Cricket isn’t the only thing that New Zealand is good at. They are also globally renowned for supreme quality milk and milk products—the function of a carefully nurtured dairy industry. So even as the Kiwis pose a stiff challenge to India’s dream of lifting the ICC Cricket World Cup again, New Zealand’s largest dairy exporter Fonterra is keen to tap the business opportunity presented by India’s growing dairy industry.
In August 2018, Fonterra, owned by 10,000 farmers and their families, announced an equal joint venture (JV) with Future Consumer Ltd—the fast-moving consumer goods (FMCG) arm of the Kishore Biyani-led Future Group—called Fonterra Future Dairy. The JV seeks to capitalise on Fonterra’s expertise in managing the dairy supply chain and ensuring a steady stream of quality milk products and the Future Group’s retail expertise in India that includes a finger on the pulse of what works with the Indian consumer.
On Wednesday, around 10 months later, Fonterra Future launched its consumer brand in India called Dreamery. The first products to hit the shelves of retail stores here would be curd, UHT Toned milk, and chocolate and strawberry milkshakes. The JV, which is eyeing a turnover of ₹6,000 crore from India in the next six-seven years, wants to capitalise on trends such as increasing urbanisation, rising household incomes, and a greater number of women entering the workforce to launch ready-to-consume dairy products keeping local tastes in mind, Sunil Sethi, chairman, Fonterra Future Dairy, told Fortune India in an interview.
Also during the interview, Kishore Biyani, vice chairman, Future Consumer, and Future Group chairman, said the new partnership would be crucial to Future Consumer’s own growth plans since dairy constitutes a major portion of the FMCG industry.
The announcement of the JV between Future Consumer and Fonterra was made 10 months back and the brand has been launched now. What was the preparatory work that took place in this period?
Sethi: We have built our understanding of the dairy value chain in the country over the past 18-24 months. Since the JV was signed in August 2018, efforts to sharpen our understanding of the Indian consumer were dialed up. Once our partner (Future Consumer) came in, we picked up a lot of data and analytics they had about consumers through their own ecosystem. We also enhanced our understanding of the whole supply chain and logistics piece, where once again the Future Group helped with its own experience.
We also spent this ensuring that we put in place a manufacturing ecosystem that ensures a supply of milk that matches up to our global standards from a quality and quantity standpoint. Then we developed product formulations, which came out of our understanding of the consumer, and were worked upon at our research centre in New Zealand. That’s why we said our products are designed in New Zealand, and then made using Indian milk and tailored to suit the local palate. We then tested these products with consumers and were clear that we won’t launch in the market till we don’t get significant consumer preference over the next best option available. Eventually, we have come to this day where we believe we will create an inflection point in the dairy category.
Dairy in India is a fast-growing sector, which has also seen a lot of competition with a lot of established and emerging brands vying for consumer attention. How will Dreamery compete effectively in this cluttered market?
Biyani: The way we are trying to market dairy products through this venture us what I would call Dairy 2.0. We aren’t looking to compete with Dairy 1.0. Dairy 2.0 is all about the new age customer, her needs, and requirements. We are not selling the conventional products that you see. The whole idea is to create new categories and products for the new generation. If you look at the history of India, not many people had refrigerators in their homes 15 years ago. Now people have multiple-door fridges. Retail chains and kiranas never had refrigeration facilities earlier. Now they do. So a lot of products couldn’t be marketed earlier because of that. Dairy 1.0 was a very different experience and there are many players who are experts in that business, which was more about selling plain milk and milk products. We are approaching this business with a deep understanding of the market and products that have been perfected and that will remain consistent through their life cycle. That takes a lot of effort on the front-end and the back-end.
Fonterra had a JV in the country earlier (with Britannia, which ended in 2009). What makes you confident that your present foray into the country will be more successful than the last one?
Sethi: Around 15-20 years ago, the dairy category and market dynamics were very different. Dairy at that time mainly meant milk sold in pouches. There was very little appetite for value-added products. Second, quality and quantity of milk available then was a challenge. Supply chain and logistics hadn’t developed and modern trade was just about emerging. I think we realised we were a little ahead of time. However, we never gave up on the Indian market.
Over the next seven years, India is expected to see incremental demand of almost 80-82 billion litres, which is expected to be seven times the growth that China will see. So we always maintained that we will re-enter India at the right time and with the right partner. Today the scenario has changed. Lots of changes are unfolding on the– rapid urbanisation, higher incomes, more women are getting into workforce and thereby requiring convenience at home. Earlier, getting dairy products like curd from outside was a sin. Today it is not.
The whole supply chain network has evolved significantly and modern retail has been one of the major drivers of that. The quality and quantity of milk has improved significantly. So we have a lot of respect for what stakeholders in the industry have done here. Today, our dairy expertise and understanding the grass-to-glass model along with the Future Group’s expertise is a potent combination to win in the marketplace.
How important is Fonterra Future Dairy as a venture to Future Group’s own plans of growing its FMCG footprint?
Biyani: If you look at food and grocery consumption in India, 8-10% of the business comes from dairy for a retailer. So it isn’t small and it is very important for us to be in this category. Also, 20-25% of ingredients used in our daily cooking comes from milk products in some form or another. We have a stated ambition of reaching a level of 70% of our overall sales from our own brands. So this is a category that we can’t ignore. If you look at last three months, Future Consumer has launched three big categories—snacks, detergents and now dairy.
Given that you will be competing with some very large and established players to begin with, will you be competing on price?
Biyani: No. Pricing is not the way we want to win in this business. Our strategy will be centered around quality, nutrition and taste.
What are Fonterra Future’s future plans in terms of product innovation?
Sethi: We want to position dairy not only as milk but also a snacking option. Versus taking another snack, is there a way that dairy can satisfy a similar need, craving and sensorial requirement? How would you respond to transparent milk or a fizzy milk drink? Those are options that will be exciting and lot healthier than what you may have otherwise. That’s the space we will be getting into. If you have parathas with butter and pickle for breakfast, can we give you a butter that has pickle included in it? So staying within the consumer’s consumption behaviour, we want to make it more exciting for them to use our products that would taste well and be convenient to use. So these are all innovations on the table, which we will get into the country at the right time.
What is your take on the Indian FMCG market in general? It has been going through a slowdown, even as you plan on entering it.
Sethi: Even though the percentage growth in India may slow down, it is still ahead of many other markets. How many markets with 70% of its people below 45 years can boast of such growth? Will there be ups and downs? Always. We are in this business for the long term and we are excited by the potential India has in terms of future growth in per capita consumption of dairy products.
Globally, there is a movement towards bringing down sugar content in beverages due to growing health concerns. What are Fonterra’s plans in this regard?
Sethi: Globally, we have been able to achieve a reduction in the sugar content in our products. From an added sugar level of 10%, we have brought it down to 4%. We are looking to cut this down further to 2%. We are trying to achieve this by tweaking product formulation and using some flavours that reduce the sugar content but don’t change the sensorial experience of sweetness. We will get there in India as well and will also develop products targeted at sizeable sections of customers like those with diabetes. These products will be developed using alternatives to natural sugar, which won’t even include artificial sweeteners like aspartame.