A failed venture in Kerala

The one-year-old Milma-Mother Dairy joint venture seems destined for a premature death owing to differences between the NDDB subsidiary and the State cooperative KCMMF.

R. KRISHNAKUMAR in ThiruvananthapuramR. Krishnakumar in Thiruvananthapuram

IN the end, it was not the idea but its implementation that turned sour. Milma Foods Ltd. (MFL), the joint venture marketing company established a year ago by Mother Dairy India Ltd., a subsidiary of the National Dairy Development Board (NDDB), and the Kerala Cooperative Milk Marketing Federation (KCMMF), the State cooperative that owns Kerala's market-leader milk brand `Milma', is about to cease operation.

Following an offer from top NDDB officials in March 2004 to "withdraw its (100 per cent) subsidiary from the venture, if the State cooperative was not so enthusiastic about it any longer", a general body meeting of the KCMMF held in Thiruvananthapuram on June 9 "unanimously decided" to pull out from the joint endeavour. KCMMF Chairman P.T. Gopala Kurup told Frontline that "the atmosphere has become one of mutual distrust, the marketing gains expected from the joint venture did not materialise and the two profit-making (of the total three) regional cooperative unions of the federation incurred heavy losses after the company took over their marketing activities."

According to the Mother Dairy representatives in the MFL, however, "the State federation failed to provide the promised support and honour several commitments and went against the grain of professional marketing strategies on several instances and, rather prematurely, began blaming the NDDB and Mother Dairy for all the inevitable failings and initial shortcomings."

Both sides claim they are unhappy about the outcome but want to part ways "amicably, as friends". The blame game is very subdued, with many officials and representatives reluctant to go on record.

The MFL was the first of the joint venture companies formed by Mother Dairy with State dairy cooperatives, in the backdrop of the unsavoury controversy between the Gujarat Cooperative Milk Marketing Federation (GCMMF), the path-breaker cooperative which owned the country's leading `Amul' brand, and the NDDB, a Central government statutory corporation (established by an Act of Parliament as a sort of techno-financial-managerial consultancy and venture capital fund for dairy and agro-processing cooperatives), which had 100 per cent stake in Mother Dairy. With the leaders of India's dairy cooperative movement, GCMMF Chairman Dr. Verghese Kurien and his protege Dr. Amrita Patel, now the Chairperson of the NDDB, locking horns over the issue, the fate of the few joint ventures that were proposed became a matter of keen business interest with far-reaching consequences for the cooperative dairy sector. The grand dispute (Frontline, March 28, 2003) was about the dangers of a government-owned statutory body like the NDDB, potentially bound to follow government policies in an era of globalisation and liberalisation, entering as a majority stake-holder in joint ventures with dairy cooperatives and threatening the core principles of equity, democratic control and equality within cooperative institutions and perhaps deflecting them from their orientation towards the welfare of dairy farmers. What eventually came of the joint venture experiments was to help in the arbitration of the dispute.

Several issues and questions that had a bearing on the larger controversy were raised at the time of the formation of the MFL. The KCMMF, for example, had declared that its mission was "the prosperity of its farmers through the satisfaction of its customers". The primary motive of the new joint venture company, however, was to seek profits for its shareholders. Importantly, the majority of the shareholders in the enterprise (in which Mother Dairy held 51 per cent stake) were not dairy farmers. It was argued that the fledgling venture would also usurp the only revenue-earning part of the value chain in a dairy business - the marketing of milk and milk products - leaving the procurement and processing functions alone to the regional cooperative unions. It would thus convert the well-established three-tier cooperative structure into a two-tier arrangement where the key marketing function would rest with the company and the farmers were unlikely to get good realisation for their efforts. The State marketing federation would be left with no job to do. Another concern was that if the skills of the State federation and the weakness of the marketing infrastructure were the real problems, would the forming of a collaborative venture with a government body be the right solution to them at all? Should not the problems be solved by strengthening the federation itself, instead of leading the way for the government's entry into the cooperative business? Also, Milma already had 76 per cent of Kerala's urban liquid market and it was not clear how the new project would benefit either the federation or its member-farmers.

But it was also true that since its inception in 1981, the KCMMF had remained at best a mere "distributor" of milk and milk products, even though it had grown in a matter of over two decades to gain a Rs.400-crore market in Kerala, largely in an environment where it had no rivals for a long time. The need for "aggressive marketing" began to be acutely felt with the opening up of the economy, and with over 35 private players entering the market in Kerala, establishing their presence in specific areas and nibbling at the cooperative's profits. Although the three regional unions of the federation (based in Thiruvananthapuram and Ernakulam and in the Malabar region) together continued to sell over seven lakh litres of milk every day, its rivals soon gained a marketshare of over 2.5 lakh litres a day in the State in a short span of time. Moreover, multinationals such as Britannia and Nestle were threatening to enter the Kerala market in a big way, and the cooperative's capital base, infrastructure and marketing skills were often found to be wanting to meet the new challenges.

Although Milma has existed for over two decades, the entire range of its milk and milk products were not well known to consumers in the State. Some products were available only in certain regions while products of one union could not be sold in zones demarcated for others. Production too was not economical, with different units being forced to produce the same product, even though it made more sense to do it at one place. The regional unions had too much on their hands selling liquid milk alone, and hence they could spare very little effort and resources to market the entire range of products.

Milma had to shape up or increasingly share its profits with its ever-stronger rivals to the detriment of the State's marginal farmers, nearly seven lakhs of them members of over 2,400 primary Anand-type dairy cooperatives under the three regional milk unions, to which the federation passed on nearly Rs.80 lakhs every day towards the value of milk received twice a dayat the primary cooperative collection centres.

THIS was the context that led to the launching of the MFL on March 21, 2003, despite the resentment expressed by the regional unions, especially the profit-making Thiruvananthapuram and Malabar unions, which did not like to part with their hard-earned share of the profits with a new company over which the federation or its member-farmers had little control. They were also unhappy about the dismantling of the three-tier cooperative structure and the take-over of the key marketing function by the new company, under the pretext of bringing in long-term benefits to the cooperative movement. Employees of the federation too were concerned about their prospects when the new marketing company came into being, and used the labour negotiations that were going on then to delay the shifting of employees to the new company and to ensure that they would remain temporary employees of the company, over whom company managers would have little control. Eventually, according to a federation representative, when they joined the new company, many of them did not get the expected positions of power or pay. For several months after the MFL came into being, Mother Dairy failed to appoint a suitable person to head the key department of marketing. In the initial months, therefore, as marketing efforts began to go awry, resentment and distrust began to grow between the joint venture partners.

According to officials of the MFL and the State federation, the drifting apart started even before the new company started functioning fully. During the reinventing of marketing strategies, Mother Dairy representatives suggested a different pricing system for the three different unions with their own separate cost factors, but the Federation demanded a "uniform price" for milk supplied to the company for marketing and hence a uniform commission for the company for every litre of milk sold throughout the system.

The argument of the Federation representatives was that since the procurement price and the selling price were uniform, the purchase price (for processed milk supplied by the unions to the company for marketing) should also be uniform, a move suggested to benefit the loss-making Ernakulam union. Officials of the MFL told Frontline that the purchase price was "arbitrarily" fixed at a uniform Rs.12.05 a litre, without any cost analysis. This immediately worked to the disadvantage of the Thiruvananthapuram and Malabar unions, which were then realising Rs.12.10 and Rs.12.12 respectively for every litre of milk they sold in the market; the Ernakulam union was getting only Rs.12 for a litre.

About the same time the unions had to incur an additional expenditure owing to the hike in the prices of petroleum products, electricity and skimmed milk powder. Thus when the new company entered the fray, both the profit-making unions, which were expected to better their performance, were suddenly seen to incur losses. An MFL official said that this was only to be expected because the State federation had insisted on a uniform purchase price. "If indeed the federation had wanted to help the Ernakulam union, which was declared as a unit under rehabilitation, the incomes of the three unions should have been combined and then shared equally in true cooperative spirit to overcome individual handicaps. Instead, for no fault of ours, the NDDB and Mother Dairy are now being blamed for the losses incurred on account of the policies the Federation had imposed on the company," he said.

In the subsequent months there were several instances when the interests of the new company and those of the Federation clashed. During the Onam festival season in 2003, the Federation, which was forced to buy ghee from the open market because of a severe shortage, unilaterally increased the retail price of ghee sold through Milma outlets. Mother Dairy representatives did not find it amusing as the joint venture "had specified that a price revision should be implemented only through mutual consent". Again, during the lean season, when the unions wanted a Re.1 hike in milk prices, the company was of the opinion that the quantum of hike should be decided only after some more time, perhaps during the flush season. This time MFL managers too were called for discussions. The Federation insisted on the hike and got it. "Without any explanation as to how the additional one rupee was to be shared as per the costs incurred, the company's share was fixed at 2 paise. The unions objected strongly even to such a small portion of the additional rupee going to the new company," an official said.

P.T. Jacob, Managing Director of the MFL, told Frontline that even a year after the company was established, the spirit of collaboration and sense of partnership that should have been there was missing. "The Federation could not honour many clauses in the agreement, especially regarding the daily supply and the rate and quality that needed to be maintained. While protracted labour negotiations were going on, supply was disrupted several times. We needed to ensure quality and the professionals appointed for the purpose were treated like intruders and even physically threatened. Our plans for aggressive marketing could not be implemented for want of cooperation," he said.

But according to the Federation Chairman the advantages that the unions expected to see with the formation of the joint venture company did not materialise. "The expectation was to increase our market share by 11 per cent, but the actual growth was only 7.4 per cent. The general body of the Federation felt that there was no need for a separate company to achieve such a growth in sales," Gopala Kurup said.

Indeed, MFL managers are of the view that the company's success or failure was being judged too quickly and harshly. "We had invested Rs.3.5 crores in infrastructure development and marketing. The visibility of the products had improved, vehicles were remodelled to transport milk at a fixed low temperature, and puff boxes were provided for many retailers. We also made an effort in rural marketing, to spread the sales network in rural areas. These were long-term investments and the results would not be immediate. For reasons beyond our control, the unions began to incur a loss and unjustly made the company the scapegoat. The Federation representatives and officials could not also agree to the new professional culture that we were insisting on if we were to succeed. Surely there were instances of some of the union representatives wanting the company to provide jobs for favourites," one of them said, on condition of anonymity.

Representatives of the State cooperative have a different perspective. They feel that the Federation gave the company a Rs.400-crore market "on a silver platter". Milma, they said, was already the market leader in Kerala and had a lot of goodwill. "There was no need for a gestation period. The results should have been immediately visible. But we found ourselves in a situation where the ones who toiled were at a disadvantage while the facilitator was making money. There was a drift in the operations of the new company. Had it continued, it would have eaten into the profits of the unions," a Federation representative said.

Asked why the experiment failed so quickly, a top official of the Federation said on condition of anonymity that the key issue was the losses incurred by the originally profit-making unions "perhaps because of the Federation's wrong decision to insist on a common purchase price. On the other hand, had the unions been able to make additional profits in the crucial first year, this unfortunate situation would not have come about. The concept was good, but the implementation was faulty. The Federation too will have to share the responsibility," he said.

Both sides now want to get out of the joint venture. The NDDB game plan of having a number of such collaborative ventures with various State cooperatives and finding a good upcountry market for milk products under the Mother Dairy mnemonic (that of a stylised drop of milk) as a symbol of quality and homogeneity for the products of all dairy cooperatives in the country too seems to have failed. State cooperative managers say that this may be another reason why it is losing interest in the Kerala venture.

The Kerala experience may have a bearing on similar arrangements elsewhere in the country. A similar joint venture is in place in Uttaranchal, albeit on a small scale. The proposed joint venture in Andhra Pradesh is yet to take off.

A formal announcement of the winding up of the Kerala venture is to be made by the middle of July, according to Gopala Kurup. P.T. Jacob, however, told Frontline that even a fortnight after the KCMMF general body meeting, neither Mother Dairy nor the NDDB was informed of the decision. Sources in the KCMMF said that the dissolution of the MFL was now only a formality since the general body decision to withdraw was merely waiting for the "concurrence" of the State government. However, the decision will also depend on the NDDB. But in all likelihood, the MFL seems destined for a premature death.