Startups in the land of costly milk and honey

Dairy startups are modernising the way milk is delivered to people, but their high cost of doing business means they will struggle to make money

If you talk to entrepreneurs, there are a handful of things they will insist they have to do to set up a successful startup: find a problem, solve that problem, create a niche, form habits and then scale up to make money of those habits.

So, the likes of BigBasket found a problem: the difficulty of going to a store every time you run out of groceries. Solved that problem — by getting groceries delivered at your doorstep. Created a niche. You see, people bought groceries in the past, all the company needed to do was change the channel. The more you get used to the comfort, the more it becomes a habit. Now, scale is the next big challenge before BigBasket.

But could you reverse engineer it? Find a habit, and create scale from there. So, what’s India’s most common habit? Milk. It is relatively easy to narrow down. According to news reports, India produces 150 million tonnes of milk a year. Break it down into per capita and it comes to 300 grams. According to the same report, India produces more milk than several countries in the European Union put together. That’s a lot of milk.

And recently, if you’ve been paying attention, there are a few companies that seem to be raising a significant amount of capital to deliver milk. But is there a problem to fix or does the current system have flaws? The answer is, no.

Milkmen in India aremostly people who work in dairy farms and deliver milk at 4am. The product is prepaid, the delivery is seamless and it works effortlessly. It doesn’t need technology. But there is a niche; it is something that people need every day. In that sense, it is habit-forming.

A quick back of the envelope calculation shows the business potential. According to statistics released by dairy cooperative Amul, milk was priced at ~42 per litre in 2016.

The website hasn’t been updated since. But let’s assume this price hasn’t increased. According to entrepreneurs and investors, in urban areas, people buy close to two litres a day. It means, the company has locked in a customer at ~84 a day — every day. It adds up to ~2,500 per month, per customer. It is also the average ticket size per month of a BigBasket customer. So, there is reason to be optimistic. But dive deeper into this business and the flaws become apparent.

Milkmen can make money off ~42 because their procuring costs are low. They produce their own product, payment is done in cash and they have developed a delivery network that has worked for years. It is all being done as frugally as possible without investing on marketing and branding.

When startups enter this segment, they have to compete against the milkmen. Which means discounts, aggressive marketing, expensive uniforms for delivery personnel and bikes with milk coolers. It also means buying milk from these milkmen who increase their prices when selling to a perceived competitor. And with all these extra costs, the companies need to make money and compete with others in the sector.

“Milk as a business does not have large margins,” says the founder of a grocery company, which has now shut down. He asked not to be named as some of his current investors have pushed capital into milk delivery companies. The margins are thin, which is why milkmen are frugal. “If the margins were huge, you would see milkmen turn millionaires,” he adds. There is a grain of truth here. Another founder says the margins are so thin that the payment gateway charges are often more than the margins per litre. It means, as the business grows, the losses would grow deeper.

There is another level of complexity. “The way to crack open this sector is to adhere to two things: quality and time,” says Vikram Gupta, founder and managing director, IvyCap Ventures. A Mumbai-based venture capital firm. Time is a huge factor for milk delivery. The deliveries have to be timed between 4 and 7am. “Customers are unforgiving here. You miss your delivery by 15 minutes and you’ve lost the customer,” Gupta adds. The other part is quality. This is tricky too. There is no room for error. If the milk smells or is rancid, you lose your customer. There is no second chance.

There is no good way to maintain quality, however, unless these startups try to procure their own dairy farm. It means huge capital expenses and additional problems.

But there are people who have used this niche to grow further. The likes of Gurugram-based MilkBasket, which use milk as a trigger to acquire customers. Anant Goel, founder and CEO, of the company says the percentage of milk in an average order has been declining over the years. He has managed to convince customers to order not just milk but groceries as well. In effect, Goel has used milk as an entry point to create habit and then start to compete with BigBasket. “Even though our per order cost is low, our order per month, per customer is the same as BigBasket,” Goel says. And since he uses the milk delivery timing to deliver all of his products, streamlining everything in a short time burst every day, reduces cost.

Expanding stock keeping units may be the only way forward. But it means that with every step that MilkBasket takes out of Gurugram, it will need a lot of capital to set up operations “For these models to succeed, they will need to probably burn money for three, maybe, four years before finding the right fit,” says Ivycap’s Gupta. It is an optimistic view and only time will tell if this sector flames out or burns bright.