Shokti Doi by Grameen Danone Food Limited (GDFL)

Danone, a multinational company that specializes in the food and beverage industry with an annual turnover of more than $ 1.2 billion teamed up with the Grameen bank, the pioneering micro-finance organization in Bangladesh to create Grameen Danone Food Limited (GDFL). GDFL is a 50-50 joint venture between the Grameen and Danone, with a mission to alleviate poverty by implementing an innovative business model that will bring healthy and wholesome food to the poorest everyday. Since GDFL was established with a view to conduct social business, it operates without the sole objective of maximizing profit, but rather operates on a no-loss basis. This means that no shareholder should lose money from their participation in the business model; the business model should be profitable for each party and any profits (beyond the cost of capital) generated by the company will be reinvested in the growth and development of the business, in a manner that is mutually agreed upon by both parties to the contract. GDFL developed a yoghurt branded Shoktidoi (which means strengthening yoghurt in Bengali) specifically designed to alleviate child malnutrition. Shoktidoi is rich in proteins and calcium and also contains live bacteria which helps in fighting diarrhea, a common disease in Bangladesh. GDFL established its first plant in Bogra 220 Km north-west of Dhaka, the plant, the 7500sq. ft factory currently processes 6000 litre of milk on a daily basis to produce 3000 Kg. of yogurt. While some assets are owned by Grameen Danone (plant, brand, and product formula), others are acquired from outside (raw materials such as milk, date molasses, and micronutrients). A broad network of partners is in fact a cornerstone of the ventures business model. Grameen Danone has relationships with local suppliers of milk (e.g., Grameen Livestock and Fisheries Foundation and micro-farmers) and international suppliers of nutrients (BASF SE) and packaging materials (CAPEX). A partnership with the Global Alliance for Improved Nutrition (GAIN) in Geneva extends the companys capabilities in social marketing and impact assessment. Bogra Manufacturing plant Guy Gavelle, Groupe Danones Industrial Director for Asia-Pacific Operations, managed the design and construction of GDFs first factory in Bogra . The Bogra facility, which was quite different than the typical GD factory in terms of location, size, and workforce, presented several unique design challenges for Gavelle:. Product the factory needed to maintain GDs high food safety standards throughout the production of the Shokti Doi brand of yogurt (Exhibit 2, see Appendix). Durability the equipment needed to be durable and dependable enough to be operated and maintained in remote locations that have limited access to replacement parts. Lower Capacity the factory would produce a fraction of the output of GDs other plants but maintain the same quality standards. Different Labor Usage production processes should be both labor intensive and simple enough to be performed by a low-skilled workforce.

Distribution and Sales the plant must include a cold storage distribution center and office space for regional sales and administration staff. Environmentally Friendly - the Bogra facility needed to include equipment and processes for wastewater treatment, recycling, rainwater harvesting, solar water heaters, and a biogas generator. GD broke ground on July 14, 2006 and equipped the plant with yogurt processing and refrigeration equipment imported from China and India and stainless steel tanks and pipes that were locally fabricated. Construction took about six months to complete; commercial production began in January 2007. While other Danone factories can be more than 75,000 square feet with an annual capacity of more than 100,000 tons, the Bogra factory is about 7,500 square feet with an annual capacity of 3,200 tons, or about 8,000 liters per day. The total cost of the plant was about US$1 million US$50,000 for land and US$950,000 for the facility.

Figure : Bogra manufacturing plant.

Why Bogra? Bogra was chosen for a number of strategic reasons: It is within 250 kilometers of Dhaka, Bangladeshs economic and political hub. Around 250,000 people live in the district of Bogra (solid red in map below) and about 35 million live in the Rajshahi Division, of which Bogra is a part. The division is strategically located in Bangladeshs northwest region and well connected with the rest of the country by rail and road transport. The Indian state of West Bengal is on Rajshahis western border and the Rangpur, Khulna, and Dhaka divisions are the north, south, and eastern borders respectively. The Jamuna (Brahmaputra) River defines Rajshahis eastern border and the Padma (Ganges) River creates the southern border. In the dry season, the banks of these river systems are ideal for dairy cow grazing. As a result, much of Bangladeshs dairy industry is based in the Division. Bogra is known as having some of Bangladeshs best yogurt and other milk-based sweets. The region also has high rates of malnutrition, providing GDF an opportunity to measure the impact of its yogurt on health.

Figure:

Milk

collection

from

micro-farmers.

The Shokti doi The flagship product needed to be nutritious, affordable, and tasty. The International Centre for Diarrheal Disease Research Bangladesh (ICDDRB) helped GDF determine the ideal product characteristics for a food product for undernourished children. ICDDRBs Director, Dr. David Sack, recommended developing a product that could compete with the rice gruel traditionally fed to children. Yogurt was chosen for a number of reasons: It leveraged GDs global leadership in the yogurt product category. Yogurt is a popular and traditional Bangladeshi food product and imported packaged yogurts not affordable for the majority of Bangladeshis. Studies indicate that the live cultures in yogurt can decrease the duration and severity of diarrhea, which kills thousands of Bangladeshi children a year (ICDDRB). GDF felt that it could adjust the yogurt recipes to include the necessary nutrients without sacrificing taste. The final product was branded as Shokti Doi, which means yogurt for power with a lion as the company mascot. The formula includes 3.5 percent milk, local date molasses sweetener, and 30 percent of a childs daily needs for essential nutrients like iron, calcium, vitamin A, and iodine. It was packaged in plastic containers and initially priced at 5 taka (7 cents) for an 80-gram cup.

Scope GDFLs scope of business covers the manufacturing, packaging, marketing, sales, and distribution of fermented fresh dairy products under the brand name Shokti+. Additional core activities are linked to social marketing (i.e., educating consumers about their nutritional needs and health topics) and setting up a rural sales and distribution system. Grameen Danone has adjusted the companys entire value chain to its social mission and rural business environment. Trying to

realize a proximity business model, the company involves local communities in all parts of its value chain: as of spring 2010, around 280 farmers act as suppliers of raw milk, around 30 residents are employed within the factory (in quality control, maintenance, and production), and around 175 local women are engaged as sales ladies in daily rural distribution. In order to maintain the flavour, texture, and acid content of the yoghurt in the absence of a functioning cold chain, Grameen Danone emphasizes a quick turnaround (48 hours) from factory to consumer. Value Proposition The collective brand name for the companys current bundle of products is Shokti+, a Bengali expression for energy plus. The + points to the nutritional value of the yoghurt. Shokti Doi (energy yoghurt) consists of pure, full cream cow milk, live fermenting cultures, data molasses (a local sweetener), and sugar. Fortified with a high dose of micronutrients, a 60 gram cup covers 30% of childrens daily needs of vitamin A, zinc, iron, and iodine37. The yoghurt is furthermore a natural source of calcium and protein. Developed by nutrition experts from GAIN and Danone, Shokti Doi is supposed to improve the nutritional status of children aged 3 to 15 years, who eat the yoghurt on a regular base at least one cup twice a week. In the absence of a perfect cold chain, the product has a limited shelf-life of around 6 instead of 28 days. Although Shokti+ seems to be similar to Bogras local yoghurt (Mishti Doi), its added features (fortification) and specific attributes (smaller quantity, more liquid texture, less sweetness, need for regular consumption) make Shokti+ a new value proposition. Shokti Doi is served in blue plastic cups decorated with a picture of a cartoon lion (GDFL 2010c). Mishti Doi, by contrast, is offered in clay pots and usually sold in larger quantities (e.g., 700 gram for 65 Taka or US$ 0.89 and 1,600 gram for 160 Taka or US$ 2.18). Mishti Doi is part of local dishes and a famous desert for family occasions. Only a few shops sell pots for on-the-spot consumption at a price of 15 Taka (US$ 0.20) for 80 gram. Specifying Grameen Danones value proposition, the Marketing Manager alludes to very good nutrition at a very affordable price. However, in order to be effective it requires regular consumption. Marketing and Customer Interface Geared to a local proximity approach, the companys virtual target market is Bogra District . The initial idea was to distribute the product only within a radius of about 30 kilometres around the plant . Assuming that around 25% of the Districts population are aged 3 to 15, Grameen Danone expected to have more than 750,000 potential customers close by. However, due to low sales in the companys core market, Grameen Danone has continuously expanded its sales area. Since November 2008, the yoghurt business has been serving a twofold market: in cities, Grameen Danone sells its yoghurt through a retail network of more than 1,600 shops, whereas in rural areas the companys own sales force sell the yoghurt door to door . The yoghurt company is confronted with low levels of education (the average adult literacy rate among villagers is around 30%), limited purchasing power (30% of households have incomes of less than 166 Taka or US$ 2.27 per day), and a lack of basic infrastructure required to maintain a cold chain (i.e., networks for reliable electricity and retailing). Electricity is a scarce commodity all over Bangladesh, hampering all businesses in their development. About half of all villages have access to power, but those connected to the national grid face a barrage of related problems: low voltage that may damage household and industrial equipment, frequent

interruptions (load shedding), potentially destructive power surges when the current is restored Customer Segments Grameen Danones rural and urban customer segments can be distinguished by the following attributes: rural children and their guardians usually live in remote and dispersed settlements. Their families are short of purchasing power and nutritional awareness. By contrast, urban children and their guardians can be divided in three groups: lower-class consumers living in smaller cities (characterized by limited purchasing power, little nutritional awareness, but accessible through corner stores), middle- and upper-class children and their guardians (including foreigners) in Dhaka (disposing of sufficient buying power, general health awareness, and accessible through modern trade or cornerstones), and slum dwellers in Dhaka (with little purchasing power and nutritional awareness and best accessible through door-to-door sales). These different customer segments receive slightly different offers and are served through various distribution and marketing channels. Channels While taking advantage of retail shops in cities, Grameen Danone operates a sales-lady network in rural areas. Sales ladies are local women that act as micro-entrepreneurs. They get fresh yoghurt stock in insulated shoulder bags every day and distribute the yoghurt door-to-door. Customer Relationships In villages, the customer relationship is personal. Sales ladies directly interact with their target customers and provide them with information about nutrition and the yoghurts potential health benefits. In urban areas, the customer relationship is shop-based, comprising over-the-counter sales through small retail shops and self-service in modern trade stores.

Performance
The first primary business objective calls for a profitable business model. According to the original business plan from 2007, Grameen and Danone expected to achieve a first positive operating result (ROP) of around 14 million Taka (US$ 191,130) after two years with a positive return on invested capital (ROIC ) of 28% in 2008 . From 2010 onwards the management anticipated an annual ROIC of 35% for its Bogra operation. This business case was supposed to be the backbone for quick expansion. Grameen Danone had the vision of establishing 50 plants all over Bangladesh by 2018, of which six were supposed to be up and running by 2009, and ten by 2010. In reality, Grameen Danone is still loss-making and the amount of loss has been growing every year so far. After having incurred operating losses of 16.4 million Taka in 2007 (US$ 223,896) and 22.8 million Taka in 2008 (US$ 311,270), the companys operating loss in 2009 was 32.5 million Taka (US$ 443,696) . By March 2011 Grameen and Danone (or rather Danone Communities) have invested around 175 million Taka (i.e., more than US$ 2.3 million), covering initial construction costs as well as previous losses. This amount does not account for Danone resources invested in R&D or direct subsidies (e.g., in terms of management support from Danone India, marketing expenditures, and salaries for Danone interns) amounting to more than 1.9 million Euros (i.e., almost US$ 2.7 million). Around 70% of Grameen Danones authorized share capital (i.e., 250 million Taka or about US$ 3.4 million) have been spent so far. Given the companys previous losses and additional investments (e.g., for the construction of its

second plant), neither Grameen nor Danone executives currently have the heart to forecast when exactly their company might have generated enough surplus to pay back the initial investment. Limited Demand for Packaged Nutrition Although Grameen Danones value proposition comprises both quantitative (low price) as well as qualitative elements (high-quality nutrition, professional product design, and brand), the novelty of the product category (i.e., packaged child nutrition), and its intangible benefits (improved nutritional status if consumed regularly) are limiting consumer demand in the companys virtual target market. Shokti+ serves an abstract need, which few villagers actually perceive as such. Not only due to a lack of (health) education and nutritional awareness, but also because there was no similar offering before. According to Grameen Danones Rural Sales and Distribution Manager, illiterate villagers have difficulty in understanding the concept of nutrition. They cannot understand what we are trying to do with this product why it is important. Insights from the field suggest that this lack of concept goes along with superstitions. Local staff from the agency engaged in rural marketing report that villagers often get scared when they first learn about Shokti Dois ingredients, confusing zinc with a chemical used in fertilizers or a local divinity called Zin. They are afraid that their children might catch a cold if they have a chilled product in winter. Or even worse: Women say if the child drinks our yoghurt, it will die Local Preferences In contrast with children, adults tend to complain about Shokti Dois strange color, bad smell, and sour taste. Because Mishti Doi defines local yoghurt preferences, Doi (the local term for yoghurt) has to be brownish, thick, and sweet. But even for those consumers who like Shokti+, the price of 6 or 7 Taka (about US$ 0.09) for a 60 gram cup is a common barrier. The findings suggest that due to their limited purchasing power, villagers exhibit a clear buying priority and rice comes first. If they have 10 Taka, they think about rice, vegetables, and some fish if they can.
Channel Issues in Rural Marketing and Sales In addition to these customer related obstacles, channel issues have complicated rural marketing and sales. Grameen Danone has difficulty in communicating its value proposition and secure daily distribution in Bogra District. Low literacy rates limit the value of printed information, and even if somebody has a TV, there are frequent power cuts. So we cannot do mass communication in the rural area, the companys Marketing Manager explains. In addition, a dispersed population is hampering his effort: In urban areas, if someone is standing somewhere with a hand mike... you will find 1,000 people paying attention to him. But in the village area, houses are dispersed. In response to a lack of retail infrastructure (namely refrigeration facilities and reliable energy supply) in rural Bogra, Grameen Danone had to set up its own distribution channel from scratch.

Grameen Sales Lady With female Grameen Bank borrowers in mind, Grameen and Danone had envisioned creating a network of independent sales ladies to sell the yoghurt fdoor to door .Both parties expected to quickly grow the sales network from 600 (within two years) to 1,200 sales ladies (within three years). This plan finally didnt work out, because comparatively few women were eager to go for the job. As of spring 2010, the actual proportion of Grameen Bank borrowers among the sales ladies was estimated at 20%. Sociocultural barriers have caused the companys slow progress in recruiting. Grameen Danones sales lady strategy seems to conflict with traditional norms and

values in Bangladeshs Muslim society. They are restricted in their mobility and feel shy about approaching strangers especially if they are male. Without strong family support, women feel unable to keep the job. Even those women who are not confronted with social pressure have difficulty in coping with their working conditions: having to walk several kilometers per day, being on their own, carrying a bag of 5 kg over their shoulder, having to bargain with customers, or being verbally attacked . As a consequence, Grameen Danone has had a tough time expanding its sales-lady network. As of spring 2010, the drop-out rate among new sales ladies was still above 60%, and few ladies were working on a daily basis. At the same time, Grameen Danone is struggling to raise the average number of cups sold per lady from 50 to 100 per day, because uneven talent and skills are limiting the sales forces overall . Operating cost While the companys financing costs have been negligible due to cash deposits by Grameen and Danone, the yoghurt business has been struggling with high operating costs. Due to low production levels duringthe first years, its cost structure was characterized by a high proportion of indirectcosts in the past, comprising office and administration as well as sales and promotion expenses. In 2008 and 2009, indirect costs even topped total revenue. Rising raw material prices, resource wastage, and high logistics costs per unit in rural sales (due to various unfavorable product features) were major reasons for high direct costs, on the other hand.
Milk-Based Product Causing Structural Issues Although costs should naturally be minimized, Grameen Danones price-based value proposition particularly depends on low-cost production and economies of scale. But while low sales volumes inhibited economies of scale till 2009, the companys dependence on milk undermined low-cost production. With milk being the main cost factor per unit (responsible for around twothirds of raw material costs), a sharp increase in local milk prices was the major driver of the cost explosion in 2008. But the milk-based product also involved supply chain issues in sourcing. Around 90% of milk suppliers are small-scale farmers who sell their milk in local markets. Grameen Danones management, therefore, decided to contract a number of large-scale suppliers to secure regular milk supply. But offering them a purchase guarantee without having an alternative usage for over-supply caused high levels of milk wastage. Other Unfavorable Product Features The conventional plastic yoghurt cup has furthermore led to high packaging costs of approximately 15% of total production costs per unit. A large proportion, considering that the packaging is not part of the core value proposition. Serving the yoghurt in a cup also caused hygienic issues: the cup format requires a spoon for consumption. A commodity that is scarce in Bangladeshi villages which is why children consume the yoghurt with their fingers or bamboo sticks. As of spring 2010, Grameen Danone has been supplying spoons for every second cup, thus adding another direct cost factor that had not been taken into account before.

Limited Shelf Life Shokti Dois limited shelf-life in the absence of a perfect cold chain (mainly due to power cuts in urban areas and a lack of fridges in villages) caused two further problems: in urban areas, this led to high return rates of expired products from partner shops. In rural sales, the products limited shelf-life outside the fridge has a different effect: it augments the distribution costs per unit in terms of personnel and transport. The companys sales assistants have to deliver fresh

yoghurt stock to their sales ladies every day, causing inefficiencies in the supply chain the company wouldnt have if the product had a shelf-life of more than 45 days. Governance Issue The yoghurt business had no people concept. Once the first plant was ready for operation, the company was supposed to be run by locals. But since neither Grameen nor Danone knew what sort of management and employees their social business required, the company was left without a full-time manager and professional marketing support for seven months. During that time, quality issues disrupted yoghurt production, sales-lady recruiting made little progress and sales stagnated at a level of 6 to 7 tons per month little more than the plants daily capacity at that time. In August 2007, a full-time MD joined the company and started to fill organizational gaps in rural marketing and sales. But due to the companys 50/50 joint venture structure, this person was left with little freedom of action and decision power. Rather than driving the business on the ground, the manager was located at the companys headquarter in Dhaka and kept busy with coordination tasks. This organizational set-up resulted in a lack of local leadership and impeded quick decision making, even when the company was affected by the global economic crisis and had to take an important decision: raise the selling price or accept further losses. The sales completely collapsed in the summer of 2008.
External Shock In the light of the latest global economic and financial crisis, the average market price of milk in Bogra District almost doubled within a year, rising from 14 Taka (US$ 0.19) in February 2007 to 26 Taka (US$ 0.35) in April 2008. Accounting for around two-thirds of the companys raw material costs, milk became the main driver of cost explosion, eliminating the small profit margin that had been established when pricing the yoghurt product. At the same time, sourcing costs for packaging material, micronutrients, sugar, and date molasses went up.

Questions: 1. Do you think, marketing research can help GDFL to upgrade in its current position or it would be a wastage of money adding extra burden to the company. 2. Before starting any social business, do you think, a country analysis is mandatory or optional? 3. Which sales channels should GDFL focus on and what strategy should it use? 4. What improvements could be made to the supply chain to reduce cost and increase efficiency? 5. How can GDFL increase sales to low-income consumers and sustain its current sales growth to urban segments?