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Past Issue • Oct-Dec 2015

Amul: A Business Strategy Built on Value for Many

Amul: A Business Strategy Built on Value for Many

There are very few brands that evoke a sense of nostalgia, satisfaction and pride the way Amul does. Whether it’s Amul’s witty socio-political ads or catchy taglines, or be its famous mascot – all have defined Indian marketing and branding distinctly. R S Sodhi, Managing Director, Amul (Gujarat Cooperative Milk Marketing Federation) visited ISB recently. He was interviewed by C Chitti Pantulu, Director, Marketing and Communications, ISB. Excerpts from the interview.

Chitti Pantulu: We have all grown up with Amul in many senses. The brand is identifi ed with Dr Verghese Kurien; so how has the change been since he passed away?

R S Sodhi: Dr Kurien passed away about two and a half years back but he had retired from Amul in 2006, when he was about 75 years old. He has imbibed a value system in the organisation and those ideals and values continue to be a great source of guidance and inspiration for all of us at Amul – the organisation is still functioning in the same way as it did when Kurien was there and nothing has changed. Fortunately the top management of Amul – be it me or my colleagues, all of us have had the opportunity of working with him, right from our day one – we are still in our first job, since the last 30 years. His style of management, his business strategies, his values are still there. If the organisation gets into any trouble, we try to visualise how Dr Kurien would have dealt with it. And this solves a lot of problems. Sometimes this even helps us to convince others also.

So nothing much has changed because he had laid very solid foundation. Even after he left, the organisation is growing at the same pace as before. In the last five years Amul has captured about 21 to 22 percent of the market. We have grown – have set up new plants, introduced new products, expanded our distribution to newer geographies. And the most important thing is that we are paying very well to our farmers, which has encouraged them increase their productivity. Over the last nine to ten years their income has grown by 9 to 10 percent per annum, which has not happened with any other agricultural produce.

At the origin of an organisation a value system is adopted by the first generation leaders, just as Dr Kurien had done for Amul. How does that value system get codified for it to continue after that person leaves? What has Amul done to ensure continuity of the value system from the first generation to the next?

The value system gets into the DNA of an organisation through its people. Since, these are the values which have been inculcated by the founders of the organisation. So eventually it evolves as the culture of the organisation. No matter who comes and joins Amul, they immediately connect with these values. For instance integrity was something that Dr Kurien used to emphasise upon. As a result everybody at Amul is a person of integrity. The same applies to other values like ‘excellence’ or ‘efficiency’.

Another thing is that, we very rarely induct people at middle or higher levels. Most of the people, who join Amul, join immediately after their college. We ensure that this is their first organisation. While other organisations – the new ones, hire thousands of people at different levels at the same time – people from diverse backgrounds, from different cultures and different value systems. So the organisation cannot have a unified DNA.

Amul – the organisation is still functioning in the same way as when Kurien was there and nothing has changed. Fortunately the top management of Amul – be it me or my colleagues, all of us have had the opportunity of working with him, right from our day one – we are still in our first job, since the last 30 years.

We do also take experienced people, but in terms of percentage – they won’t be more than 3 to 4 percent of all our employees.

What is it that you look for in a new employee joining at the entry level?

We look for three things: Integrity, Integrity and Integrity. If you are graduating from a good management school, then I already know of your calibre, your intellectual level. I know that you are educated. What makes the difference is integrity.

One sees Amul in a different light these days – much more aggressive and a very fast growing company.In the next five years – in terms of size, turnover and growth you are actually looking to do what you have done in the last 30 odd years. Now, that’s really remarkable. So how are you going to achieve this kind of growth target that has been set for the company?

First of all let me tell you that, we at Amul are very fortunate that we are located in a country or a market which is growing very fast. India is not only the largest producer of milk but it’s also the largest market (consumer) of milk and milk products. We are thus very fortunate. We are very self-suffi cient; whatever we produce, we consume. But the share of organised market is just 17 percent and out of that Amul’s share is only 25 percent. Sky is the limit for us. We can grow as much as we want.

Since the last four-five years, we have consciously directed our business strategy in a new direction. The thing is that Amul is owned by 3.6 million farming families of Gujarat. And 68 years back when Amul was founded, the idea behind it was that farmers won’t only produce the milk but will also process and market it so that they get the maximum share of the price that consumers were paying in the cities.

From the very start we were procuring milk only from farmers in Gujarat (in the process we were also helping Gujarat to grow), processing it, adding value and selling it all over India and exporting some of it. Around 2004-2005 we realised that after selling, we were left with a lot of surplus milk which we were converting into other value added products – milk powder and white butter. We were selling these to urban milk dairies in the metros – Delhi, Bombay and Calcutta. So we were dependent on these consumers. However, every year the number of value-added products was increasing because growth in milk procurement was much more than what we could sell in value-added form. So then we thought that instead of giving our products to other dairies in the metros why shouldn’t we ourselves sell our products. So in 2004, we started with Delhi – we got a very good response from the consumers. And then we went to Calcutta, Bombay, Kanpur, Nagpur, Pune – all the major cities. Within six to seven years we were well established as a brand and network. In all our markets we emerged as No 1 and all of a sudden we could sell off all our commodities/products. We were left with zero inventories of our products. But then another problem arose, the massive growth in the market for our value added products. Gujarat alone wouldn’t be able to meet the requirements. So we decided to look beyond Gujarat and share the benefit of the Amul brand with the farmers of other states. We started procuring milk from Rajasthan, Haryana, West Bengal, Maharashtra, UP and lately also from Punjab and MP. From all these states we procured milk as per the Amul model – directly from the farmers. And today 20 percent of our milk is procured from outside Gujarat. About five lakhs farming families are being benefitted by the Amul brand without paying any royalty.

The dairy industry is not one where you can buy your raw material from the market. You need to source good milk daily. Once we had expanded our supply, we expanded our processing facilities. So we started setting up plants beyond Gujarat – we have set up four plants near Bombay, three in Delhi, in Kanpur and Nagpur. More than 12 to 15 processing plants are now outside Gujarat. For these, every year we invested thousands of crores of rupees. Simultaneously, we also expanded our distribution network – by establishing more stock points known as depots. Now we have 60 depots across the length and breadth of the country.

We very rarely induct people at the middle or higher levels. Most people, who join Amul, join immediately after their college. We ensure that this is their first organisation. While other organisations – the new ones, hire thousands of people at different levels at the same time – people from diverse backgrounds, from different cultures and different value systems. So the organisation cannot have a unified DNA.

How has your business strategy changed over the years? Particularly, now when you are considering expanding your footprint, which would mean that you will be required to spend on technology.

Basic business strategy does not change – you keep changing the execution. Our basic business strategy is ‘value for many’ – which is diametrically opposite to that of any corporate house. But being the CEO of a cooperative, my mandate is – or the goal is that, I have to buy my raw materials at as high a price as possible, and sell my product at such a reasonable price that whatever raw material is offered to me, I should be able to sell. I can’t decide the purchase of my raw material on the basis of the market. And I have to market whatever is offered to me. So my strategy is that I have to buy at maximum price and sell to ensure value for all the stakeholders.

Another thing that’s unique to our case is that we deal in food. Things change over a period of time; say for instance this room would have been very different 50-60 years back. But a cup of tea remains the same over the years – so does the food platter. Similarly, food habits don’t change, but what changes is the use of technology, packaging, distribution, supply chain and with time we have kept evolving on all those fronts. We have introduced new products, new technology, new packaging solutions and new kind of supply chain management. Our supply chain is very different from that any other FMGC. We distribute four types of products, which are as follows:

  • Ambient product distribution to meet the retailer’s needs for on-time deliveries and onshelf product availability
  • Distribution of chilled products like cheese and butter
  • Frozen products, that’s ice creams, for pan India distribution
  • Fresh products, which are the most important of all, comprising milk, curd, butter milk – these need to be marketed within three or four hours of packaging.

I don’t have bottom line targets – only top line. The emphasis is on the price I buy the milk at. The 3.6 million farmer families are our shareholders and also our suppliers – they are our owners. They are not there for dividends. They need a good price for the milk they are selling to us.

So, the basic premise of Amul’s business model is diametrically opposite to that of any modern day successful business where it’s about profit maximisation – buying raw materials at the lowest price and selling the finished product at the highest price. So how are you actually meeting your bottom line requirements, targets and the profitability aspect?

I don’t have bottom line targets – only top line. The emphasis is on the price I buy the milk at. The 3.6 million farmer families are our shareholders and also our suppliers – they are our owners. They are not there for dividends. They need a good price for the milk they are selling to us. Having said that, I must also add they still get dividends. But every member can only own one share, nobody can have two shares. So accordingly everyone gets dividend for one share which is very nominal. So I don’t have to worry about the bottom line. So whenever we make profit, we increase the price that we pay to our farmers. That’s the measure of performance for us.

How do you address market realities? The dairy sector, at least a few years back, was not very profitable, but now it seems to be coming into its own. Competition is growing; now there are several brands. When you don’t have bottom line pressures how do you address the market forces and the competitive elements?

Competition is going to be there. Many more players will come in. But as I said before the market is huge – there is space for everyone. Let more organised, transparent and bigger players come, it would lead everyone to invest in the market; invest in increasing the category – so the whole market will witness an increase. Dairy is a very complex market. The first thing is that you cannot enter the industry overnight.

For setting up dairy plants all you need is money to buy the latest technology. But the difficult thing is building a brand, trust and faith. That too can be taken care of if you have good money, say about R 200-R 300 crores to spend every year. But the third most difficult thing, which takes decades, is building the distribution highway – ambient, chilled, frozen and fresh. You can invest in a cold chain but what you need is volume.

Only when you get volume on this highway, only then will all channel partners get some money. Otherwise it will just be like a toll road, if nobody uses the road, nobody pays the toll; so even if they built good roads it won’t be there. It’s the same in your distribution highway – you will need traffi c, volume and scale. And the fourth and the most difficult thing, which people who are not in the dairy business won’t know, is a very reliable source of milk procurement. You cannot buy milk from the market, from the contractors, or from the vendors. One day you buy from one, the next day you buy it from someone else – the quality won’t be the same every time, neither the price nor volume would be the same.

So it’s a very unique industry, whatever you have recounted until now…

60 percent of the organised dairy industry in India is in the hands of the cooperatives and remaining 40 percent is controlled by the private sector. Amul, may be, is the No 1 brand across India, but in different states, the local cooperative is the market leader. For instance in Karnataka Nandini is the No 1 not Amul; in Rajasthan Saras is the No 1, in Bihar Sudha is No 1. So any private entrepreneur or private dairy wants to compete with Amul or any other cooperative, they have to battle first with the cooperative business strategy of buying at the maximum price and selling at reasonable rates. Private players will also have to adapt the same cooperative strategy. In past 30-40 years you will not fi nd any of the private players making money including the net deductions. When in 2004 Amul entered the metros – Delhi, Bombay, Calcutta – the big corporates were already present in the liquid milk category in all these markets. But within three-four years they were out.

So, does it mean that the dairy sector is not profitable?

No, it’s profitable. But it’s reasonably profitable. If you are looking for 15 to 20 percent profit, then it won’t happen; but if you are looking to make a profit of five to six percent then you will get that.

So given these realities, Amul has this target of reaching R50000 crores turnover by 2020, which is not very far away. So on paper it looks like a very ambitious target.

No, you see, in 2010 our sales were R8000 crores and in 2014-15 it’s R21000 crores.

So, what’s the secret of such success – is it expansion, is it more investment in your infrastructure and supply chain?

Prosperity of Indian consumers. People are earning more; they are spending more on food – on branded food products. 50 percent of vegetarians drink milk or eat milk products from morning to night. So we don’t have to worry so much.

Only when you get volume on this highway, only then will all channel partners get some money. Otherwise it will just be like a toll road, if nobody uses the road, nobody pays the toll; so even if they built good roads it won’t be there. It’s the same in your distribution highway – you will need traffic, volume and scale. And the fourth and the most difficult thing, which people who are not in the dairy business won’t know, is a very reliable source of milk procurement.

What are your plans? How do you intend to expand?

In the South, we have entered only Hyderabad some months back. We have launched Amul milk which is doing very well. So, as and when the time comes, we would like to expand across all the markets. Compared to other parts of the country, we haven’t entered South aggressively because I feel that in South the cooperatives are doing reasonably well.

While Amul is the No 1 brand in the country, in the regional markets the cooperatives are doing well. So clearly the competition for Amul is from these other cooperatives which are also expanding. Like the producer of Nandini has recently expanded to Hyderabad, they were doing well in Karnataka for many years.

All cooperatives are our brothers and sisters. All cooperatives have originated from Amul. In 1965, the National Dairy Development Board was founded with the objective to replicate Amul model all over India. And that white revolution, Operation Flood 1, 2, and 3, when it was implemented across India – it was the Amul model being replicated. So Karnataka Milk Cooperative is our brother. They also make our Amul ice-creams. Besides, whenever we are short of milk, we source it from them, they send it to us in Mumbai.

When we have surplus, we share it with them. Say if Orissa or Bihar has surplus milk and they don’t know what to do with it; we help them by taking it to our Calcutta market. We are sourcing a lot of milk from the cooperatives of Maharashtra. The thing is that the mentality of the cooperatives is absolutely different from that of the corporate sector. Farmers are all one. They want to help each other. A shareholder of Amul who joined 68 years back and one who joins today enjoys the same benefits; their share value is the same. So the old fellow is sacrificing for the new entrant. See the royalty of the Amul brand is such that a member who joins today becomes the owner of the Amul brand. Where would you fi nd in the corporate world such a thing happening.

Communication needs consistency. And consistency is possible because at the helm of organisations, at our end as well as at the advertiser’s end, the same people are there even today. This ensures consistency.

Talking about the brand, there is huge legacy behind the Amul brand. The beautiful da Cunha campaign is still on. So what are your future plans? How are you going to build the Amul brand further?

Let me tell you about our communication philosophy and strategy. Dr Kurien told us that communication is essential, brand building is essential. Amul invested in brand building in 1950s when no Indian brand used to do it. This Amul topical butter campaign is 50 years old. But this doesn’t mean that you go on a spending spree, you spend what is necessary, what consumers wish to see. Our advertising spend is one percent and this has been so right from day one (unlike other Indian food companies who spend anything between 8 to 14 percent). In fact, last year it was 0.8 percent. So the reason we are able to make impact with minimum spends is because we do umbrella branding. No management school teaches that you should go for one brand image for multiple products. But we have a different strategy and our philosophy is of an umbrella brand. It helps us keep our spending to the minimum. Whatever you invest in an advertisement comes out of the consumers’ pocket. Suppose you see one soap ad today and you buy the same soap tomorrow; do you know how much you paid for that soap ad? A minimum of six to seven rupees. They charge the consumers 14 to 15 percent. Dr Kurien also said, ‘leave communication to the professionals’. Why do you hire professionals in the first place? Because they know better than you, they have got more knowledge, they are more creative, so don’t interfere in professional work. The second rule is, what is working, don’t change it. So if any advertising campaign, like Amul butter is working, it’s making impact, then why change it? The Taste of India campaign started in 1993-94. We are continuing with it. The Amul utterly butterly delicious campaign has been going for the last 50 years. It’s because communication needs consistency. And consistency is possible because at the helm of organisations, at our end as well as at the advertiser’s end, the same people are there even today. This ensures consistency. Communication needs consistency. And consistency is possible because at the helm of organisations, at our end as well as at the advertiser’s end, the same people are there even today. This ensures consistency.

 

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