Amul Case Study

GAMMA is engendering diversification in a substantial way into non-milk processed food businesses. It should decide whether it should go ahead with this diversification or concentrate on its core business of milk and milk products. 1. Why is GAMMA considering diversification into the processed foods business? 2. Will the proposed diversification result in the resolution of the problems faced by GAMMA? 3. How similar is the proposed food products business to Gamma’s core business of milk and milk products, really? 4. What should GAMMA do? . What are the organizational implications if it diversifies into the processed foods business? What should it do if it does not diversify into the processed foods business? (It may be helpful to look at the product portfolio now and after diversification). Reasons why GAMMA is considering this diversification. (I)GAMMA is facing a problem of adequate supplies of milk, whose growth in production is tapering off in the country. It seems to be growing at around 6 percent per year. There is also Increasing competition to the milk produced.

New players are entering the scene of milk and milk products such as Britannic, the biscuit major in India. The case also mentions that supply constraints would pose serious problems. Dry. Currie also seems to share this view. Demand does not seem to be a problem; it is growing at around 8 to 10 percent per year. (ii)Certainly the present product portfolio of GAMMA is very narrow, being confined to milk and milk products; even in this, liquid milk itself accounts for RSI. 2. 75 billion of the sales (15 percent), butter for RSI. 4 billion (22 percent), and ice creams, RSI. 2. Billion (1 3 percent). Edible oils account for RSI. 3 billion, or 16. 7 percent (up. 1 5). Liquid milk and edible oils are low margin items. GAMMA has established itself well in the ice cream business, but it is still a ewe entrant and a regional player. Hence its overall profitability would depend on the margins it can command over its other value added products such as butter, cheese and milk powder, all subject to a fairly high competition. (iii)There are also new and large opportunities opening up in the food sector, which is seen as one of the fastest growing sectors in India.

Hence it is that majors such as Nestle and Hindustan Lever are in this market in a big way. GAMMA, which considers itself as a food company, wants a piece of this action. Pros and cons of the diversification. 1 . The processed food industry offers excellent opportunities for growth: (I) The large arable area under fruits and vegetables cultivation (3. 7 and 5. 7 million hectares respectively) and a healthy growth trend of about 5. 5 percent. (ii) With increase in living standards, a shift in food consumption towards processed foods is predicted, with consumption rising by 150 percent in the decade ending in the year 2005.

Demand for fruits and vegetables itself is likely to grow to 169 million tons by the year 2010 compared to the present 113 million tons). (iii) Processed food capacity is likely to increase to 8. 45 lion tons from the present 2 million tons. (iv) The present low percentage of food processing (about 1. 3 percent as compared to other newly industrialized countries such as Malaysia (80 percent) and Thailand (30 percent). Value addition in India is also very low, about 7 percent as compared to 23 percent in China and 45 percent in Philippines). (v) The processed food market is likely to be huge. It is estimated at RSI. 0 billion in 1997 and could provide great opportunities. (vi) Processed foods business is also likely to be quite profitable. This is likely due to the high growth potential, scope for value addition and the highly regimented nature of the industry, with 51 12 units with a total capacity of only 2. 1 million tons. Thus the industry offers scope for consolidation. 2. The milk and milk-based products are likely to encounter problems due to the tapering Off Of the milk supplies. If so, there would be limits to growth in this sector, and GAMMA would encounter this limit if it sticks to this business. 3.

Since this is an emerging market, there could be an advantage in being there early and enjoying the early mover advantage. It would be necessary to capture a commanding position early if GAMMA wants to be at all in the food equines in the long run. 4. The processed food has the challenge of organizing the farmers in this sector into co-operatives, something very much consistent with the mission of GAMMA. There is clearly inordinate appropriation of value by the middlemen, with mark ups of 25 percent and more at each stage. The farmer gets only one sixth of the price eventually paid by the consumer for fresh produce.

Thus if GAMMA can appropriate some of this value, it could offer products at a much lower price to the consumer and yet be profitable. 5. At present there are huge wastage in the movement of the produce from the arm to the market, at least 35 percent. GAMMA could, by organizing a superior logistics system, contribute to the reduction of this wastage. 6. GAMMA is likely to enjoy an advantage over its competitors due to its lower costs. It has no middlemen, and it has a lean organization, with moderate pay scales. This advantage can be leveraged. Comparison of Milk & Milk Products Business vs..

Processed Foods Business Dimension Processed foods business Likely to be upper middle and upper classes keel to be high Driven by Chain Nell of distribution Us apply Milk & milk products business Large number of consumers of different classes High for milk; low for most other products Cost in many of the products Retails shops, super markets From a large number of farmers Suppliers Already formed into co-operatives egoistic Cold chain needed for inputs and outputs Brand name Already established name of Maul Competition Little in milk and certain products such as butter; strong in others.

Has been able to compete in the latter products Need to be organized into cooperatives Cold chain useful for the inputs; not necessary for most of the Yet to be established name of Safe keel to be very large and powerful companies such as HALL Market Price sensitivity Differentiation Larger shops; super markets From a smaller number of farmers, likely to be larger farmers The arguments against the diversification move 1 . There are opportunities in the milk sector itself. The output of Indian cattle is low by international standards. To get an idea of the magnitude of this difference.

The difference, at 1000 vs.. 2000 kegs. Per lactation gives a ratio of 1:2. Clearly the situation offers scope for great improvement. Thus the so- called supply problem may be actually an opportunity for GAMMA to make a difference, in the same way as the kind Of difference it made in the earlier years. But, of course, it has to be recognized that this can only be in the long term. It may involve introduction of new cattle feed, new varieties of cattle and better veterinary care. While these are very much in the mandate of GAMMA, they are all likely to take a long time to make any great impact. . The introduction of the new products would surely require a lot of resources in new marketing campaigns. GAMMA would have to pit itself against the vast resources of companies such as Nestle and HALL, already among the largest ad spenders of India. GAMMA is a RSI. 22 billion company, as against HI_L, which is a RSI. 1 00 billion company. Even though Nestle is smaller (RSI. 15 billion), it has access to its parent’s resources. Hence a move into the processed foods sector will demand a great deal of resources from GAMMA for brand building and support.

Essentially, Oconomowoc have to become a much bigger organization, with sales volume providing the impetus for the cost advantage. Hence it would be essential for the organization to become simply bigger in size along with the increase in scope (see also the analysis of financial of GAMMA under the section on strengths and weaknesses). 3. Personnel may also be a critical factor. Though GAMMA has a good set of people, it will have o expand its team greatly if it gets into this venture. A much larger number of personnel, especially executives, need to be put in place.

It may find it difficult to get adequate number of people given its pay scale structure and opportunities for further career advancement. 4. The question of which brand GAMMA should compete in may be raised: Maul? Safe? A new brand altogether? Maul may be a powerful brand, but it is very closely linked with milk products. Extending it into fruit and vegetable based products may not work. Safe is yet not a well-known and powerful brand name, and Safe products have had only a limited success so far. Hence it would require major efforts at building brand awareness before it can be really useful. A new brand will involve even more resources.

It should be remembered that though Maul itself is a well-known brand, GAMMA as a company is not so well known. Hence Safe may have to be linked to the Maul brand through some device (here ideas may be invited: joint brand name such as Maul-Safe) to lead to any meaningful leveraging of the Maul brand name. The “Taste of India” campaign (page 19 of the case) may perhaps be redesigned to include the Safe brand as well. 5. TTS earlier attempts at organizing farmers co-operatives in groundnut farming were not very successful. It remains to be seen whether fruit and vegetable farmers can be organized effectively.

They are more widely dispersed, with different kinds of fruits and vegetables, especially the former, being grown in particular parts of India Organizing in States outside Gujarat may not be easy. 6. The organization structure is essentially zonal. With quite a wide variety of products and brands to be managed, it may be necessary to go in for a product-based structure With product and brand managers to manage each brand and each product under each of brands. GAMMA has had no experience in handling this sort of a structure. Strengths analysis A very strong brand name, Maul, well known all over India.

It has already been leveraged into many of its milk based products. An excellent distribution system: 3600 dealers and 400,000 retailers spread all over the country. Supermarkets were already their customers for all their products. 3. An organization that covers the length and breadth of India, and some overseas countries as well. 4. An excellent cold chain, which may be used also for moving fruits and vegetables for processing. But it may be noted that the cold chain of milk may to be suitable for fruits and vegetables; the cold chain is also essentially local, and may not be useful in moving fruits and vegetables from far away places.

For that, a fresh cold chain may be needed anyway. Familiarity with the needs of farmers and a strong commitment to their interest. 6. A group of competent and dedicated executives who were committed to the mission of GAMMA. Its linkage with IRMA serves to tap a pool of good talent. 7. A track record of successful diversification. 8. An excellent track record in marketing, especially in communication. Its Maul hoardings with the topical items conveyed with good humor had a strong appeal. It sponsors very popular programmer in Indian’s largest television network, Doorways, so that it was known to a very large number of people all over India. Nakedness analysis Presently, GAMMA is too highly dependent on its dairy products business. Hence it is highly vulnerable to what happens in this business. It is also highly vulnerable to the production and procurement of milk. This is becoming more difficult with competition and stagnation in milk production. 2. Its major strategy has always been based on a low cost proposition. Even though its marketing savvy may be pointed out by some of the participants (in arms Of its advertisements, brand name development etc. ), it depends on the whole on its low cost position.

The processed food business may not be very sensitive to prices, given its consumer profile. Hence it will have to play a differentiation game, which may require considerable resources and a different orientation as pointed out by Porter . But its marketing abilities have been shown even in highly competitive businesses. 3. Its relationship with the suppliers has also been mainly on the milk business, and that too, mainly in the Gujarat region. The new business would need different suppliers from different parts of the country. . It is still a small organization as compared to giants such as HALL.

Hall’s turnover is about RSI. 101 billion, as against Scamps RSI. 18 billion. Even though Its turnover is larger than that of Nestle, the NC has access to the resources of its parent as well. GAMMA should be prepared for a long and costly battle before it can establish itself in the foods business. This may further be seen from the financial analysis given below. Financial Analysis of GAMMA a. Scamps net profit as a percentage of sales is only about 0. 7 percent. This is perhaps because of its policy of giving higher prices to its farmers, who are also its shareholders.

But with entry into food processing, this may have to change, especially if all its supplier farmers are not its shareholder members. It may however, be noted that its net profit as percentage of sales is improving. B. The net profit as percentage of all types of assets is showing a steady improvement. This points to improved assets utilization. Scamps return on share capital and equity are good (about 60 percent and 24 percent respectively). C. Its share capital has been increasing off and on, but whether the shareholders will be willing to contribute further share capital for this new endure is not certain. . The cash position of GAMMA is not particularly strong, only about RSI. 528 million. Hence if it gets into this new business, it will have to find considerable sources for funds. It may be noted that it has no long-term loans at all; hence it may not find it very difficult to raise new finds from banks. Of course, it will increase the fixed costs in the form of interest. E. The cost composition indicates that purchases constitute about 93 percent of sales. This is no doubt because GAMMA is a marketing company, not a manufacturing company. But its marketing expenses are only about 2. Recent, a very modest percentage. If it enters into the proposed business, it will have to increase the marketing expenses a great deal, reducing its profit margins still further. F. Its inventory management is excellent; even in its worst year (1996-97), it was only 10 percent of sales, implying an inventory turnover of 10 times in an year. Currently it is about 25 times in an year. It may be able to leverage on this capability in reducing the costs in the new business.