Amul’s plans to enter Karnataka has caused concerns about competition with Nandini, the dominant player in the state’s dairy market. Former Karnataka Milk Federation officials accused Amul of engaging in predatory practices and violating unwritten rules of cooperative societies, leading to an anti-Amul campaign on social media.
Amul plans to sell packaged milk and curd exclusively through e-commerce platforms in Bengaluru, but it is still being perceived as a competitor to Nandini. It can be argued that once Amul enters the market in Karnataka, there may be no stopping its expansion into other areas of business, including traditional markets.
But do concerns regarding competition laws hold any merit?
The primary means of competition between the two brands is likely to be through price competition. Nandini’s products are currently priced significantly lower than Amul’s. For instance, while Amul sells 1 litre of toned milk for Rs 54 in Delhi, Nandini sells the same quantity for Rs 43 in Bangalore. Similarly, Amul Gold retails at Rs 66 per litre in Delhi, whereas Nandini sells the same variety for Rs 55 per litre in Bangalore. Additionally, Amul’s curd is Rs 19 more expensive than Nandini’s. Given the current pricing, it may be difficult for Amul to capture the Karnataka market.
However, Amul is a significantly larger player than Nandini, with a milk handling capacity of 5.2 million litres per day compared to Nandini’s 1 million litres per day. Additionally, Amul deals with 3.64 million producers, while Nandini deals with 2.4 million. Given Amul’s size, Nandini’s concerns about the potential for price wars may be valid, as there is no guarantee that Amul will not lower its prices to compete in the market. From a competition law perspective, this does not necessarily raise concerns on its own. However, the real issue would be how Nandini responds to this potential price war.
Challenges for Nandini in Karnataka
One of the reasons Nandini is able to price its products lower is because of the subsidy of Rs 6 per litre that the Karnataka government provides to milk farmers. Nandini’s high market share in Karnataka and Bengaluru also gives it a competitive advantage.
However, if Nandini were to lower its prices to a point where it would be impossible for Amul to sustain itself in the market, this could potentially be seen as anti-competitive conduct of predatory pricing. As a dominant player in the market, Nandini has a certain responsibility to compete fairly and avoid anti-competitive behaviour. It would be important for the competition authorities to closely monitor the behaviour of both Nandini and Amul to ensure that they are not engaging in any anti-competitive practices.
According to Explanation (b) of Section 4(2) of the Competition Act, predatory pricing is the practice of selling goods or services at a price lower than the cost of production as determined by regulations, with the intention of reducing competition or eliminating competitors. This strategy is often employed during a price war in order to undercut a competitor’s profits, and requires the firm to sustain losses for a certain period with the expectation of recouping them by charging higher prices once the competition has been eliminated. Typically, only firms with the ability to absorb these short-term losses engage in predatory pricing. While both Nandini and Amul are large firms backed by the government and are capable of weathering short-term losses, the key question is whether Amul would consider entering the Karnataka market as viable in light of the possibility of a hypothetical predatory price war.
Additionally, the dairy industry heavily relies on consumer trust and brand loyalty. Customers are often reluctant to switch to a new brand unless they have a compelling reason to do so. Building brand loyalty requires significant investment of time, effort, and marketing resources. Nandini has a strong reputation in Karnataka and Bangalore, making it challenging for Amul to win over consumers’ trust and loyalty. If Nandini lowers its prices to compete with Amul, it would be difficult for Amul to justify charging higher prices without an established brand reputation in the region. Therefore, even if Amul engages in a price war, it may not be enough to sway customers from Nandini. Moreover, as some observers have noted, the North-South divide could pose an initial hurdle for Amul. Switching costs can often act as an impediment for companies because they give the bargaining power to consumers.
In addition, there may be switching costs for suppliers, such as dairy farmers, who are required to pay an entrance fee to join their village milk cooperative society and purchase at least one share in this cooperative. Convincing farmers who are already members of a cooperative to join another cooperative or to supply milk to a different buyer independently may prove to be a challenge.
Can Amul avoid anti-competitive practices?
Amul may be leveraging e-commerce channels to enter a market that Nandini has left untapped due to the challenge of convincing customers to switch brand loyalties in established markets. While Nandini has established parlours in neighbourhood stores and sells products in supermarkets, Amul is currently focusing on modern trade avenues. This diversified presence across different channels may prove advantageous for Amul.
Hypothetically, Nandini may react to Amul’s entry in Karnataka by altering the terms of its contracts with the dairy farmers who supply it with milk, which could potentially result in an exclusionary infringement. Nandini provides significant financial incentives such as subsidies to its dairy farmers in Karnataka. On the other hand, Amul currently sources its milk from neighbouring states such as Andhra Pradesh and has facilities approximately 120 km away from Bangalore. If Nandini were to modify its agreements with its suppliers and make them exclusive distribution agreements, Amul would be unable to obtain any suppliers in the state, and would have to bear additional expenses for storage and transportation from another state as GCMMF (Gujarat Cooperative Milk Marketing Federation) has no plants in Karnataka.
An exclusive distribution agreement refers to a contractual arrangement that limits, restricts, or withholds the output or supply of goods or services, or allocates a specific area or market for their sale or distribution. Such an agreement restricts the seller’s freedom of action, and may also have a territorial restriction. Under Section 3(4)(c) of the Competition Act, an exclusive distribution agreement between enterprises or persons at different stages or levels of the production chain, in different markets, with regard to production, supply, distribution, storage, etc., which has an appreciable adverse effect on competition within India, is considered void. While parties generally have the freedom to enter into agreements, if a dominant firm enters into an exclusivity agreement that could harm competition, the Competition Commission of India (CCI) examines the potential pro-competitive benefits against the anti-competitive effects.
CCI considers various effects when analysing the impact of exclusivity agreements on competition, such as the creation of barriers to entry for new competitors and foreclosure of the market. In the case of a commodity like milk, which requires local supply to maintain freshness, an exclusive distribution agreement could result in market foreclosure as new entrants would face significant hurdles in introducing their products and maintaining their freshness.
These concerns are relevant to Amul’s entry into Karnataka’s dairy market, where both Amul and Nandini are well-established national brands with high market shares. While they are capable of competing with each other on merit, the use of exclusivity agreements could impact competition and result in anticompetitive effects.
