This paper characterises smallholder milk outlets in Nakuru district one of the major milk producing Districts in Kenya, and also analyses factors that influence their current operating and handling capacities. Data comes from four divisions of the district. A sample of 137 smallholder milk retail outlets was made using systematic random sampling methodology. Both descriptive and ordinary regression methods were used in the analysis. A characterisation of the retail outlets is brought out and the factors that affect their current operating capacities presented. Results show that a unit change in education, experience and selling prices leads to 0.29, 0.18 and 0.23 significant changes in milk handling capacities by the retail outlets respectively. These imply that there is an efficiency gain from education and better prices through higher consumer incomes in the industry. Enhancement of milk retailers' value addition through provision of physical facilities such as cooling equipment and stability in prices should be encouraged through policy intervention to promote informal sector investments in the sub-sector.