Hi everybody if you’re someone who wants to learn how to build a legendary brand in a market full of sharks then this episode is for you because the story that I’m about to tell you today is the story of a 17-year-old boy who had no money no brand value and no investor backing at all and yet he went on to build a 2,000 CR Dair business and that.
To in the presence of many giant competitors now just so you know the milk industry is one of the most brutal Industries the country because your product will perish in 4 days your margins are hardly 3 to 5% and if you don’t move your inventory fast enough you will be out of business in no time secondly during that time amul was the.
Pioneer of the white revolution of India so much so that in the 1960s if you look at this graph we were importing 50,000 tons of milk powder but by 1990s we became a net exporter of milk powder operation flood which ran from 1970 to in 1996 is the world’s largest Dairy development program where the farmers would collectively decide their rates.
And sell directly to the dairy this was the birth of operation flood under the newly formed National Dairy development board the world’s biggest Dairy development program that transformed India from milk deficiency into the world’s largest milk producer this was the effect of the wide Revolution on India so during this time all these milk.
Brands and cooperatives had the perfect recipe for Domination which were money brand value and Technology whereas this 17-year-old boy neither had money nor did he have the technology to scale his business and let alone brand value nobody even knew he even existed this boy that I’m talking about is one of the most underrated entrepreneurs of India.
Who goes by the name Satish Kumar and the brand that he built is none other than milky mist and today milky mist is such a successful brand that they sell 2,000 crores worth of dairy products all across India so in this episode today ladies and Gentlemen let’s go deep and find out how did a 17-year-old boy carve a space in the challenging Battlefield.
Of the Indian dairy industry what were the business strategies that helped Satish build a 2,000 CR company with very less money and no investor backing and what are the business lessons that we need to learn from the rise of Satish and milky Mist this is story that dates back to 1992 when Satish Kumar was a 17-year-old.
Boy who had just dropped out of his school and he joined his father’s milk business but very soon he realized that their business was running into losses and if he did not do anything about it they would have to shut down their business this is when he identified three major problems in their milk selling business firstly because there.
Was no value addition to milk they couldn’t charge High margins so they barely made 30 PES to 1 rupee Max per liter of milk sold so this this was a margin of barely 3 to 5% and sometimes they even had to sell milk at a loss secondly milk had a shelf life of Just 2 days so they had to dispatch the milk within 10 hours of milking so that they.
Could move their inventory at a profit and thirdly because of this Logistics was a nightmare and they could not expand their business so they were practically stuck in a stagnant Market with a low margin business and with no power of logistics at all then the question is how did this boy turn milky Mist into such a legendary company with.
2,000 crores in Revenue well the first thing they did was escape the commoditization of milk with a strategy of value addition now this seems like a simple statement right but you know what guys this statement has a very deep meaning so hear me out this philosophy of business says that the margin of your product is usually directly proportional.
To the value that you add to the product let’s take the example of rice if you buy rice from a wholesaler and sell it in the Market at 50 rupees a kg your gross margin would be around 30% and you’ll make a 15 rupes profit out of it but if you take rice and add 250 g of UR Dal and grind it into a batter you can make 3 cges of idly batter to make these.
3 CES of batter you would need 50 rupees worth of rice 40 rupees worth of urat Dal and 20 rupes worth of other materials so the input cost is 110 rupees but now at Standard Market rates you can sell this batter in Mumbai at 80 rupees a kg so when you sell 3 kg of batter you make 240 rupees now if you see because of the value that you added.
To rice with urat Dal and grinding your margin has shot off from 30% to 54% and now if you turn this batter into idy something magical happens again 3 kgs of batter will give you 20 idys per kg and 60 idys in total and when you turn it into idly it will cost you another 20 rupees of input cost for Chutney and other items per kg so the.
Total input put cost is 110 rupes plus 60 rupes which is 170 rupees right and now if you sell a plate of three idlies for 40 rupes a plate you can sell 20 plates of idys so the total revenue that you generate is 40 into 20 equal to 800 rupe so now what’s your gross margin it’s 800 – 170 which is 630 rupees or 78.75 so if you see the idiy that you’re.
Selling is still made out of the same 1 kg bag of rice but your Revenue has short up from 50 rupees to 800 rupees and the gross margin it commands short up from 30% to 78.75 so you see as you added value to the commodity your margins shot up from 30% to 54% and then when you turn the batter into idley by adding more value.
The margins went up to 78% this is how ladies in German companies turn a commodity into a high margin product by value addition if this is very very clear to you let’s see how milky Mist applied this philosophy to milk you see milk is a commoditized product with a profit margin of just 3 to 5% but what the founders of Milky.
Mist did was they procured milk and turned it into CD paneer and ghee and this is where the magic of value addition happened if you see this table while the margin in milk is less than 5% the moment you go to kurd the margins jump to 20% with paneer it’s around 20% again but with higher cost with ghee it goes to 22% and with ice cream it shoots.
Up to more than 35% so Sati saw that the root cause of their business problems which were margin Logistics and growth is nothing but the milk itself but if he adds value to milk suddenly the margins shoot up by four to five times based on the products he sells this is a reason why ladies and gentlemen Satish started selling paneer.
And ghee in the market and this gave milky Mist three major advantages firstly as they went from milk to paneer the number of competitors in the space reduced by a large extent in fact in South India back then even cooperatives were not bullish on paneer CD and ghee type products secondly like we saw it help them stretch their margins which.
Help them make their business viable and lastly the beauty of value added milk products is that as you go from milk to paneer not just your gross margins increase but also the shelf life of your product increases so if you look at this chart when you go from milk to ice cream the shelf life of the product increases from 7 days to 30 days to 6 months to.
Even one full year this is the reason why milky Mist started selling CD and paneer in the market and this teaches us the first lesson in business which says if you’re in a commoditized market you will end up killing your own margins with prize wor but if you use value addition you can escape the pricee wars of the market and actually make a profit.
Coming back to our case study in the southern part of India the consumption of paneer was very less and it was consumed only by rich people this was partly because refrigerate of penetration in India was less than 20% in 1995 but in the late 1990s the 1991 globalization effects were seen all across India 1991 was a landmark here.
For India with economic reforms changing the way we live work and spend money it’s a budget that’s set to change the path of the Indian economy is we are in a phase of restructuring our economy so markets opened up lots of people got jobs and the per capita income of India shot up so when the middle class population of India became.
More affluent they also became more aware of nutrition and food and this is when people started seeing paneer as an important source of protein and as you all know while the non-vegetarian have chicken mutton and eggs vegetarians can only have paneer and Tofu for protein that’s it this is the reason why suddenly paneer started selling very.
Well in the South Indian market so this looks perfect isn’t it Satish found a great market and a high margin product which had less competitors so Satish must have had a very easy time building his business isn’t it well absolutely not because there were three more challenges in the market which were way more difficult than just producing and.
Selling paneer and cod so the question is what were these problems and how did saish tackle them firstly India’s milk source was extremely fragmented in fact even today if you see it is so fragmented that we have 7.5 lakh small Dairy Farmers with an average of just two cows or buffalos so you can imagine how difficult the situation was in 1995.
Where there was no internet very less highways and very less Logistics infrastructure secondly the farmers could not be bound by a contract to sell milk only to one company because back then then it was considered to be a taboo of corporate control why because we were a socialistic country where the word business was an evil word but.
Funnily at the same time the Loyalty of the farmers was such that tomorrow if somebody paid them more money they would happily sell their milk to that company and they will just cut all ties with the existing company so you as that milk company might suddenly lose thousands of liters in supply of milk so long story short it was very difficult to win the.
Loyalty of the farmers the third challenge was inconsistent quality of milk from different Farmers this was because education was very less amongst the farmers and they used to feed unhygienic or not so nutritious food to the cows that led to inconsistent quality of milk so in short supply was not guaranteed quality was.
Not guaranteed and Logistics was not high class at all then the question is how did they solve these problems well the first challenge of scattered Supply was solved by the location itself if you see this map this is the EOD milk belt for those those who don’t know EOD is a major milk producing City why because Cav water was available to the citizens.
Of EOD in large quantities and because of water agriculture prospered in this region as a result good quality feed and F were available and hence more cattle was owned in EOD and the adjoining areas this way milk procurement became a little bit easier the second challenge of farmer loyalty was soled in a wonderful Way by Mist you know what they.
Did to win the Loyalty of the farmers they ident ify the most pressing problems in their life and became the farmers Lifesaver and there were three major problems that they solved for number one was lack of loans this was because the banks could not trust the Farmers Credit worthiness secondly they saw that the farmers had no reliable.
Source for animal care so as a farmer in the middle of the night if your cow collapsed you had nowhere to go no doctor was available during emergency and you just had no option but to let your cow die and lastly the f farmers were uneducated about the latest technology in the market because of which they were not able to increase.
Their income so milky Mist so these problems immediately firstly they used their Rao with the bank to give loans to Farmers secondly they launched 24/7 Animal Care help line and give ready access of doctors to Farmers at subsidized rate so the farmers could immediately seek help from these doctors and keep their cattle in good health.
Cherry on the cake they even got them cattle feed at zero profit so that the farm Farmers could produce great quality milk and thirdly they educated the farmers about the latest technology and even arranged financing so that the farmers could produce more output and eventually make more money and the best part was that milky Mist paid Farmers on.
A weekly basis so this say the farmers had enough cash flow and they could take home money and they did not face cash Crunch and this payment today is done digitally straight to their bank account so that the banks could track their income and their transactions and event eventually they could increase the farmers loan eligibility now you tell me.
Guys as a farmer if a company takes so much efforts to pay you on time to take care of your cattle to help you get a loan and even takes the trouble to educate you with no contract binding at all my question to you is won’t you be loyal to that company this is how milky Mist won the trust and loyalty of the farmers without a written contract and.
In return they again got three major benefits they got high quality milk they got consistent supply of milk and most importantly they did not have to worry about competitors stealing their farmers and this teaches us the second lesson in business which says while good companies focus on extracting maximum value out of their Partners to maximize their profit.
Margins great companies collaborate with their Partners to help them deliver maximum value and eventually end up increasing their profit margins this is one of the golden attributes of conscious capitalism and if you remember this philosophy of helping the partners is what turned Japan from a wall tone country into the second largest economy.
In the world this is how ladies and gentlemen milky Mist solve their supply problem but now the question is they were buying so much milk that is fine but how did they manage to sell their milk products and what did they do different from their competition well firstly they started with five star hotels in Bangalore this is because five.
Star hotels have a very strict regulations about p for those who don’t know five star hotels have these strict regulations of using high quality paneer which needs to be stored between 0 to 4° espcially they also need to have the perfect level of consistency and quality of paneer so while local vendors struggle to match.
The quality milky Mist could fulfill all their criteria this is how they got their first set of customers but as you all know the total addressable market for festar hotels in India is too small in the entire country even today we barely have 324 F star hotels so this was too small of a market for milky M to make a hefty profit but at the same time.
This was enough customer base to keep them running this is the reason why they stepped up their game and reached out to Kira stores so again this looks very simple right I mean what can be so complicated about asking kirana stores to sell your paneer which is a high value product well as it turns out milky Mist.
Encountered two more challenges number one the kirana stores back then did not have chillers to store the paneer for more than 2 days and secondly the transportation from Factory to the kirana stores was a big big problem so if you see the shelf life of paneer without a refrigerator it’s not even 2 days so if the trucks did not have.
Refrigeration and the Kira stores also did not have refrigeration the company only had 48 hours after manufacturing to ship distribute and sell paneer at the retailer and if the customer also does not have a refrigerator it will get spoiled within just one day so this was a big big problem which was lack of Refrigeration in trucks and Kira stores.
And the shelf life of paneer and as we know even Refrigeration was only present in 20% of Indian households so the question is how did milky Mist solve for Logistics and Refrigeration well this is where they came up with two very high cost solution and it almost looked futuristic to all the competitors back then number one.
They decided to give out 20,000 chillers to all retailers who could sell their paneer and if you remember this is what Coca-Cola did to distribute their soft all across America this cooler keeps the air just below freezing so that with a Simple Touch of a button you can enjoy an icy version of your favorite Coca-Cola beverage and this will allow.
Us to expand to many many more places CU it leverages the coolers that are already out there you’re starting to see there’s over a thousand of these in stores in the US already and secondly their paneer was manufactured in their Factory in per and got transported to different cities in the South so they installed chilling Technologies in the.
Trucks so that the products could be stored in cool conditions till they reach the retailer basically milky Mist was one of the first companies to build a cold storage supply chain now any season businessman would ask a question as to why didn’t milky Mist Outsource their Logistics to a cold storage company because that way they could.
Reduce their upfront cost and they could skip the headache of managing the staff and Logistics team right well that is what even we were wondering but when we spoke to the stakeholders in the Daily Business what we understood is that even though Outsourcing gives you cash flow it takes away your control over quality so if Outsourcing leads to degradation.
In quality you must bring it inhouse even if it is costly and this is a very very important lesson for all entrepreneurs because we somehow choose the convenient option of Outsourcing because we feel like we need not have the headache of managing a staff and paying them consistently even though they might have less work but what we.
Fail to realize is that that Outsourcing might lead to degradation in quality and efficiency both now in case of Milky Mist they noticed that the drivers were shutting down the trucks Refrigeration in between their trips with a fully loaded truck which was decreasing the shelf life of paneer they were also not punchable with the deliveries which.
Again affected the logistic schedule and milky Mist could not do anything because the trucks belonged to a third party provider so milky Mist decided to purchase the trucks and operated them all by themselves this way they could control both the journey times and the quality of the product but you know what this is where they faced another problem.
When you own these trucks you can send cheese from oo to Shimla but most of the trucks would return empty right so automatically the transportation cost would shoot up in fact it would double so you know what the team of Milky Mist did they managed to build their own return logistic system for example if the truck full of Milky Mist products.
Goes to Shimla or Kashmir the truck does not return empty from there instead they might get apples from Kashmir back to Tamil Nadu so they actually made a profit out of their return logistic system and today milky Mist has more than 250 cargo trucks and tankers all fitted with GPS mechanisms to keep track of their data and their location so this.
Is how Satish found a gap in the market leveraged it to make a profitable business sold for a fragmented Market soled for the trust of the farmers and then built a logistic supply chain to turn milky Mist into a two ,000 CR Revenue company and did all of this by selling milk and milk products so what are the lessons that we learned from.
This case study lesson number one if you are in a commoditized market you will end up killing your own margins in prize Wars with competitors but if you use value addition and branding you can escape the price Wars of the market so find a way to turn a commodity into a value added product and sell it under a brand name and invest heavily into.
Branding secondly while good companies selfish focus on extracting maximum value from their partners and increase your profit margins great companies collaborate with their Partners to help them deliver maximum value as a result end up increasing their profit margins this is one of the golden attributes of conscious capitalism and lastly even.
Though Outsourcing gives you cash flow it takes away your control over quality and if Outsourcing leads to degradation in quality or efficiency you must it in house this might mean high cost initially but it will pay you dividends beyond your imagination these are the lessons that we learn from the rise of Satish and the.
Brand called milky Mist that’s all from my side for today guys I would especially like to thank Satish and his team for spending their precious time with us in helping us understanding the Milky my story in helping us derive these valuable business lessons it really means a lot to us and guys if you have a message for Satish and milky Mist.
Please drop a comment I think he will have wonderful time reading your comments and your messages if you learn something valuable as usual make sure to the like button in order to make Bey Baba happy and for more such insightful business and political case studies please subscribe to our Channel thank you so much for watching I will see you.
In the next one bye-bye
