W20113

FARMERY: SCALING A START-UP IN AN EMERGING ECONOMY

Sweta Agarwal wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective
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In February 2018, Manoj Arora was waiting for Varun Rawat, one of his early angel investors, at a café in
New Delhi, India, to discuss a potential growth path for his three-year-old venture, a farm-fresh milk
subscription business called Farmery. While waiting for Rawat, who was running late, Arora recalled the
business model and brand positioning choices he had steered his business through. After starting with ₹3.1
million1 in revenues in 2015, the business was projected to end 2018 with ₹80 million in revenue and with
earnings before interest, tax, depreciation, and amortization of 5 per cent. Losses in the first and second
years had been mainly due to the costs of setting up and refining Farmery’s business model, which finally
pivoted to that of a farm-to-home milk subscription brand. The goal was to hit an annual revenue of ₹500
million by 2021.
There was a growing market in India for fresh, safe, unadulterated milk.2 Consumers in the Indian market were
open to trying young emerging brands rather than buying from established players. Milk was a commodity
product, and India’s largest dairy organization, Anand Milk Union Limited (Amul), which was also both the
fastest growing and the ninth-largest dairy organization in the world, had been a trusted brand for years. 3 At a
smaller scale, the industry had low entry barriers; hence, capital requirements were high for brand-building and
customer-engagement efforts, such as farm experience visits, videos, and influencer-based marketing.4
Over the years, Arora had observed consumer behaviour to try to figure out which would be more viable: a
premium, farm-fresh milk brand or a fresh-food brand that led with milk and included other products such as
cottage cheese, curd, and bread. He believed that there was room for a fresh-food grocery brand that could serve
Indian households, much as Fresh Direct Produce Ltd. or Whole Foods Market Inc. served the US market. Time
was running out: mobile grocery applications (apps) like BigBasket and Amazon.com Inc., which had started
doing grocery deliveries in key metropolitan areas, had started to develop their own private fresh grocery labels,
such as Fresho, BigBasket’s private label.5 Arora needed to choose his options quickly.
1
₹ = INR = Indian rupee; ₹1 = US$0.01554 as of February 2018; all currency amounts are in INR unless otherwise specified.
2
Smitha Verma, “Milk Shaken Up: Organic, Adulterant-Free, Dairy-Free Is Rage,” Financial Express, May 27, 2018, accessed
December 23, 2018, www.financialexpress.com/industry/milk-shaken-up-organic-adulterant-free-dairy-free-is-the-rage/1182415/.
3
Gujrat Cooperative Milk Marketing Federation Limited, AMUL is 9th Large and the Fastest Growing Dairy Organization in the World,
September 26, 2018, accessed December 20, 2018, https://amul.com/files/pdf/Press-Release-AMUL-9th-largest-organization-in-
world-26-09-2018.pdf.
4
IMARC, “Understand the Competitive Structure and Identify Key Players in the Indian Dairy Market,” IMARC, accessed
February 06, 2020, www.imarcgroup.com/indian-dairy-market.
5
About Us,” Fresho, accessed February 03, 2020, www.fresho.com/about-us; Pamela N. Danziger, “Online Grocery Sales to
Reach $100 Billion in 2025; Amazon Is Current And Future Leader,” Forbes, January 18, 2018,

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Page 2 9B20M024

THE BUSINESS

Arora co-founded Farmery in 2015 with a former colleague, and the business had a great start. It was based
in India’s National Capital Region (NCR), which included New Delhi and surrounding urban areas and was
the country’s largest metropolitan area, with a population of over 47 million people.6 Farmery was built on
the proposition of procuring fresh, pure cow’s milk from farms and offering convenient home delivery
within 24 hours of milking. Farmery was one of the first brands to offer raw, chilled milk; the other available
brands all used pasteurization and standardization (balancing the proportions of the fat and non-fat milk
solids in milk to prepare products like full cream and low-fat cream). Farmery’s product was packaged in
recyclable glass bottles rather than low-density polyethylene (LDPE) pouches, which worked well to
differentiate it from the incumbent milk brands and also appealed to environmentally conscious consumers.
It was priced 30 per cent higher than other available milk brands in the market. Farmery’s early adopters
were mostly professional working parents, who responded to the promise of health benefits from pure, fresh
cow’s milk, direct from the farm, to complement their young children’s breakfast.

RIDING THE OPPORTUNITY

Farmery’s product, which promised farm visibility and daily laboratory reports on the presence of
hormones, adulterants, and pesticides in its milk, was also helped by media reports of rampant milk
adulteration. The Food Safety and Standards Authority of India had found in 2012 that nearly 70 per cent
of milk was diluted with water or contained milk powder or other impurities, such as urea, liquid
formaldehyde, and detergent solution,7 and urban consumers had started to realize that they needed access
to healthy, farm-fresh, good-quality produce, leading to a growing urban market for pure, safe milk. New
brands provided millennial consumers with assurances that their milk had no chemicals, pesticides, or
adulterants. A big market thus started emerging that charged a 20–40 per cent premium over the prices of
conventional pasteurized milk. In 2017, although the organic milk business represented only around 1 per
cent of the country’s ₹5 trillion market for dairy products, 8 this was predicted to grow at a rate of around
15 per cent annually as customers became more conscious of organic milk’s benefits.9 One financial advisor
noted that “high-quality milk marketed as fresh, organic, pure, unadulterated milk is fetching price as much
as ₹80 to 100 per litre, almost double the price of milk sold by co-operatives and private diary players.”10
According to Arora’s estimates, in five years there was a potential market of at least 0.5 to 1 million
customers across select Indian cities, representing a monthly average revenue per unit of ₹3,000–₹4,000,
and the opportunity to grow his business by as much as ₹20–₹30 billion. Arora further felt that similar
companies in China, which had started 15 years previously, now possibly had over ₹150 billion in revenues.

www.forbes.com/sites/pamdanziger/2018/01/18/online-grocery-sales-to-reach-100-billion-in-2025-amazon-set-to-be-market-
share-leader/#68e8de7a62f3.
6
India Today Web Desk, “National Capital Region of India: Things You Must Know about It,” India Today, February 17, 2016,
accessed December 19, 2018, www.indiatoday.in/education-today/gk-current-affairs/story/national-capital-region-309198-
2016-02-17.
7
Kounteya Sinha, “70% of Milk in Delhi, Country Is Adulterated,” Times of India, January 10, 2012, accessed December 18, 2018,
https://timesofindia.indiatimes.com/india/70-of-milk-in-Delhi-country-is-adulterated/articleshow/11429910.cms.
8
Shobha Roy, “Start-Ups Ride Demand for Desi Milk,” Hindu Business Line, July 31, 2018, accessed December 27, 2018,
www.thehindubusinessline.com/economy/agri-business/start-ups-ride-demand-for-desi-milk/article24566117.ece.
9
PTI, “Dairy Sector to Grow at 15% CAGR Till 2020 to Rs 9.4 Trillion: Report,” Economic Times, December 17, 2017, accessed
January 15, 2019, https://economictimes.indiatimes.com/news/economy/agriculture/dairy-sector-to-grow-at-15-cagr-till-2020-to-rs-9-
4-trillion-report/articleshow/62105938.cms.
10
Hemendra Mathur, “Investing in ‘Cattle’ as an Asset Class,” VCCircle, August 14, 2015, accessed December 15, 2018,
www.vccircle.com/investing-cattle-asset-class/.

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Page 3 9B20M024

THE OPERATING MODEL

Farmery’s sourcing model was asset-light: the cattle were owned by existing mid-sized cattle farms, which
were committed exclusively to Farmery. The farmers were guaranteed set premiums and daily volumes and
were offered financing support for the necessary cold-chain and milking equipment.

Farmery sold milk on a flexible subscription model, where consumers could choose their consumption
levels and weekly delivery days via a consumer mobile app, which also allowed them to choose prepaid or
post-paid subscription packs (see Exhibit 1). Farmery then used the resulting daily and long-term forecasts
to manage its sourcing and packaging demand.

In order to keep the milk cold throughout the length of the farm-to-home supply chain, the milk was cooled
to 4 degrees Celsius immediately after milking at the farms. It was then transferred to a central laboratory
and packing facility, where it was checked for quality and packed in glass bottles for onward distribution.
The milk was then packed in iceboxes and taken to distribution hubs in key local markets; from there, milk
was delivered to consumers’ homes via insulated bags on motorcycles The company had a fleet of over 100
dedicated bikers who did home deliveries in the early morning hours. Delivery requirements and routes
were automatically assigned to bikers at midnight and were communicated to the bikers electronically via
a front-end delivery app.

FARMERY’S ECONOMIC PREPAREDNESS

The business had an optimal business model and the technological capacity and operational excellence that
were needed to succeed in its market.

Capital-Efficient Business Model

Many businesses in the farm-to-table category, such as Pride of Cows (a farm-fresh premium Indian milk
brand owned by Parag Milk Foods) and most dairy companies in the West, were built on investments in
mega-farms. These were tough to manage due to the high overheads associated with cattle management,
which limited the firms’ abilities to scale up quickly across multiple geographies.11 Farmery adopted a
hybrid sourcing model that was halfway between an Indian cooperative milk collection model and a large,
integrated single breed cattle farm model. It used exclusive contracts with small- and mid-sized single-
breed cattle farms that each had around 50–100 cattle and produced 500–1,000 litres of milk per day.
Moreover, it upgraded these farms through minimal investments in equipment, cattle vaccinations, and
hygienic milking practices. This enabled an asset-light model with low risk and gave the company access
to source milk at a 10–15 per cent premium right at the farm gate, compared to a 50 per cent premium in
an integrated own-farm model. Farmery also had no linear investments in manufacturing facilities, such as
heat or ultra-high treatment plants for pasteurization, since they sold only raw, un-processed, chilled milk.
This significantly reduced their capital expenditure investments.

11
Ajita Shashidhar, “Sparkling Milk,” Business Today, September 25, 2016, accessed December 27, 2018, www.businessto
day.in/magazine/features/sarda-farms-does-not-aggregate-milk-from-milkmen/story/236899.html.

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Page 4 9B20M024

Technology-Driven Operations and Customer Service

The company’s in-house technology system was built from scratch, using operational and consumer
insights about aspects such as forecasting route management, milk subscription, online billing and payment,
tracking milk within the supply chain, and wastage. Arora felt that the ease with which customers could
manage their own subscriptions, delivery instructions, delivery tracking, and daily milk test reports was
ground-breaking in the direct-to-home milk subscription market.

Negative Working Capital

Indians were accustomed to paying the person who delivered their milk at the end of the month, in what
was called a post-paid model12. Since Farmery’s brand was positioned as a transparent, credible, and
professionally managed enterprise, it was able to persuade consumers to subscribe using a prepaid model.
It took deposits 15, 30, 45, and 60 days in advance and offered consumers cash back deals. Farmers were
paid on a 10- to 15-day credit cycle, enabling a customer-funded cycle and eliminating any working capital
requirements while scaling up.

INITIAL GROWTH

In order to assess consumer responses across different demographic segments, Farmery started with small
pilot runs in New Delhi: affluent, established households; New Age, cosmopolitan, working-professional
households; and middle-class households. Traction was highest in the New Age, cosmopolitan, working-
professional segment, where the brand grew rapidly with the help of local field-level marketing, sampling,
and referrals. Within three years of its launch, Farmery was delivering raw cow milk to a consumer base of
5,000 households daily.

THE COMPETITION

Within the New Delhi, high-density apartments were key consumers. The main dairy players present in the
region are described below.

Amul

Amul was founded in 1946 by farmers in the Kaira District in Gujarat, India, as a cooperative of local milk
producers. Under the leadership of the late Dr. Verghese Kurien, the Gujarat Cooperative Milk Marketing
Federation (GCMMF) was formed in 1973.13 GCMMF sold all milk products under the Amul brand and had
the biggest market share in the domestic market. It was also the largest exporter of milk products in India.14

12
Jai Vardhan, “BigBasket Enters Microdelivery Space: Will it Outlast Milkbasket and Daily Ninja?,” October 25, 2018,
accessed December 25, 2018, https://entrackr.com/2018/10/bigbasket-milkbasket-dailyninja/.
13
V. N. Balakrishna, “Amul — Brand of Milk and Products,” Hindu Business Line, May 24, 2013, accessed December 25, 2018,
www.thehindubusinessline.com/news/variety/amul-brand-of-milk-and-products/article20617726.ece.
14
Saffron Media Private Limited, “Amul Becomes an International Brand, Goes to 40 Countries”, FnB News, June 14, 2008,
accessed January 7, 2019, www.fnbnews.com/Company-Report/Amul-becomes-an-international-brand-goes-to-40-countries.

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Page 5 9B20M024

Mother Dairy

Mother Dairy, which also had a cooperative model, was a subsidiary of the National Dairy Development
Board of India. The company was a dominant milk supplier in India’s NCR and had a presence in other
major cities in the country. In addition to milk, it had a significant market share in other milk products like
ice cream, curd, paneer (cottage cheese), and ghee (clarified butter).15

Country Delight

Country Delight was a “direct-to-home, mass premium fresh milk brand.” Like Farmery, its business model
was built on having total control of the supply chain. It sourced milk from local farms and delivered directly
pasteurized milk to consumers’ homes LDPE film packing,16 after minimal processing and within 24–36
hours of milking. Consumers managed their Country Delight service through a mobile app.17

Pride of Cows

Parag Milk Foods launched its premium milk brand, Pride of Cows, in Pune, a cosmopolitan city in
Maharashtra, India. Priced at ₹75 per litre, the milk was delivered to homes “only by order.”18 It invested
in an integrated, 10-hectare modern farm, Bhagyalaxshmi Dairy Farm, that was equipped with the finest
international technology for feeding and milking cows and processing their milk.19

Alternate Delivery Channels

Arora’s research indicated that leading retail channel competitors, such as Amul and Mother Diary, were gaining
traction in home-delivery milk distribution services and that they were using their market power to ensure that
other small brands, such as Farmery, did not become established players in direct-to-home milk sales.

THE NEXT PHASE OF GROWTH

After Rawat arrived, Arora and Rawat discussed possibilities for the company’s next phase of growth, from
expanding Farmery’s portfolio of products, to launching in other markets within the NCR, to even
expanding Farmery’s distribution range to include other towns and cities. Their goal was to achieve a target
of gross sales of ₹500 million by 2021.

15
Press Trust of India, “Mother Dairy Turnover Up 9% at Rs 7,850 Crore in FY17,” ET Markets, April 9, 2017, accessed December
21, 2018, https://economictimes.indiatimes.com/markets/stocks/news/mother-dairy-turnover-up-9-at-rs-7850-crore-in-
fy17/articleshow/58092042.cms.
16
Country Delight, “Our Cold Chain Delivery Ensures that Milk is Packaged and Pasteurized at 3° Due to Which all Milk Stays
Fresh,” Facebook post, July 5, 2019, accessed September 30, 2019, www.facebook.com/CountryDelightMilk/photos/a.7989118
20270155/1213689028792430/?type=3&theater.
17
“Matrix Partners Leads Rs 70 Cr Investment in Country Delight,” NuFFooDS Spectrum, February 12, 2019, accessed March 17,
2019, www.nuffoodsspectrum.in/news/27/4420/matrix-partners-leads-rs-70-cr-investment-in-country-delight.html.
18
Jayashree Bhosale, “Parag Milk Launches Premium Milk Brand ‘Pride of Cows,’ Worth Rs 75 per Litre,” Economic Times, August
30, 2012, accessed March 14, 2019, https://economictimes.indiatimes.com/industry/cons-products/food/parag-milk-launches-
premium-milk-brand-pride-of-cows-worth-rs-75-per-litre/articleshow/15989400.cms.
19
Bhagyalaxmi Dairy Farms, “About Us,” 2017, accessed September 30, 2019, www.bhagyalaxmibio.com/.

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Page 6 9B20M024

Portfolio Approach

Rawat and Arora considered the option of introducing new products with low market penetration—for example,
milk enriched with calcium, protein, and vitamin D—that would primarily be marketed toward children.
Farmery could also introduce low-calorie Indian desserts marketed toward health-conscious millennials, or
workplace-oriented products like flavoured milk and healthy, dairy-based snacks and breakfasts.

Arora suggested that they could also strengthen Farmery’s organic dairy product portfolio by introducing
white, unsalted butter; probiotic drinks; fresh curd that set without additional milk products; and ghee, a
superfood with many health benefits.

Farmery also had the option of including complementary fresh products with early morning milk
deliveries—for example, freshly baked bread and other bakery products, organic eggs, freshly ground wheat
flour, or dosa and idli batter.

Distribution Approach: Direct-to-Home and Other Channels

Farmery also had the option to scale its distribution services via neighbourhood kiranas (local grocery
stores) or other franchise-led last-mile deliveries, where Farmery would still have control over daily demand
management through its website and its customer and retailer mobile apps. Rawat also suggested that they
could sell their products through up-and-coming online subscription grocery players such as Milkbasket,
India’s first subscription-based micro-delivery service, which delivered household grocery essentials to
customers every morning.20

Arora had to choose. Farmery could go deep—that is, it would serve only a few geographic markets, but
within those markets it would position itself as a major fresh-food provider with daily morning deliveries of
milk, freshly made dairy products, bread, and other grocery essentials. Alternatively, Farmery could go
wide—that is, it would focus primarily on gaining new customers and would expand rapidly to the top 20–30
cities and markets in India, but with an exclusive emphasis on selling farm-fresh milk. A go-deep approach
would require less capital but would compromise customer growth. Based on his interactions with venture
capital investors, Arora felt that venture capital investors preferred a go-wide approach, which would provide
a first-mover advantage and help the company rapidly capture subscribers in multiple markets. Milk was a
low-margin product and Farmery had limited capital, and Arora was not sure whether continuing to sell only
milk was sustainable or whether it would provide a good return on investment (see Exhibit 2).

20
“Milkbasket: Overview,” Crunchbase, accessed January 24, 2019, www.crunchbase.com/organization/milkbasket.

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Page 7 9B20M024

EXHIBIT 1: OPERATING MODEL: COMPETITION VERSUS FARMERY

COOPERATIVE COLLECTION MODEL FARM-FRESH, DIRECT-TO-HOME MODEL

The company owns a
Milking is done by farm with a single
small and medium breed of cows.
farmers.

Machine milking,
Milk travels some untouched by
distance to reach the human hands.
collection centre.

Milk moves from the Milking to bottling is

collection centre to seamless; there is no
the processing centre. additional processing.

Milk is processed, Milk is delivered to

packed, and distributed. homes within three
hours of packing.

Source: Company documents.

EXHIBIT 2: FARMERY’S ACTUAL AND PROJECTED REVENUES

Actual Actual Actual Estimate Estimate Estimate

Year 2016 2017 2018 2019 2020 2021
Total Daily Milk Volumes (Litres) 1,100 2,350 3,400 7,000 12,000 16,500
Contribution from Other Channels 700 2,400 3,500
(Not Direct-to-Home) (Litres)
Milk Revenues (₹ Million) 26.1 55.8 80.7 166.1 284.7 391.5
Contribution from Other Fresh 0.0 0.0 0.0 49.8 85.4 117.4
Products (at 30 Per Cent) (₹ Million)
Total Revenue (₹ Million) 26 56 81 216 370 509
EBITDA (Per Cent) (25) 4 5 6 7 7

Note: EBITDA= Earnings before interest, taxes, depreciation and amortization.

Source: Company records.

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