough scope for competition, he said, adding that nearly two-thirds of the industry is still unorganised. At the same time, he spoke about the high barrier to entry in the market.
“It’s a low gross profit and lower Ebitda category because you’re competing with the well-established state brands who are working at a lowest profit and you were to come out,” he said. “So, its profitability is based on your supply chain efficiency vis-à-vis other expenses.”
A young company cannot efficiently set up milk processing units across geographies and compete with brands like Amul at the same time, especially not in a matter of 4-5 years. “We have created very high entry barriers for all these people to come and come up with their own brand.”
Watch the full conversation on India’s trade agreements, demand trends and Amul’s foray into new verticals, here:
So, let me start by asking you, given your experience of the last several months now, all the efforts you’ve put in during the lockdown period, the post lockdown period, the unlock period and now what we’re seeing, which is marginal signs of recovery and the economy bouncing back. Have you seen dramatic shifts in consumer trends, what is the current status according to your assessment?
Yes, definitely there have been changes in consumers’ consumption pattern, purchase pattern and the price pattern. Overall, as I say we are in the food sector or dairy sector, these changes are very positive, not only for the short term but also from the long term perspective of the branded packed food industry because the industry has shifted at a very rapid speed from commodity to packed and branded.
It was shifting but during the last seven months rate has been multiplied by three to four times because the best indication for shifting for us is some product which the consumers used to buy loose for last for many decades, whether it is milk or dahi or paneer or it is like ghee. So, we have seen that we have been growing though not that big, but suddenly there has been a spurt in all packed vendor products and not only packed and branded with trustworthy brands. The most important aspect which you’ll notice is that the spurt has come in affordable branded products and not in the high-end branded product.
Did you have to adjust pricing as a result of that shift towards formalisation, but those consumers who are moving away from loose products like pointed out, are looking for more competitive pricing. So, to be able to expand that market and include them, have you either considered variants which are lower priced or just considered just lower pricing as a medium-term trend?
There has been no change in the price firstly because there has not been no change the commodity pricing.
In our case we buy fresh milk and we buy it from our farmers or who are our owners. Based on the market, there’s no opportunity to increase. Rather, in case of ghee we have reduced the prices. That is a one change and I don’t foresee it that we will be compelled to change any prices. Now, as far as it comes to packaging, definitely small packs sales increase in the tier two tier and three cities because maximum conversion has happened from loose or unbranded or commodity within smaller cities. Now there, it is because of their affordability, they had preferred to buy smaller pack five-rupee pack, a ten-rupee pack or a forty-rupees pack. In the bigger cities we had seen it because the currency of purchases had reduced. So, the consumers had shifted more towards the bigger packs. So, you will see little demand increase in bigger packs but much more increase in demand in the smaller packs without changing the price.
What would you say about your market share increases? You are the leader in most categories that you operate in. Has this increased because of this formalisation process or the move towards package branded processes has been substantial?
We have seen our share in butter, cheese, paneer, ghee, milk, curd, buttermilk and even ice cream and also, chocolates. I mean chocolates, I can’t explain to you, we never expected such a spurt in demand during peak summers. I mean, we sold doubles on chocolates in this volume in the summer than last winter and now, we don’t have not much stock.
This increase in market share is not only because of the brand or the products but is also more because of the availability. Amul was visible, Amul was available and Amul was affordable too. Consumers also realised that during this time, one should go for more pure or immunity boosting products. So milk or Amul is categorised as that and meets all those. So, we got all the positive aspect going on during this unfortunate situation. So, the market share across our product category increased. I mean, ice cream, no doubt there’s been drastic declines but because of our same supply chains or the same plants, even the small requirements—we could fulfil and our working distributors could meet the requirements.
You see this move to formalisation as a sustainable one or do you think in six months or eight months as things come back to pre-Covid normalcy, people will go back to maybe consuming or some of the earlier, non-branded loose products, etc. especially because incomes have also taken a hit?
This trend from commodity to unbranded to branded is irreversible. I mean, you will see that the consumers are shifting and the shift is only which can reduce or can do the reverse is, if you take a pack of branded products, very costly or the difference in one kg of dahi today is Rs 10, if you make it at home or you buy a pack of Rs 5 or Rs 10. If you make a pack which is Rs 100 more costly, naturally the consumer will shift. That is why I said affordable. If you make it slightly, 10%-15% more than the loose and unbranded, the consumer will continue to use.
It is up to us how to not only retain consumers but also attract more because the tipping point has come. I’ve seen in my last 38 years of life that in all product categories, each geography, once the tipping point comes and some volume is cheap, you will find that suddenly people will start shifting from word of mouth publicity and also, because more retailers started stocking the product. I remember that 25 years ago when we launched dahi, nobody was ready to keep and nobody’s buying it. Today you see everybody’s buying packed dahi. So, it will sell until you keep it affordable and available.
You said this pandemic has marked a sustained shift, both in the way food items are being consumed as well as some of the other trends like small packets or large packets. What has the experience been in the second quarter because we’ve seen some of the growth taper off a little bit in food. In dairy when you look at some of the listed companies year on year sales is now down just about 3% or so. So, at Amul given that you are the amongst the largest or the largest in many categories, what is your experience for the second quarter been with regards to both sales year on year as well as maybe if you can give us some insight into the third quarter for which two months are already over?
In case of Amul, we have two types of product categories. One is the consumer branded products; others are commodity like skim milk powder, white butter, etc. For that, our sales have declined drastically because nobody was buying SMP and white butter because the factory was closed. Also the demand and prices had also gone very much low and we could not afford selling at the price. So we kept it the same. The sales are picking up but still it is not at par with the previous year. I can say it is 50-60% down commodity wise which contributes to around, 10 to 15% of our turnover. Coming to the 85% or 90% of our consumer branded products, there definitely growth continues.
The Only thing is if we were getting 30% growth in case of paneer or the cheese during those first three four months, now that growth has reduced to 20% but it’s still much higher than the previous year. Compared to previous year, what I predicted for this third quarter, growth will be there in packed-branded food products. On average, I can say they’ll be different. It will be around 10 to 15% in between in high-volume products like milk. I mean, we are getting this month around 8%-9% growth and that is a high volume, but in case of cheese and paneer, we still we are getting around 20% growth. In chocolates, we are getting double than the previous year. So, we are continuing to get growth. The average will be 12-13%, this quadrant.
This is a year on year number that you’re citing, then you’re suggesting that at least when it comes to your products the boost in sales is actually sustaining through the third quarter and may likely sustain in some ways through the fourth quarter as well?
Yes. You tell me which product you will not buy next or your driver or anybody wont buy. The consumers will continue to buy our products, because these are essential, food products and I don’t see any negativity and against these essential food products. So, no chance. Some people who may not be able to make their product available or may not be able to make the product at an affordable price may lose market share, but some others will gain. I talked about the dairy industry corporates and nobody’s seeing decline in demand. There’s no decline in demand.
I was just wondering whether we were seeing the phenomenon in the first two quarters was also that customers were bulking up right because they will go and buy one large stock and that can lead to lumpy sales and demand as well because if there’s a lockdown, who knows what will happen.
You’re right, that was there but that was for a week or 10 days. Then again, it has become normal. Now, people are not bulk buying. So, it was there during that lockdown period. There was a fluctuation but now it is normal. The other factor which is going to impact our sales growth is gradually opening up ‘Horeca’ (Hospitality industry) because around 12% sales is contributed by HORECA and gradually, marriages are happening and hotel restaurants are opening and people are getting used to it. So, I’ve seen that sale is going to give extra growth. In spite of 10-12% of sale not there but if you’re registering growth of 10 to 12% in consumer products and then if 75% of that segment comes again, you will add another 6-7% growth in the remaining months.
And you expect that the hotel and restaurant segment will sort of go back virtually to normal by middle of fourth quarter or so?
Nobody can predict but if it come, then its really good.
You have increased milk procurement by 15-17% during the lockdown if I remember correctly. So, those farmers that will not able to sell in any other way, have you maintained that increased procurement? Have you gone back to the pre-Covid numbers?
No, it is continuing and still today we are getting around 12%, more milk compared to the previous year. Let me also add here, no doubt we are getting 12% more milk than it used to be, that’s 15-17%, but if you compare the milk procurement previous to the previous year, in 2018-19. We are more or less at the same level. Last year, the milk procurement had declined compared to 2018-2019. So, the industry is getting milk equal to 2018-2019 and demand has increased much from the last two years. Demand has increased by 15-18%. Why we are able to service the market is, during these six-seven month lockdown period, the surplus we got is converted to commodities. Those commodities now will be used during next six seven months.
Explain this to me, if milk procurement across the dairy industry has only just been restored to the 2018-2019 fiscal year levels that effectively means that no matter what product you make of it, consumption in India was virtually stagnant for at least dairy products in the last one year and has only returned to FY19 levels, right now? So, between 2018-2019 and now 2021, we’ve just gone back to the same level. There is no actual growth, the growth is only between the previous year where there was a decline?
Actually, the growth in milk production is there, what we are talking is procurement by the organised dairies sector because last year, in milk suddenly, the demand increased the commodity was not there so milk prices increased. So a lot of consumers have shifted to this loose milk and the industries also started buying milk directly. Who were not buying it in 2018-2019, they started purchasing milk from the farmers. So, that much milk was left to corporates likes us. In 2018-2019, people were not buying because SMP prices were low so we were getting more milk. So, the long-term plan, the 5-6% growth is there but in the last two years, you’ll see that organised cooperatives sectors who continued to buy more during 2018-2019, are getting it the same rate.
What is your outlook on milk prices because in the first quarter from what I could read procurement prices were low but wholesale prices had moved up a little bit. This is the first quarter for FY21 and in the second quarter, prices were benign. What’s your outlook on pricing?
As far as milk procurement prices are concerned, it will definitely increase because before Covid till March, I’ll give an example of Maharashtra, cow milk prices were hovering around Rs 32- Rs 33 which declined to Rs 21-22 during April May because all unorganised players, small dairy farmers were at the mercy of a few cooperative brands like Amul.
We increased our procurement by 100% in Maharashtra from all other states, including Gujarat. But gradually the prices started going up. The prices had gone down in Maharashtra to Rs 21-22 but are now Rs 26-27 and the flush is there. So, I can predict by March, milk price being paid to the farmers will come back to the prices of this March, that is around Rs 32-33. So, the procurement prices will increase but also let me tell you, consumer price is not going to increase because when milk procurement prices go down, nobody reduces the milk prices to the consumers. So, at Rs 32-33, you can afford selling at the current milk price, without incurring a loss.
Gujarat Cooperative Milk Marketing Federation Ltd. (the marketing body of Amul) as they say, is the ‘baap’ of it all in the country but how do you view the fledgling competition that you’re seeing from some of the listed dairy players like for instance, Parag, Hatsun or Heritage. You understand this business better than most people. So, I’d love for your assessment of what you think of these companies and their ability to scale growth.
Let me tell you, competition in organised agriculture produce is good for the farmers, good for the consumers and good for the country because once more competition comes, efficiency comes. People who are efficient under pressure, they’ll be able to survive well and naturally, more transparency comes. Now, there is a lot of agitation with the farm bills that is going on, which is probably nothing but competition instead of a monopoly company. So, I think competition is good and for Amul, competition is not new.
When we started 74 years back already, the world’s best multinationals were there. Today, also only one third of India’s dairy sector is organised two thirds are empty. So what I feel is, opportunities are there but one has to look for the gaps in the dairy industry—which are the geographies where there are gaps in milk procurement and gaps are there in converting from commodity to the packed side. Let me also tell you, dairy industries are mainly in India are owned by farmers. So, any private sector, any multi-national can make a minimum $1-$2 billion of business in India very easily but like I said, it is a low gross profit and lower Ebitda category because you’re competing with the well-established state brands who are working at a lowest profit and you were to come out. So, its profitability is based on your supply chain efficiency vis-à-vis other expenses. So, the opportunity is there but it has to be a very supply-chain-efficient organisation.
I know you said competition is good for the business we’re now seeing many front end retailers, which includes some very large business houses, both in the country, and large foreign business houses as well. I want sort of create their own backward supply chains right when it comes to food. Do you see in the next five years the regulatory as well as the economic environment allowing for anybody to be able to create whether it’s a Reliance on Amazon or somebody else create a structure parallel to what GCMMF has created for several decades?
No, no, practically there is a such a vast country and today you see after so many years of the organised modern trade and e-commerce put together, food and facilities are able to corner only 14 to 15% business and they are able to corner only because of their efficiency. I don’t think in India any big retailers can monopolise the distribution in their life. We have got the western word on the U.S., where two retailers are squeezing the manufacturer and the consumer also by keeping an hefty margin of 30-40% and because it is a simple thing, Indian general trade is operating on a very paper-thin margin. So, for any big retailer, the biggest challenge is how to compete on the profit with the small traders who operate in a 7 to 8% margin? India’s general rate is a 7 to 8% margin. I mean the cost of any organised retailer for the manpower is 4 to 5% leaving aside the other things. So, the only thing is bigger cities where people are busy, there this sector is growing. I mean there are some cities like Bangalore, Hyderabad which 50% business for us is coming from the modern trade and e-commerce and e-commerce has doubled during Covid.
That is on the retail end, I’m saying if any of the large retailers decided to set up their own house brands and a dairy, do you think that over a period of 5-10 years, they might be able to duplicate any part of GCMMF’s success or do you think what GCMMF did was in its time and that kind of scale is now very difficult for somebody to achieve?
It is difficult to achieve or come to the GCMMF level. What we have achieved in 74 years anybody can achieve the next 30 years but not in four or five years, because you may have pan India distribution but you need to buy and process raw materials locally. So you can select the geography and I say, it is welcome because two thirds of India is unorganised and most of the people have tried and stopped because they found it that their milk procurement, logistics, transportation and selling. They are not able to compete with the co-operatives whether Amul or Nandini or Parag of Uttar Pradesh. So, they say, it’s better to sell at 7-8% from the already established and then going for their own. The dairy sector is not earning 20-30% Ebitda like all the personal products or others. So, they are they find it lucrative, but their margins are very small. So, we have created very high entry barriers for all these people to come and come up with their own brand.
Then, what is the fear? Is it just cheap imports that has had the dairy industry lobby against RCEP, because I think that was one big worry that there would be dumping of milk products, and that also played into one of the large reasons for why India has chosen to stay out of that trade agreement.
You are right. We are not against competition or foreign companies or FDIs coming. They’re welcome. Any company or the world’s best companies have come to India also, it’s not that the world’s biggest dairy company or number three haven’t come here. They have come up also, that is different. So, they can bring their capital, they can bring their experience, they can take their brand and they can also bring efficient knowledge—whatever business they can run, but what we are saying is, please buy milk from the farmers of India. Don’t bring milk from New Zealand or Australia because India is already the world’s largest producer, two third of the sector is unorganised, so there’s no scarcity of milk.
So, you are welcome. Again, I said, for all these corporates and multinationals—I’ll tell you, I had a talk last year with international CEOs and I’ll tell you that they have packed off because when I asked him, he said, we can’t compete with the supply chain efficiency of the Indian dairy companies. I mean, I’ll tell you that milk from our factory to your house, do you know how much margin we get in that? Only 7% -including distributors and retailers. In the western countries it is 35%. So, they think there is no cream while doing this business in India.
But then, what is the fear about imports being under-priced because if imports have to match the kind of margin and pricing in India, it would be probably nonviable and the amounts would not be very high then of imported milk or dairy products?
Their dairy industries subsidise. You see each farmer in New Zealand is given 1000-2000 acres of land. They don’t need to feed them, the cows will go, graze and come back for milking. Their farmers don’t need to feed them, so our cost of production is more. We are against imports. Okay, not imports but zero-duty imports. Imports are allowed in India, you import cheese, you import but anything. 30-40% duty is there—like those countries are charging. Canada is charging 200% duty; U.S. is charging 70% of duty on our daily products. The world’s biggest dairy-importing countries like, China or Russia or Europe, they don’t allow dairy products even after paying duty from India. Now, they listen to their side of the story, no one listens to us. We want to export to Russia. We have been struggling, we want to export to China, but we are not allowed.
You have decided to enter edible oils through the Janmay brand, and you’ll be taking on players like Marico and fortune. You’ve decided to do cookies of biscuits you’ll be taking on players like Britannia and ITC. You’ve just recently launched Seltzer, and in that you’ll be taking on some of the largest beverage companies in the country which is like Pepsi and Coke, you’ve launched Puffles, again you will be taking on Lays, Tasty Bites and 1000 other snack manufacturers in this country or savoury snack brands and a couple of years ago you also did frozen foods which competed with ITC. So, effectively now you are taking on the entire FMCG industry. Where do you see maximum potential in each of these categories? What is your game plan going forward?
First of all, let me tell you that as we’ve gone for these new categories, it is just because of two reasons, either because any of the categories are using dairy ingredients like we’re selling butter cookies with 25% butter. Because people are buying these butter cookies, they made their brand by selling it as butter cookies but then they stopped using butter instead you start using vegetable oil. So, we found that they are buying our butter. So, I said if they don’t want our butter, so we’ll sell our butter through cookies. Then with Janmay, it was because we wanted to buy the produce from our farmers, or we started buying frozen potatoes. We are putting most modern plant of these various type of potato products like McCain at Banaskantha because first our farmers were selling to other people and now they themselves are buying and processing it. So, again the milk story. With Seltzer, it’s nothing but juice and dairy ingredients. So, we are getting it through either with the dairy angle or the farmer angle. It is more of a learning, coming into the potentiality of the new sector in which we have entered, I think the biggest opportunity we see is in the bakery and the the carbonated drinks—with whatever the response we’ve got but let me tell you, the potentiality lies more and more in the dairy sector. So our focus will be dairy only but once in a while just to learn what is happening in the dairy sector too, cash implies our distribution chains.
So, your capital effort or your management bandwidth is not going to be substantially be focused on growing out these new categories into very large businesses. These are all into experimental stages and you don’t intend to try and scale these up in any big way is that right?
No, we are not going to make any big investments because the same investment if we make in dairy, it will give much better results than investments in biscuits or carbonated drinks.
Is there consideration or plan to ever list Amul?
Why to list?
Just like, you make the farmers stakeholders in the prosperity of this brand or that ordinary Indians would become stakeholders in the growth of this dairy brand?
But then you see that as a CEO of a company, what mandate do I have to follow? Farmers will ask more price for the milk and the urban shareholders will buy more or the minimum to get Ebitda and profit and the consumers will want cheap milk. Already you see, it is a conflict of interest. So here, the owners—their purposes is solved if they don’t list it. So, there’s no need. I mean, let me tell you, like the question you asked, it is like the Australian cooperative—they listed their company for five to six years and today, they are closed, they had to sell it off to that Canadian dairy because the same thing happened. The farmers moved away, the new CEO took from multinationals, kept on reducing current price so that he can meet the shareholders demands and can get more incentives. The farmers moved away, and company had to be closed.