With tea tepid, Tata Global set for food, beverage buys

The tea business brews more than 71% of Tata Global Beverages’ revenues, but galloping prices at the garden level has meant margins have crunched and remain under severe pressure.

As an offset, the company, formerly called Tata Tea, would make acquisitions in the more lucrative health beverages and snacks space globally, sources familiar with the development said.

The idea is to strengthen presence in segments that are rapidly growing, and analysts tracking the company said small to medium-sized buyouts could be in the offing.

Tata Global, which has transformed to an international entity than a local one —it derives more than 65% of consolidated revenues outside India — is experiencing challenging times in its staple businesses that includes coffee.

Volume growth in tea in India is a bare 1% now compared with 3-4% two years back. Globally, the trend is flat.

“Growth rates have not looked up and we are still seeing pressure as commodity prices continue to go up,” said Sushant Dash, vice-president- marketing, Tata Global.

Last fiscal, tea prices rose significantly, upping input costs by 50%. Tata Global raised prices by 35-40% in June, but that’s not sufficient to cover the inflation, said analysts.

Ergo, the pain on margins. “In the last 3-4 years, the company has been facing constant margin pressure. It’s unlikely to change going forward because frequent price increases are not an option,” said Himani Singh, analyst with Elara Capital.

Five years ago, tea made up for almost entire turnover of the company. Today, 29% is made up of coffee and water.

Nikhil Vora, managing director, IDFC-SSKI Securities said the significance of tea could reduce as the company strives to grow three times its current size.

“It (tea) is an extremely challenging business, it’s possibly the bottom-end of the consumer brand-business that one can look at. Tata Global cannot grow from $1.5 billion billion to $5 billion with tea and coffee alone. The way out is to look at other categories within beverages, water and foods,” Vora said.

One complaint analysts have is that Tata Global has not yet leveraged its substantial distribution strength in India to generate consumer involvement.

For example, its water brand Himalayan, made by unit Mount Everest Mineral Water, is utilising only 30% of the parent’s distribution reach, they point out.

And the company’s endevours in newer segments - such as green tea, nutritional drinks and iced tea, all of which are fast growing - will need patience, they said.

A joint-venture with PepsiCo that the company embarked on will also be a huge positive, analysts said.
But it’s unlikely any of the lines will replace the predominance of tea anytime soon.

“They are all long-haul businesses. Yes, Tata Global is trying to diversify into other streams of beverages in many geographies, but the efforts will take time to fructify. Therefore the dependence on tea will remain for a while,” said another analyst, who did not wish to be named.

Tata Global’s Dash said according to the Tea Board, the current shortage in tea crop is around 25-30 million kg.

The headroom is narrow because household penetration of tea has already touched 91% in India, analysts said.

To boot, the market is well covered by both, big players such as Hindustan Unilever Ltd and Tata Global, and a plethora of regional and local entities.

Headwinds also exist because rising prices of tea, milk and sugar have led to greater downtrading by consumers to mass brands and loose tea.
“The higher-end better quality tea prices have gone up more than the lower variants. So the gap between the economy segment and the premium segment has widened,” Dash said.

In the bargain, Singh said, loose tea has seen maximum growth. “Till there is some softening in tea commodity prices, we don’t see any major volume growth for Hindustan Lever and Tata Global in tea,” he said.

Not that Tata Global is not trying to ride the downtrade. The company has relaunched Tata Tea Premium, the largest mass brand in its portfolio, and has also started experimenting with different stock-keeping units (SKUs).

For example, it has started pilot runs of a Rs 30 packet of Agni, its lower-end brand.

That’s par for the course, Singh said. “The company will change the mixes, SKUs and take some medium-range price hikes - all of which will have an impact on margins,” he said.

The company sells Tetley in the high-end, Tata Tea Gold in the premium end, Tata Tea Premium in the mass end and Agni at the lower-end.

To consolidate, Tata Global could also merge Tata Coffee and Mount Everest Mineral Water with itself which would fold in a slew of businesses - Tata Tea, Tata Coffee, mineral water business Himalayan, Eight O’ Clock Coffee, Tetley, Good Earth and others - into the mothership.

But this is unlikely to impact consolidated revenues, said analysts.