Dairy Industry

The dairy industry, which is one of the oldest prevalent industries in the world and still
continues to grow at a considerable rate. The industry has also managed to maintain a
relatively optimistic growth despite the slowdown in economy.This can be observed from the
fact that the average annual increase in the dairy market size was 5.16%, i.e. $2760million in
2014 to $3210 million in 2017.Also, according to analysts,the estimated market size of the
dairy industry will reach $4165million.Moreover, milk production is projected to increase by
22% by 2027.Besides,by 2027,the additional milk output produced by developed and
developing countries will be 9% and 33%, respectively.
Coming to the Indian dairy industry, India ranks first in milk production,accounting for 19%
of the global market share.The Indian dairy industry comprises of approximately 75million
dairy farmers,40% of them operate in the organized sector and account for approximately
20% of the total volume production.The unorganized sector,on the other hand,contains
players who prefer selling within their respective communities.The largest market share in
the Indian dairy industry is dominated by liquid milk, which is 58%.Also,in line with global
dairy industry,the Indian industry has been experiencing steady growth rate with each passing
decade.The dairy market is expected to grow at 16% by FY 2020.
Moreover,the milk processing industry in India is projected to expand at a CAGR of 14.8%
between FY 2018 and FY 2023.Also,in terms of valuation it will reach Rs.2458.7 billion by
FY 2023.
The Indian dairy industry is characterised more by ‘production of masses’ than ‘mass
production’.In order to compete and sustain in the market; the players in dairy industry
propose and implement different strategies. Some of them include

Industry Analysis
 The value-added products of the Indian dairy industry are at 34% and are likely to
grow at a healthy rate of 23% annually. Besides, value-added products provide
margins in the range of 25-45% as compared to relatively low margins of 6-8% of
liquid milk. This is why companies are focusing on increasing their revenue share
from value-added products to over 50% to drive growth along with improving their
market coverage.
 In India, the number of dual household incomes is increasing at a consistent rate.
Customers are left with high disposable incomes and therefore are ready to try out
new dairy products and thus driving consumption.
 To create brand visibility,companies are investing heavily on packaging to build
brand loyalty and awareness. Innovative practices for packaging are coming up which
are lighter, more robust and ensure the products inside stay completely free of toxic
chemicals.
 Due to urbanization, which accounts for 28% of the Indian population, brand
awareness amongst consumers is on the rise which serves as a demand driver for
 branded products.Also,there is growth in consumers preferring clean, hygenic and
ready to eat milk and dairy products, thus contributing to the organized dairy industry.
 Companies are also focusing on the supply chain and logistics to ensure short lead
time as milk and its products have a short shelf life and are perishable. Technologies
and data analytics are now being implemented to facilitate better decision making and
empower the dairy industry.
 Since 1991, the dairy industry has been liberalized in a phased manner.It also
witnessed many private players entering the industry setting up plants in areas with
surplus milk.Due to this vast potential, the government has also come up with
proactive measures that guide the investors willing to set up processing plants in
different parts of India.
 As dairy serves as a source of income for households in rural areas, the government
has set up numerous schemes with an effort to increase the income of those families.

Industry Attractiveness Analysis: Porter’s Five Forces

1. The threat of new entrants: High
 The Dairy Industry is very large and competitive.Each firm tries to establish itself by
aiming for quality products and focusing on customer satisfaction thereby obtaining a
considerable share in the market.
 The dairy industry requires high capital investment due to the requirement of
industrialized processing and quality control methods.
 Policies such as globalization and liberalization and government schemes have made
it easier for players to enter the market and seek assistance from the government.
 It is difficult to achieve economies of scale in the dairy industry as it requires high
labor output. Besides,it has been observed that the production cost of milk produced
per unit is similar for small-scale producers and large-scale dairies,even though small-
scale producers use family labor.
 Loyalty is of utmost importance in this industry as consumers have a preference for a
particular brand. The level of preference is such that the customers would rather go to
some other retailer to purchase their desired brand rather than purchasing some other
brand.
 A strong distribution network in key markets ensures the diverse customers'
requirements are met thereby helping sales and the growth of the sector.

2. Bargaining power of Customers: High

 When it comes to consumption of dairy products, customers have a fair amount of
bargaining power up their sleeve. The availability of close substitutes further
contributes to customer preference being influential.
 Also,it is quite difficult to ensure that the customers will persist with the same product
again and again due to the availability of diverse products along with low switching
costs.

3. Bargaining power of Suppliers: Moderate

  The dairy industry serves the model of corporate society wherein the farmers who are
the suppliers of milk and milk products benefit from the companies.This ensures the
suppliers have a good return on their supply.
 There is a fair share of bargaining from the suppliers, too, as nowadays the farmer’s
rights are protected under rules and regulations,thus ensuring moderate bargaining
power from their end.

4. The threat of Substitute Product or service: High

 The availability of attractively priced substitutes has ensured that consumers have a
wide array of products to choose from.Also,low priced substitutes are also available in
abundance from the local vendors and retailers.
 Substitutes are considered as of similar quality than the product counterparts.Thus,the
rate at which the customers switch to substitutes is very high.On the other
hand,buyers can also switch to customers without any obstacles.
 Besides,companies also need to wary about the distant substitutes taking away the
share of the sales of their products.

5. The intensity of rivalry amidst the competitors: High

 Since,the demand for the dairy products is increasing at a very
healthy rate,companies are battling out the competition to
outperform each other at regional as well as national level.To
withstand the rivalry,companies are coming up with a diverse
portfolio of products.Also,it benefits the consumers as rivalry
encourages companies to bring out new products which the
consumers can leverage on.

Thus,the Porter’s Five Forces Model reflects a profitable yet highly

competitive market for the dairy industry.

Sources:

Annual report

https://economictimes.indiatimes.com/industry/cons-products/food/value-added-products-help-
indian-dairies-tide-over-milk-price-volatility/articleshow/62241964.cms?from=mdr

http://www.mondaq.com/india/x/698204/Industry+Updates+Analysis/Indian+Dairy+Industry+The+
Quest+To+Grab+A+Share+Of+The+Consumers+Monthly+Basket

http://www.fnbnews.com/Top-News/valueadded-dairy-products--an-added-edge-to-the-balanced-
nutritious-food-47000

https://www.crisil.com/en/home/newsroom/press-releases/2018/07/value-added-dairy-products-
to-grow-50percent-faster-than-sector.html