Amul's diversification strategy


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Case study on Amul's diversification strategy

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Amul's diversification strategy

  1. 1. Amuls Diversification Strategy Amuls Diversification Strategy: A Pizza for Rs 20!In early 2001, Gujarat Cooperative Milk Marketing Federation (GCMMF)1planned to leverageits brand equity and distribution network to turn Amul2into Indias biggest food brand.Verghese Kurien, Chairman of GCMMF, set a sales target of Rs.10 bn by 2006 as againstsales of Rs 2.3 bn in 2001. In 2001, GCMMF entered the fast food market in India with thelaunch of vegetable pizzas under the brand name SnowCap in Ahmedabad, Gujarat. GCMMFwas also planning to launch its pizzas in other western Indian cities like Mumbai, Surat, andBaroda.Depending on the response in these cities, GCMMF would decide to introduce its pizzas inother cities in India. The pizzas were offered in four flavours: plain tomato-onion-capsicum,fruit pizza (pineapple-topped), mushroom and Jain pizzas (pizzas without onion or garlic).GCMMF launched the pizzas in the Rs.20-25 price range. The existing players in the pizzamarket, like Dominos, Pizza Hut and Nirulas offered pizzas at nothing less than Rs.39.(Refer Exhibit I). Analysts felt that GCMMFs move would force the existing players toreduce their prices in the long run.GCMMF planned to open 3,000 pizza retail franchise outlets all over the country by 2005.The pizzas would be made at the retail outlets. The technical training and the recipe for thepizza would be provided by GCMMF. It would also negotiate with bulk suppliers ofvegetables to get these at wholesale rates. These would be provided to the retailers.The main cost component of the pizza is the mozarella cheese. GCMMF would offer thecheese at a bulk rate of Rs.140 per kg, compared to the market price of Rs 146 per kg, thussaving the retailers Rs.6 per kg. GCMMF on its part would have a ready market for itscheese products.Analysts felt that the supply of cheese products by GCMMF at a cheaper price would enablethe retailers to price pizzas lower than that of the competitors. R S Khanna, GeneralManager-North zone, said that GCMMF intended to do to pizza what it had already done toice cream. He said, "We want pizzas to become a mass consumption item. And as in thecase of ice cream, we will force pizza manufacturers to slash prices. Eventually, this wouldexpand the market for cheese."BackgroundIn 1996, B M Vyas, Managing Director, GCMMF, commissioned the Indian Market ResearchBureau (IMRB) to conduct a consumer survey to identify the products consumers wantedfrom Amul. Based on the findings, Amul entered into the following areas: ice cream, curd,paneer3, cheese, and condensed milk. (Refer Exhibit II for Amuls product portfolio). In1997, Amul launched ice creams after Hindustan Lever acquired Kwality, Milkfood andDollops4. Positioned as the Real Ice-cream, Amul Ice cream was one of the few milk-basedice creams in the market.
  2. 2. With GCMMF gradually expanding its distribution reach, Amul was all set to strengthen itsshare in the ice cream segment. (Refer Exhibit III for market share). In August 1999, Amullaunched branded yoghurt in India for the first time, when it test marketed "Masti Dahi" inAhmedabad first and then introduced it all over the country. "Masti Dahi" was plain yoghurtsold in plastic cups. Each 400 gm cup was priced at Rs 12.In January 2000, Amul re-entered5 the carton milk market6 with the launch of "Amul Taaza"in Mumbai. Amul Taaza was non-sweetened, plain, low fat milk. The product was positionedas a lifestyle as well as functional product. It was targeted at the upper middle classhousewife who could use it for different occasions. Amul was targeting sales of about 0.1mn litres per day. In November 2000, Amul decided to promote mozzarella cheese, whichwas used in pizza.The growing demand for mozzarella cheese from pizza making companies like Pizza Hut andDominos Pizza was expected to give Amuls cheese sale an additional push.1] GCMMF was Indias largest food products marketing organisation based at Anand, Gujarat. GCMMFhad annual sales of more than Rs 22 bn in 2000-01. It is a state level apex body of milk cooperativesin Gujarat. GCMMF has 14 affiliated dairy plants with a total milk handling capacity of 6 mn litres perday and milk drying capacity of 450 Mt per day. With 12 milk processing units, each located at thedistrict level, GCMMF has a membership of 2 mn farmers who belong to 10, 000 village dairy co-operative societies.2] Amul is the mother brand of GCMMF. 3] Paneer or cottage fresh cheese is made from low fat milk,without involving long, complicated procedures. It is rich in proteins.4] In 1993, HLL acquired Dollops Icecream from Cadburys India. In 1994, BBLIL launched the Wallsrange of frozen desserts. By the end of the year, HLL entered into a strategic alliance with the Kwalitygroup. In 1995, the Milkfood icecream marketing and distribution rights were acquired by HLL.5] In 1983, Amul had introduced branded milk in 500-ml tetrahedron-shaped packs priced at Rs.4.50and one litre rectangular packs at Rs.9. Amul felt that the tetrahedron pack was well ahead of its time,which was why it was not accepted in 1983. Moreover, the packaging was not convenient and it wasdifficult to store.6] The three main players in the Rs.360 bn packaged milk market are Amul, Nestle and Vijaya. Themarket is important to all three. Nestle is looking at a Rs.1.50 bn business from milk alone by 2004.Amul Taaza is expected to be a Rs.1 bn brand by 2001, and Vijaya could achieve Rs.1.2 bn sales frompackaged milk. Amul is investing Rs.300 mn in two new factories in Andhra Pradesh and Maharashtra.Nestle is targeting the south as a potential big milk market. Nestle is setting up two more plants(amount invested yet to be revealed) in the southern region and is aggressive on the price front,pegging its Pure Milk brand at Rs 20 a litre against Amul Taazas Rs.22.7] A flat unleavened bread made from flour, water and clarified butter.8] A deep-fried fritter made by dipping pieces of vegetable, meat or shellfish in chickpea flour batterand generally eaten as a snack.9] Amuls chocolate portfolio includes brands like Amul Bitter, Amul Premium, Amul Crisp, Amul Fruit& Nut, Amul Badam Bar, Amul Milk and Amul Crunch.10] Amul followed a strategy of roping in cooperatives to aid growth around the country. Amul icecream is now manufactured in seven locations across the country. Pune Milk Cooperative and AklujDairy (near Baramati in Maharashtra) have been roped in to sell 0.2 mn litres of milk per day underthe Amul brand name in Mumbai. In TamilNadu, Salem Dairy has signed up to produce milk and gheeunder the Amul brand name.
  3. 3. In July 2001, Amul planned to enter the instant coffee market through a tie-up with TataCoffee. GCMMF had a strong national distribution network while Tata Coffee had expertise inmanufacturing and marketing coffee. As a part of the tie-up, Amul was to source the instantcoffee from Tata Coffee and distribute it.The domestic coffee market was estimated at Rs.11bn, with the instant coffee segmentbeing around Rs.4.5bn. In August 2001, Amul decided to enter the ready-to-eat stuffedparatha,7 cheeseburger, cheese and paneer pakoda8, and cheese sandwich segments. Theproducts were to be marketed under the SnowCap brand. The SnowCap brand would alsoinclude tomato sauce and ketchup.Amul was also restructuring its chocolates business9. Seven of its brands that werewithdrawn from the market were to be relaunched soon. Amul tied up with Campco, thecocoa and arecanuts farmers cooperative in Karnataka and Kerala, for the supply of cocoabeans.10 Amul marketed Milklairs, which was manufactured by Campco. This tie-up wasexpected to help Amul in the expansion of its chocolate business.Why Diversify?With the liberalization of the Indian economy in the early 1990s, and the subsequent entryof new players, there was a change in lifestyles and the food tastes of people. The newteam that took over the management of the GCMMF in the mid-1990s hoped to takeadvantage of the change. The management adopted Total Quality Management (TQM) andset for itself higher benchmarks (in terms of growth). They also diversified the Amulportfolio, offering a range of food stuffs such as ketchup, jam, ice-cream, confectionaries,cheese, and shrikhand.11According to some analysts, this diversification was probably not entirely demand-driven.Being a cooperative, GCMMF was compelled to buy all the milk that was produced inGujarat. And with milk production having increased since the mid 1990s, GCMMF had tomake use of additional milk, and hence the pressure to make and market more and moreprocessed-milk products. Amul had to expand the consumption base of milk-based productsin India. It planned to make its products (butter and cheese) a part of the regular diet inmost households.Amul launched its new products with the intention of increasing the offtake of its basic milkproducts, including cheese. This in turn was expected to increase the earnings of thefarmers. The pizzas were expected to increase the sale of its cheese. The entry into theconfectioneries market was another avenue for increasing milk consumption. This flurry oflaunches helped Amul broaden its appeal across all segments. Price was an advantage thatAmul enjoyed over its competitors. Amuls products were priced 20-40 % less than those ofits competitors.Analysts felt that Amul could price its products low because of the economies of scale itenjoyed. Amul created two new distribution set-ups: a cold chain for ice-cream, and anotherfor limited life fresh foods like curd. Expecting the demand for ready-to- eat foods to grow,Amul prepared to leverage the ice-cream cold chain for a new range of frozen foods,beginning with pizza. However, some analysts felt that as the pizzas would be made by theretailers, Amul would have little control over the quality of the pizzas. That was why Amulwas marketing the pizzas under the brand name SnowCap.
  4. 4. Said S K Bhalla, Chief of Quality Control, "The product has received premature hype.Meeting consumer expectations will be a challenge, until we make the frozen pizza in ourown facilities." According to some analysts, Amuls obsession with keeping down manpowercosts and dealer commissions could be a weakness. In ice-creams for example, Amuls retailcommission in Ahmedabad city was 17.5% which was 10% lower than what competitorsoffered.They also pointed out that Amul might not have the financial muscle that multinationals hadto achieve rapid growth. However, all said and done, Amul seemed to be all set to makesteady progress in the coming years with its products having become quite popular in bothrural and urban households. Said Vyas, "Weve handled liberalisation and globalisation farbetter than our transnational rivals. It has made us fitter than ever."ExhibitsExhibit I: Pizza Price ComparisonExhibit II: Amuls Product PortfolioExhibit III: Market Share in Percentage (1999)