Pradesh Milk

Federation

Submitted to
Professor Ganesh Prabhu
New Product Development

Submitted by Group E (NPD2)

Anant Pandey
Shaunak Dey
Harshini S
Suarabh Bondade
Saurabh Suresh Bondade

PRADESH MILK FEDERATION -

Current Issues at Pradesh Milk Federation

Pradesh Milk Federation (PMF) is a cooperative apex body of about 5,000
village level dairy cooperative societies (DCS). From making a profit of INR
~22 crore in 1999, it has incurred a loss of INR 1.5 crore in 2001, which is
expected to rise up to INR ~5 crore in 2002 in case of status quo. PMF is
grappling with various issues, which are described below:
Inability to Effectively Deal With Variability in Milk Collection
While PMF had a surplus milk collection during winters, there was a shortfall
during summers. This problem was compounded by private dairies that
matched PMFs procurement price of INR 9.50/liter during winter but drew
away farmers by offering INR 11-12 per liter during summers.
PMF was unable to dispose of the excess milk procured during winter, even
after supplying to other cities. As a result, some excess milk had to be
converted to milk products for storage, which could be blended with fresh
milk during summers in order to meet the shortfall. This resulted in
additional cost of INR 3-4/liter. The remaining milk had to be converted to
skim milk powder and sold below cost in bulk.
Inability to Raise Retail Price of Milk
Being a cooperative dairy, there was constant political pressure on PMF to
keep the price of its milk and milk products low. As a result of low prices,
despite increasing milk collections, the contribution from products had been
falling over the years.
Inability to penetrate the Whole Milk Market
The Raajpur city had an estimated demand of 0.4 LLPD of fresh whole milk
delivered at the doorstep. This demand was mostly met by small, local
dairies. However, PMF was unable to enter this market since its product was
perceived to be not as fresh as that of local dairies, though few had actually
tried it.
Inability to Increase Sales of TFA Packaged Milk
Launch of TFA (Tetra Fino Asceptic) packaged toned milk represented an
important effort towards effectively managing milk inventory and creating
primary demand through new modes of milk consumption. However, sales
had stagnated at 10,000-15,000 LPD against the established processing
capacity of 50,000 LPD.
Increasing Competition in the Milk Products Segment
As a result of the WTO agreement, foreign brands were planning to enter in
the milk products segment in India. This could lead to increased competition
and impact PMFs sales further.
Lack of Proper Marketing of its Products
Inspire of increasing competition from local, national as well foreign dairies,
PMF did not pay sufficient attention to proper marketing of its product range.
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This resulted in distorted perception of certain of its products such as whole

milk, despite their being of high quality.
Lack of Product Diversification
PMF was too much focused on its liquid milk sales and did not push the sales
of its milk products as much. It only used the milk product range to drive the
sale of its liquid milk and capture market share. Having captured a large
market share of liquid milk sales, it was unable to raise its revenue and
profits further.

Implications
Declining Profitability of PMF
As a cooperative, PMF had to collect any amount of milk offered by farmers,
irrespective of its actual demand. It was unable to find effective ways to
dispose of excess milk. It was also unable to periodically and timely raise the
price of milk and milk products. This ultimately resulted in a loss of INR 1.5
crore in 2001.
Liquid Milk-focused Product Portfolio
Due to lack of diversification of its product portfolio, its sales and profits were
unduly dependent on the sales of liquid milk. The contribution of milk
products to the topline and bottom-line was relatively low.

Way Forward
Better Marketing and Positioning of its Product Range
At present, PMF is not aggressively marketing its products and clearly
defining their positioning to customers. Although its products have a very
good recall value, their promotion over TV and in print media is very limited.
For example, due to inadequate promotion, the fresh whole milk launched by
PMF was perceived to be not as fresh as those offered by rivals without even
trying the product. This perception needs to be dealt with proper promotion
and positioning of its products.
Also, milk products need to be promoted aggressively since their contribution
in the overall product portfolio is very limited. With the entry of foreign
brands, the situation will only become worse. Hence, in order to increase its
revenues and profit, PMF needs to increase sales of its milk product range
along with liquid milk sales.
Diversify its Product Portfolio
At present, PMFs product portfolio is highly liquid-milk focused, with very few
milk-based products. Even these milk-based products are used to further
improve the sales of liquid milk, although milk products have similar or
better margins. Hence, PMF needs to enter into additional milk product
markets. The advantages of diversification are:

Better utilization of excess inventory of liquid milk

Increased revenue and profits from additional product lines

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Following are the product lines that PMF can enter into:
Line Extension of Existing Products: PMF can consider line
extension of existing products in order to capture greater share of
wallet of consumer. These products can be:
o Flavored curd and yoghurt along with conventional curd
o Production of cheese along with butter
o Milk cream and condensed milk, etc.
Product Targeted at Specific Demographics: Since Raajpur is a
metropolitan city with the cost of living similar to that of Delhi and
Mumbai, there is a market for special products targeted at specific
demographics such as
o Baby milk powder for newborns and kids
o Milk products with low fat and high nutrients for health-conscious
consumers
o Milk with special additives such as vitamins, energy factors, such
as soya milk
Targeting New Customer Groups
At present, PMFs business is mainly B2C, with few B2B customers. Since it
has already captured significant B2C milk market (market share), B2B market
represents the new avenue for growth. PMF should target state-level
businesses, rather than targeting national-level customers. For example:

Targeting hotels, restaurants, etc.

Partnering with state level government programs for supply of milk

Changing the Approach in Tetra Pack Milk Market

PMF has already invested in building a TFA packaging facility and has gained
some expertise in this area. However, at present it only offers toned milk in
Tetra Packs. Since customers already buy pouched toned milk for daily
consumption, Tetra Pack toned milk offers little value-add for purchase.
Instead, PMF should diversify its TFA packaged milk and offer premium and
niche products for high-end market. The range of products that can be sold
in TFA packaging are:

Flavored milk, such as chocolate, vanilla, strawberry and coffee

Milk with special nutrients, such as calcium and vitamin D
Other varieties of premium milk, such as low fat milk for health
conscious consumers

These should be mainly offered in high-end retail channels such as

supermarkets and hypermarkets, since shoppers from middle and upper
income classthe target customer groupregularly visit these outlets.
Another advantage that Tetra Pack offers is that these niche products are
comparatively slow-moving. So Tetra Pack ensures the longevity and quality
of these products. Also, these products may not be consumed in one go, so
Tetra Pack offers convenient storage option as well.

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Offering a variety of milk in Tetra Pack and better targeting of right consumer
group will not only ensure that the capacity is properly utilized, but also the
overall market size would increase due to newer modes of consumption of
milk.
Till now, only 7.5 LLPD was sold as liquid milk out of an average of 10 LLPD
procured every day. A fraction of the remaining milk was converted into milk
products, and the rest disposed of as skim powder in wholesale market. Even
in winter, after selling excess milk to neighboring cities, the rest was
converted to unbranded skim milk powder and sold at a loss in the wholesale
market. This loss was weighing down the entire P&L of PMF. The above
mentioned steps should help PMF in better utilizing the excess milk procured
and reduce/eliminate the loss incurred due to the production and sale of skim
milk powder.

Other Steps for PMF

Periodically Raise Price of Milk
There is another issue of PMF having to constantly raise the procurement
price for farmers without being able to pass on the high cost to consumers.
This was due to pressure by activists and the government. This has resulted
in declining product contribution despite increasing collection and sales over
the years (Table 1 and 2). We need to keep in mind that operationally, PMF is
already as efficient as other cooperatives. Therefore, there are fewer
avenues for cost cutting to improve profitability.
In future, PMF should periodically raise prices of its products. To ensure that
this is feasible, the increase can be small and incremental, instead of a large
raise in one go. This will require certainly negotiation with the government
and activist groups. On the other hand, if PMF does not raise prices in light of
increasing costs, its financial viability will be threatened.
Offer Higher Price for Procurement during summer
At present, PMF offers a constant price of INR 9.5 per liter in both winter and
summer. This leads to variation in milk supplied by farmers to PMF. PMF
should instead offer INR 11 (additional INR 1.50 per liter) during summer and
procure the sufficient amount of milk, instead of spending INR 3-4 per liter in
reverse process of converting skim milk power and butter oil into liquid milk.
This step will also lead to better compliance of farmers to cooperative rules
and reduce chances of farmers offering milk to private players first during
summers.
Providing Longer Credit Period for Slow Moving Products
In order to incentivize retailers to stock long-life but slow moving products,
PMF can consider offering longer credit period to retailers for stocking such
products. This will ensure that retailers are not under cash flow strain due to
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these products. However, PMF should continue cash sale for fast-moving
items such as liquid-milk in order to keep its own cash flow healthy.

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