SME Focus

Nepal Dairy White Flood of a Kind

While other dairy units are concentrating on selling skimmed milk, Nepal Dairy (P) Ltd. is expanding in churning out value added
products perplexing the other players.

Frequent milk holidays are troubling dairy farmers particularly during the flush season while the skimmed milk plants use imported powdered milk to maintain their supply of milk during the lean season.

The situation warranted a powdered milk plant and the state-owned Dairy Development Corporation (DDC) has set up one in Biratnagar. A similar plant was planned in Chitwan district but it could not be implemented. Now reports of such plants planned for Butwal and Kohalpur (near Nepalganj) are appearing in the newspapers but Nepal Dairy, led by Dr. Heramba Bahadur Rajbhandary, former CEO of DDC, selected a different model to address the situation and reap benefits.

Nepal Dairy, which was started with seven shareholders circa 1980, has been a pioneer in private sector dairy industry (other private dairies started only after Nepal Dairy was functioning well) and it was using the milk in a conventional way – i.e. in making cheese, paneer, curd, butter, ghee etc. But around 1995 there was a big problem of surplus milk being supplied by the farmers. While the DDC imposed milk holidays (certain days of the week it does not buy milk from the farmers), Nepal Dairy adopted a new strategy – utilising the excess milk to produce other milk-based products.

Thus started nd’s, a branch of Nepal Dairy. The first product launched was ice cream being sold under the brand name nd’s. That was soon followed by pizzas, burgers and momos – all vegetarian. Even a bakery unit was set up. The idea was to use the excess cream that the skimmed milk plant of the company was producing. Last year it started selling milk-based sweets also, an idea soon picked up by even DDC.

This model has been leading the company to a completely untraditional path. To retail the products, the company has set up its own outlet at Mahaboudha, Kathmandu. To expand the volume, it is now going on franchise arrangement.

The franchising required standardisation of the distribution/retail channel so the company had to focus on designing the shops and equipment. The refrigerators were imported, but the kitchenware, tables, ovens, burners were all designed by the company for its franchises.

Thus the business model led to forward and backward integration at multiple stages. The ice cream cones used to be imported in the past but the importer has now started producing them here in Nepal itself, informs Dr. Rajbhandary. Similarly, the ice cream cups are also being produced here. ‘An industrial unit is like a peepal tree which shelters so many under and on its foliage. So if one industry is badly affected, the repercussions are widespread,’ he says.

nd’s now is focusing on specialisation, professionalism and on supplying five star quality products at prices affordable even to the lower middle class group, Dr. Rajbhandary summarises his business strategy. He stresses on ‘five star’ by mentioning that the supervisors of his production facility are also working in the five star hotels in town.

The beginning

Nepal Dairy’s beginning was, however, an inauspicious one. Soon after it went into operation, they were involved in a court case. It was tax related case but in reality it was guided by some ulterior motives of some tax officials, he recalls. The case dragged on for about seven years and the promoters did not think it worthwhile to make further investment. So other dairies that started later than Nepal Dairy got an extra mileage.

But as soon as the court case was settled, the investors went ahead and invested about Rs. 50 million in the expansion. They have had reason to be happy with their decisions. The business recorded a profit the very first year surpassing the projections. However, the expansion spree is not over. ‘The shareholders have not received any dividend so far. All the profits are being ploughed back in as additional investment,’ he informs.

Franchise problem

The franchise way of expansion selected by Nepal Dairy for its nd’s brand has faced some obstacles. One such initiative in Basantpur failed as the franchisee broke the agreement. Another franchise outlet has been recently opened at Kumaripati, but its experience is still to be evaluated. Due to the failure of Basantpur experiment, the company is now cautious about it. Therefore, though there are several proposals from outside the Kathmandu valley for franchises, the company is now focusing more on developing a proper franchise agreement template.

One learning the company has gained by consulting experts in this field is that it should develop a strong quality control base, a strong research base and a good package if it wants its franchise arrangement to be successful. ‘It means that we need to further develop professionalism,’ summarises Dr. Rajbhandary.

The company already has two food technologists, and an MBA (marketing), qualified dairy technologists and accountants among its 200 employees (100 in the pasteurisation plant at Khumaltar and 100 at the food factory at Mahaboudha). The employees are from cross-cultural and cross-community backgrounds with the majority being women, particularly those who are being neglected by their families. ‘Such people are sincere workers. They get their pride enhanced by employment, are very loyal and also eager to improve their efficiency. If you give them respect, they become your most valuable assets,’ he says giving examples of some women working with his company.

Human resource management in Nepal Dairy is a continuous process. ‘We are always looking out for talented people,’ says Dr. Rajbhandary. He shows several thick files of bio-data collected by his HR department. Anyone who comes looking for a job is asked to leave a bio-data. ‘Whenever we need to recruit a person, we consult the files and find a suitable person. We don’t have to spend money and time advertising the position. People selected this way have seldom failed to deliver results,’ he confides.

Present Status

There are some 30 dairies with pasteurisation plants operating in Nepal, but about 55% of the pasteurised milk market is controlled by the state-owned DDC while Nepal Dairy has only about 10-15% grossing some Rs. 60 million as annual turnover. But Nepali Dairy is the market leader in terms of variety though not in quantity. The variety has helped Nepal Dairy enjoy higher margins. This has left the other dairies in a dilemma. They cannot make large investments to go in for dairy based products as they have already made huge investments in milk processing. DDC, however, followed Nepal Dairy’s model to some extent by introducing various milk-based products and improving its pasteurised milk package. It was able to do this as it is not suffering from a resource crunch.

Plans

The price, quality, service and environment should be conducive for success, says Dr. Rajbhandary sharing his experience. That is the focus of all future plans that his company has.

According to him, the quality of the product should be according to the need of the customer. To ensure the quality, nd’s uses two layers of test panels – first the internal panel and then the external panel – to test the products developed. At least 80 observations are recorded before finally accepting a new product and commercially introducing it.

Now the company is also contemplating on plans to develop a consultancy wing to help the franchises.

But why not go for powdered milk plant? Falling back on his four decade experience in rural development and dairy industry, Dr. Rajbhandary says that it is simply not feasible for Nepal as it is still cheaper to import powdered milk due to the high taxes imposed on domestic production.

This feature on SME has been sponsored by Laxmi Bank Ltd.