One of the first orders that MK Stalin signed after taking oath as Chief Minister was to reduce the price of Aavin milk by ₹3. This was also one of the promises mentioned in the DMK’s manifesto for the Assembly elections. Many especially the party’s sympathizers in the media have been showering praises saying that this will provide relief to the poor and middle class consumers. However, there seems to be a larger design behind the DMK government’s move.
The ₹3 increase and decrease
Back in August 2019, the Tamil Nadu Government had come up with a revised price for Aavin milk by increasing the price of all its milk packets by ₹3. This price rise was done as a result of increasing the milk procurement prices from dairy farmers and other milk producers. Thus, the Maximum Retail Price (MRP) of 500 ml of Toned Milk (blue packet) was increased from₹18.5 to ₹21.5 and that of the Standardized Milk (green packet) was increased from 20.5 to 23.5. These two packets are the ones which see more sales.
It is good that the DMK has alongside increased the milk procurement price from farmers for cow’s milk and buffalo’s milk by ₹4 and ₹6 respectively. But, now that the DMK government has decreased the prices at the consumer’s end, it will certainly have a bearing on the milk procurement price from the dairy farmer at some point of time as the state cannot afford to bear the losses given its fiscal status.
So, is reducing the price of milk by ₹3 worth the trouble for Aavin? Let’s see.
₹180 vs ₹22 crores
Consider that a family of 4 in Chennai buys 2 packets (1 litre) of Aavin Toned Milk per day. Earlier, the family had to pay ₹43 per day for a litre which is ₹1290 for 30 days. With the new price, the family has to pay ₹1110 (₹18.5*2*30). So, the family just saves ₹180 per month with this new price.
However, the ₹3 reduction in price will have a disastrous impact on Aavin. According to the Annual Policy Note 2020-21 of the Animal Husbandry, Dairying and Fisheries Department, AAVIN sold an average 12.05 lakh litres of milk per day in Chennai metro alone during 2019-20. For convenience sake let us consider the 12.05 lakh litres to be Aavin’s Toned Milk. In a month, Aavin was getting ₹155.445 crores as revenue. With the ₹3 reduction, AAVIN will face a loss of more than ₹21.69 crores.
Now, can a family in urban area afford to spend ₹180 rupees extra in a month? Sure, they can. But can AAVIN put up with a minimum loss of atleast ₹21.69 crores in the long run. Ofcourse, it cannot.
The state government will put in the tax money (the money paid by you and me) and try to close a hole that will only keep enlarging.
So what explains this move of the DMK government? Let’s see that too.
Welfare politics or providing backdoor entry for DMK family’s business?
Aavin is one of the largest milk brands in Tamil Nadu which retains more than 50% of the milk sales in all the districts of the state, except Chennai. It has proposed to increase the milk sale in the Chennai metro alone to 13.00 LLPD during the year 2020-2021. The earlier Tamil Nadu government under AIADMK in its policy note for 2020-2021 had set a goal of increasing the market share of brand Aavin from 30% to 35%. But the Tamil Nadu government has been able to set such ambitious goals for AAVIN only in the last few years. Before that, the company was in shambles making losses.
During the 2006-2011, the company posted a cumulative net loss of ₹109 crores. On the other hand, it made a cumulative net profit of ₹231 crores from 2011-20. With increasing revenue, it has been able to spend on its marketing and brand building efforts making it more appealing and lucrative for consumers with more value added products.
Apart from Aavin, the only other reputed and sought after brand is Hatsun’s Arokya which has been able to be the leader in the market despite selling its milk at a marginally higher price than Aavin. There are other private players too in the business – Heritage, Thirumala, etc. But of late, there is another brand that is trying to evolve as a competitor to Arokya and Aavin – Cavin.
Cavin’s milk is the dairy brand of CavinKare owned by C.K. Ranganathan, a member of the Karunanidhi clan. He is the husband of Thenmozhi who is the granddaughter of Karunanidhi from the Padmavathi branch.
The move of the DMK government has been taken keeping in mind its urban voters interest. In order to quell the fear of dairy farmers about fall in procurement prices, they have increased it by ₹6. But with this move, Aavin’s unit economics would be going for a toss. Once Aavin plunges into a state of despair meeting the fate of public sector units like Air India, BSNL, etc., it will definitely benefit private players and since the DMK is in power, it is but natural that Cavin would be trying to capture the market through backdoor.
Unit economics not mindless populism should decide policy decisions
It is important that the fair price of a product is paid by its consumers. If consumers pay less, government agencies like Aavin will not be able to survive because unit economics will not be at play. The finances of the company will be stretched with the government frequently trying to resuscitate it with tax money. This will affect procurement by government eventually pushing the farmers into the hands of the private players who will be readily waiting to ‘milk’ the situation.
Pricing is not just about price. It is about ensuring a stable ecosystem where the policy prioritizes farmer interests above everything else.
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