Can Mother Dairy Continue Sales Growth at 10% Despite Fluctuating Monsoons?
Agrarian dependence of the Indian economy may well have fallen from roughly 42% of GDP in 1960 to 17% in 20141, yet agriculture remains the focus of discussion in India every year from July to September. During these months, farmers and city-dwellers both eagerly await the arrival of the determined (sometimes fickle), scarily overwhelming (oftentimes disappointingly scarce), and beautiful (but also frustrating) natural phenomenon of the monsoons.
But why are the monsoons so unpredictable and frustrating?
Every year, meteorologists use sophisticated technology to anticipate the new personality of the monsoons, but increasing global temperatures have led to increased variability in weather, thus making such a prediction very difficult. Climate change does not bode well for India, the country where the majority of the Indo-Gangetic Plain lies, that produces 14-15% of the world’s production of wheat2. Some researchers believe that in the 21st and 22nd centuries, monsoons will reduce by 70% below normal levels, with certain regions seeing monsoons delayed by up to 15 days3, threatening food security.
Economics 101: Supply and Demand
The economics of the situation are fairly obvious. Increasingly erratic weather negatively impacts growing patterns and thus supply of fruits and vegetables. Additionally, due to weak infrastructure, India’s supply chain capacity is simply not large enough to accommodate sufficient cold storage and rapid enough distribution to retailers, which lowers supply even more. Demand however, keeps soaring. India has the second largest population (1.3 billion), about a third of which is vegetarian. High demand, low supply- seller’s market. Food prices skyrocket (as much as 100%)4, becoming inaccessible to most. No wonder as of 2012, 43% of Indian children under five, were malnourished5.
https://www.youtube.com/watch?v=kYhN8GUXSUs
So with inconsistent supply, how does any food and beverage company survive in India?
Enter Mother Dairy! Mother Dairy is a subsidiary of the National Dairy Development Board (NDDB), and was started in 19746, with the primary function of making India self-sufficient in milk production. Soon after, NDDB decided to organize the distribution of fruits and vegetables too, and started a new brand called ‘Safal’, which today stands for ‘Happy Food Happy People’6.
Mother Dairy Fruit & Vegetable (F&V) began with retail locations only in New Delhi. In the late 90s, Mother Dairy also began freezing and processing raw produce, to use both in Safal, and to supply to the food and beverage industry – PepsiCo, Unilever and Nestle6. Through aggressive marketing and expansion of stores, by 2012, there were 350-375 F&V stores7, with plans of expansion to other major, metropolitan cities. In 2013, Safal sales were $80M, which had grown steadily at 10% per year. Safal stores were handling 120,000 tonnes of fresh produce per year8.
Mother Dairy Fruit & Vegetable Supply Chain
As of 2009, Mother Dairy F&V had a relatively simple supply chain. Fruits and vegetables are shipped from farms to collection sites. Trucks then transport them to Mother Dairy’s ‘large and ultramodern central distribution facility’9 for cleaning, sorting and grading. From there, depending on grade, produce is split between retail stores and the processing plant.
Is it possible to grow sales at 10% per year, despite climate change?
In the short term (5-10 years), it should be! A large portion of fresh produce is still sold on individual road-side street-carts. To ensure continued supply, NDDB will need to adapt by building additional retail outlets in areas other than metropolitan cities, and expanding the capacity of their current supply chain. NDDB could,
- Make collection sites larger, and more widely distributed; sites can have cold storage for storing fresh produce longer before shipping upstream.
- Build a few more large distribution facilities for cleaning, sorting and grading, spaced throughout India.
- Build another processing plant, thus increasing conversion of raw produce to finished goods.
Despite a likely warmer future and despite being in a position to improve food security, Mother Dairy F&V has not taken a very strong approach to lower the carbon impact of their operations. Retail stores refuse to carry plastic bags however, selling jute bags10 instead at Rs. 34, which not only cuts plastic out of the supply chain but also furthers the sales of the jute industry. Mother Dairy could do a lot more-
- India is a country blessed with immense sunshine. Mother Dairy could use rooftop solar cells to power collection sites, distribution centers, cold storage and processing plants
- Install lightweight solar cells on top of their fleet of trucks
- Generate compost from by-product of processing plants, and distribute to farmers so they can organically increase the nutrient content of their farms, instead of resorting to industrially manufactured chemicals.
In the long term however, matters remain to be seen. How should Mother Dairy F&V ensure constant supply from farmers? Would partnering with farmers and becoming the sole fresh produce distributor in India secure their growth plans? Should Mother Dairy F&V ‘diversify its portfolio’ by expanding into grain, pulses and export business too? (809 words)
References:
1 The World Bank, “Agriculture, value added (% of GDP),” http://data.worldbank.org/indicator/NV.AGR.TOTL.ZS?end=2014&locations=IN&start=1960&view=chart
2 Venkataraman Balaji, Sreedhar Ganapuram, C. Devakumar. “Communication and capacity building to advance adaptation strategies in agriculture in the context of climate change in India”, Indian Institute of Management, Calcutta. Published online May 2015
3 Yen Yi Loo, Lawal Billa, Ajit Singh. “Effect of climate change on seasonal monsoon in Asia and its impact on the variability of monsoon rainfall in Southeast Asia”, Geoscience Frontiers, Published online March 2014
4 Varmal, Subodh. “Why dal prices have doubled: Here’s the math”. The Times of India, Oct 17th 2015. http://timesofindia.indiatimes.com/india/Why-dal-prices-have-doubled-Heres-the-math/articleshow/49426042.cms, Accessed Nov 3rd 2016
5 Food Security Portal, “India”, http://www.foodsecurityportal.org/india/resources
6 Mother Dairy, “About Us”, http://www.motherdairy.com/Category/about-us
7 Nagarajan, Shiva. “Mother Dairy plans to expand operations beyond Delhi, NCR”. The Economics Times, Feb 5th 2012. http://articles.economictimes.indiatimes.com/2012-02-05/news/31027016_1_token-milk-mother-dairy-fruit-pcdf Accessed Nov 3rd, 2016
8 Press Trust of India. “Mother Dairy to expand retail presence”. Business Standard, June 30th 2013. http://www.business-standard.com/article/companies/mother-dairy-to-expand-retail-presence-113063000583_1.html. Accessed Nov 3rd, 2016
9 Dr. H. M Chandrashekar, “Supply Chain Management of Fruits and Vegetables in Karnataka- A study of Safal Market, Bangalore, Karnataka, India”, Interdisciplinary Journal of Contemporary Research in Business, July 2009, Vol 1, No. 3
10 FRPT – Retail Snapshot, issued April 16th 2016, “Mother Dairy outlets to sell jute bags to curb polythene use”, Pages 26-27
Great read! Thank you for sharing the videos that provide better insight into the different brands I’m not familiar with.
While Mother Dairy is taking advantage of the opportunity to be a large distributor and provide more vegetables & fruit across India, do you see any potential risks that Walmart faced? Walmart had the mission to provide “every day low prices” that has resulted in numerous small businesses closing down because they can not compete with Walmart’s prices. Do you see any of these smaller farmers or individuals that sell produce on the street suffering because Mother Dairy is taking their sales? Do you think this is more of a negative impact on sustainability?
Considering that Mother Dairy does not have many sustainability practices, I wonder if it will only perpetuate the climate change issue because Mother Dairy doesn’t have many incentives to focus on sustainability and they will dominate small companies.
MC – thanks for sharing! Related to Karla’s comment, future opportunities for Mother Dairy seems broad but uncertain. While buying from farmers is great – in that it helps them make the most of the production from their fields, seasonal variations would not only hurt Mother Dairy but could crush the farmers as well. It seems the company could take a proactive role in helping farmers maximize productivity, facilitated by contracts that promise support in the way of fertilizer, price assurances or income guarantees in exchange for an exclusive option to buy all produce. This would protect and assist the farmers while assuring Mother Dairy of reliable supply even as market prices fluctuate.
MC, first off, I was really happy to come across an article related to agriculture in India. If there is one business/industry which is affected by climate change at a very primary level, it is agriculture in India. The problem is accentuated by the lack of irrigation infrastructure and also the vagaries and geographical location of the Indian Subcontinent. In this case the problem is more severe than just a company’s survival, it is the nourishment of a country which is at stake. Having seen poverty in my village despite the availability of fertile land, I cannot help but think that there lies an opportunity here to help farmers and then be a partner in the value added.
Mother Dairy has a great opportunity here to build a brand that can become iconic ( like Amul) in aiding the economic prosperity of the players in the supply chain. This can be done by becoming a partner in the production process and investing on a small scale in greenhouses, irrigation facilities and better technology for farmers. I am relatively inexperienced to provide a solution as to how the project would be financed but essentially the idea is to reduce the variability of conditions in the supply chain. This is related to both growing the produce and then storing it. The value added by this investment at all levels will help smooth out the cyclical effect of the increasingly erratic monsoons.
I don’t think that it will be wise for Mother’s Dairy to enter into the fragmented food grain business because this business too is affected by the problems discussed. It will be better to tackle the original business before expanding the portfolio.
Thanks, MC – great post! Looks like Mother Dairy has done an excellent job of creating a broad network of farmers to supply its goods. I’d be interested to understand what the level of communication is from one farm to another, or if information is centrally dispersed. Given that the farmers are presumably often competing with each other, how can Mother Dairy incentivize them to share info?
It looks like Mother Dairy has a chance to be an early mover in terms of Indian firms trying to reduce their emissions. Given its scale, this could put pressure on competitors and also allow the company to be well positioned when regulations are enacted.
Thanks for sharing, MC. Before commenting on Mother Dairy, I must say that I am flabbergasted by the statistics – especially by the fact that 14-15% of wheat production comes from India. It highlights how climate change can cripple this ecosystem and heightens the urgency of this situation.
Re: Mother Dairy, I like your suggestions about leveraging solar cells on rooftops and tops of trucks. However, given the cost of solar cells, don’t you think this will significantly increase Mother Dairy’s cost of production in the short-term? If costs increase, they would either have to take a hit to their margins or pass the additional costs to consumers. Given that consumers in India are very price sensitive, it’s very likely that Mother Dairy will have to absorb these additional costs and I am not sure if they have a strong financial standing to do that. Is the Indian government taking any steps to help local farmers and businesses?
Thanks for sharing – the supply chain constraints in India are really interesting especially when it comes to cold storage and quick distribution, and this could potentially be another area where Mother Dairy could make an impact with the growing challenges that arise with climate change. Since Mother Dairy has a broad reach in F&V retail outlets and connection to farms, I’m curious if they’ve taken any efforts to improve the supply chain and reduce food spoilage. Stats show that India has as much as 20-40% food spoilage between farms and consumers [1]. A company like Mother Dairy is positioned to make improvements in this supply chain, and could reduce their own costs through improved “yields” of product making it to the retail shelves.
[1] Sustainable Approached to Reducing Food Waste in India. MIT. Accessed from: http://web.mit.edu/colab/pdf/papers/Reducing_Food_Waste_India.pdf