Around 18 months ago, when a new milk collection center opened in her village, Kattegollanahalli in the Tumkur district of Karnataka, 60-year-old Siddamma was surprised. Her village is a small one with less than 50 homes. Of these, around 35 households, including hers, mostly have just a cow or two. All of them sold their milk to the state milk cooperative which has been operating in that region for many years. Siddamma saw no reason to shift to the new center opened by MokshaYug Access (MYA), a Bangalore-based private company. But a few months later, the MYA milk collection center head, 35-year-old Anusuya from the same village, convinced Siddamma that the firm could give her a better deal.

Today, Siddamma is glad that she changed her mind. While MYA doesn’t pay her more for every liter of milk, her yield per cow has increased. “My cow now produces four liters of milk per day, as compared to two liters earlier,” she says. Like Siddamma, 11 other families in the village have shifted to MYA and have seen their income per cow go up. “It is tough to convince families to move to MYA because of their long association with the state cooperative, but I am confident that over time, when they see the benefits that their neighbors are enjoying with MYA, they will be more open to this option,” notes Anusuya. Her own two cows, she adds, have also increased their yield and now bring in more money. Anusuya and her assistant, 30-year-old Shashikala, collect milk twice a day at fixed times. At the time of collection, they test the milk quality with a lactometer and show it to the farmers. Every MYA household has a card in which the amount of milk sold and the lactometer readings are noted daily. Payments are made every two weeks.

Anusuya and Shashikala also sell cattle feed specially formulated by MYA, coordinate between the MYA veterinary doctor and the farmers, help MYA to organize camps to educate the farmers about good dairy practices, and other such tasks. “I was part of a self-help-group in the village. When MYA approached us, I agreed to run the collection center because it gives me extra income and a better status within my community. I can also help my neighbors to learn better dairy practices and improve their income levels,” says Anusuya.

Some results are already evident. According to a study conducted a few months ago by Upaya Social Ventures, a U.S.-based nonprofit organization, households that supply to MYA reported monthly incomes that are on average 24% higher than their counterparts, the quality of the milk produced in these homes is several points higher in terms of fat and protein content, and because of transparent and timely payments, nearly half of all producers in the MYA supply chain now depend on dairy as their primary source of income (rather than agriculture, which is monsoon dependent), compared to just a quarter of households before MYA started operations in these villages. Sachi Shenoy, founder and executive director of Upaya, adds: “We also observed that those households that have joined MYA have increased their consumption of milk at home by an additional 5.5 liters per month. This indicates that they are secure in their income from MYA.”

Building Income Certainty

For Harsh Moily, founder and CEO of MYA, the increase in consumption of milk by rural households in the company’s network is an important social metric. “This has a direct bearing on their health,” he notes, adding, “The minute you increase income in rural India, other benefits will fall into place — doctors, teachers, health care.” Describing MYA as a rural supply chain solutions company, Moily says the firm is a “commercial enterprise with a social conscience. We are in the business of building income certainty for rural producers by participating across every component of the rural supply chain.”

Set up in 2006, MYA experimented with different business models before settling on its current form three years ago. The business started as a microfinance company and then added an infrastructure arm under which it sought to set up primary health care centers and dairy farming units to provide services, as well as entrepreneurial opportunities, to the rural poor. While the microfinance business continues as a separate firm, Moily thought MYA could add more value to the rural economy as a supply chain solutions provider focusing on dairy. Prior to setting up MYA, 40-year-old Moily, who belongs to a political family, had worked for more than 14 years in private equity, telecommunications and agri-businesses in India, the U.S. and the U.K.

Explaining the thought behind the company’s rather esoteric name, Moily says: “‘Moksha’ means liberation in Sanskrit and ‘Yug’ means world. I’ve always believed that the fundamental reason why the poor remain poor is because they lack access to income-generating opportunities. So as melodramatic as it may sound, I named [MokshaYug Access] because we wanted give the rural poor ‘access to a liberated world’.

MYA currently has around 1,200 milk collection centers across 23 rural clusters spread over 1,100 villages in five districts in Karnataka. The company procures more than 100,000 liters of milk every day from over 15,000 dairy farmers. According to Viswanath Hegde, MYA’s chief operating officer for upstream business, in a bid to boost women’s empowerment, most of the milk collection centers are run by females from within the villages.

Recently, MYA took a big leap forward. The company launched its own dairy brand starting with liquid milk, under the name Milk Route. Prior to entering the retail segment, MYA was operating only in the business-to-business (B2B) space supplying milk to other dairy firms.

Moily points out that the average net margin in dairy B2B for liquid milk is 3%; in the retail sector it ranges from 4% to 20%, depending on the product variant. For example, the net margin in the short shelf life pasteurized milk is 4%, but for the longer shelf life ultra-high temperature (UHT) milk, it is 8% to 20%. According to Arun Subbiah, MYA’s chief operating officer, currently around 10% of the milk procured by the firm is used for its own brand. Subbiah expects this figure to increase to 100% by the end of this year. In due course, MYA also plans to begin offering higher margin milk-based products like butter, cheese and clarified butter under the Milk Route brand.

MYA’s entrance into the retail business benefits the farmers in two ways, Moily notes. “One, since there are no intermediaries, the farmers receive a higher share of the end consumer price. Two, the higher profit margins from retail milk will be diverted back into R&D and other value-added services to the farmers. This will help them in the long run in the form of increase in yield and quality improvement, and also lower value loss of the milk in the supply chain.”

Improving Yield and Quality

Improving the yield and quality of the milk per cattle is central to MYA’s business model. Take yield, for instance. India is the world’s largest producer of milk — according to the government department of animal husbandry, dairying and fisheries, in 2011-2012 India produced 127 million metric tons of milk and accounted for about 17% of global milk production. But the productivity of Indian cattle is extremely low. Kiran Konher, founder of Dairy Assist, a Pune-based dairy consultancy, points out that while the yield per cattle per day is around 40 liters in the U.S., Canada and Israel, in India it is only two to three liters. There are various reasons for this: Dairy farmers are not able to feed the cattle adequately throughout the year, the quality of cattle is not very high, artificial insemination services are not easily available, there is more focus on treatment of cattle diseases than on prevention, and dairy farmers in the country do not follow adequate hygienic practices while milking.

At MYA, the mantra is same farmer, same cattle, more milk and better milk. The company wants to show its farmers a roadmap to increase the daily yield per cattle to 15 liters over the next three years. On the quality front, MYA’s aim is to increase the fat and protein content in the milk and to reduce the bacterial load.

One key plank of MYA’s strategy is deep farmer engagement. MYA team members interact regularly with the dairy farmers in their networks to both educate them about best practices in dairy farming and animal husbandry, as well as to gain a greater understanding of their needs and problems. “The capacity of cattle to produce milk depends on its feeding, its breeding, its health and so on,” says Konher, who has been a consultant to MYA since its inception. “Everyone in the dairy industry knows this. What makes MYA different is its focused approach, appropriate implementation and a strong R&D orientation.”

Devanath Tirupati, professor of production and operations management at the Indian Institute of Management in Bangalore, notes that MYA’s sharp focus on “the first mile” of production could yield strong returns. According to Tirupati, the Gujarat Co-operative Milk Marketing Federation — better known as Amul Dairy — introduced similar practices decades ago, but under a cooperative model. “The cooperative model has come under strain over the years with the market opening up and private players entering the space,” Tirupati adds. “MYA’s is a market-driven model. If it succeeds, it could well be a role model more suited for today’s environment.”

MYA also follows the “golden hour principle,” which entails collecting and chilling milk within the first hour of milking. In the traditional dairy model, players set up large bulk milk chilling plants of 30,000 liters to 50,000 liters capacity. These bulk milk chillers service a wide area. This means that the milk has to travel a significant distance from the collection point and is not always chilled within the golden hour. In order to stay within that time period, MYA has opted to set up 5,000 liters capacity milk chillers within a maximum of an hour’s distance from its collection centers. For optimum utilization, the location of these chillers — of which there are 23 at present — is determined based on various parameters, including the density of dairy farmers in the area, the amount of milk that can be procured daily, and the road and power infrastructure. “Our next step is to see if we can use R&D to chill the milk at the collection center itself at minimum additional cost,” Moily says.

Currently, MYA has outsourced the processing and packaging of its milk because these activities require heavy capital expenditures — for example, it costs around Rs. 3 crore to Rs. 5 crore (US$550,000 to US$900,000) to set up a 100,000 liter processing unit. The current volume of milk procured by MYA does not justify such spending. “As with our chilling units, we are looking to set up micro processing units cost effectively. A lot of our R&D is focused on this,” notes Subbiah. He points out that MYA also has a strong R&D focus at the farm level for various aspects like setting up a better storage system for fodder and capturing data on each herd regarding its lineage, health and daily yield. “We are looking at a number of low-cost innovations to increase efficiencies and productivity across our supply chain.”

The Power of Technology

Mark Straub, co-founder of the Khosla Impact Fund, which has invested in MYA, cites the company’s strong focus on technology as a key strength. “MYA is using science and technology to make small dairy farming more productive and to improve income certainty for small dairy farmers. Many of the other organizations in this space depend on subsidies, and subsidies don’t scale. Eventually, the money runs out,” says Straub.

The Khosla Impact Fund, which was set up in 2011 with venture capitalist Vinod Khosla’s personal funds, supports entrepreneurs who develop market-based solutions — products and services — for the poor. “MYA is a good fit for us because it is building capacity in rural India, both in terms of nuts and bolts infrastructure and also in terms of best practices in dairy farming and animal husbandry,” notes Straub. “As investors, we are very pleased with MYA’s progress. It has had tremendous success in scaling up in the past three years.”

In August of last year, MYA entered a new vertical: fruits and vegetables. With 80% of dairy farmers also growing fruits and vegetables, it was a logical move, says Moily. “It ensures better income certainty for the farmer and better loyalty for us.” MYA sells the fruits and vegetables to institutional buyers. The company is also experimenting with the retail format in this segment and has set up one pilot store in Bangalore branded as The Good Chain. Moily notes that the store is modeled on U.S.-based chain Whole Foods.

For the year ended March 2012, MYA’s revenue was Rs. 100 crore (US$18 million). Over the next three years, Moily wants to reach out to 100,000 farmers and is targeting revenues of over Rs. 500 crore (US$91 million). Of this, milk and milk products are expected to account for 80% and fruits and vegetables will bring in the rest. Moily predicts that it will take another year for the company to be profitable at the operating level.

A New Set of Challenges

Meanwhile, with its foray into retail, MYA now has to compete with the country’s two leading milk cooperatives – Amul Diary and Karnataka Milk Federation — in addition to domestic private players like Heritage and Britannia and also multinationals like Nestle.

Currently, MYA has eight distributors in Bangalore and a retail network of around 400 outlets in the city, primarily mom-and-pop stores. It is also reaching out to consumers through independent milk vendors who supply to large apartment complexes. Moily wants to wait before approaching the modern retail format. “We want to build our brand so that we have better bargaining power with them,” he notes. Moily is also looking to gradually launch the Milk Route brand in other cities in Karnataka followed by other states across the country.

But investments on the front end — especially in branding and marketing — will require deep pockets. So far, Moily has raised Rs. 45 crore (US$8 million) by way of equity and debt. Apart from Moily, who holds the majority stake in the company, other investors include Khosla Impact Fund, Unitus Equity Fund and Unitus Impact. Moily is looking to raise around Rs. 80 crore to Rs. 100 crore by the end of the year. But there is another challenge for MYA: That of mindset. “The DNA of MYA is the first-mile focus. If I spend more than 10% of my time on sales and marketing, I feel it’s a waste of my time,” Moily says. At present though, he is not looking to hire anyone senior for this role and will be handling it himself “with the help of advisors.”

Could this be a roadblock for MYA? Straub does not think so. While he concedes that there is a need to strengthen the company’s management capabilities in marketing and branding, Straub says that what is more important at present is to deliver a quality product to the consumers. “MYA has always demonstrated a thoughtful approach to expansion as [opposed to] a careless one,” he notes. “We think that if it can achieve an early adopter consumer base in Bangalore, then there is good evidence for justifying an increase in marketing spending.” Upaya’s Shenoy suggests that the market is ripe for a product like Milk Route. “For the new-age consumer there is something very appealing about knowing that you are getting fresh milk and also benefitting the farmer in the process.”

IIMB’s Tirupati also believes that MYA can afford to build the front end gradually. “If you can assure a good quality product, then half the battle is won. The back end is where MYA can differentiate itself, because not too many people are focusing there.”

According to Tirupati, it is critical that MYA does not take its eye off R&D. “Farmer engagement works well up to a point; but once the market develops, the farmer can give his milk to anyone else. This is what is happening with Amul. In order to maintain its edge, it is important for MYA to continue to invest in R&D to improve the yield and quality of milk, and all aspects of the supply chain.”