Tata Global smells the coffee; plans to buyout Hector Beverages

A Starbucks store in Delhi. The company is expected to achieve break-even in 2018-19
Tata Global, the world’s second largest branded tea company after Unilever, wants to be more than what it is best known for. This means a bigger play in food and beverages in India, Asia’s third-largest economy and among the fastest-growing in the world.

In the last few years, Tata Global, whose 2016-17 turnover was Rs 67.79 billion (FY 2017-18 revenue estimates are pegged at Rs 68.91 billion, according to analysts), has moved in that direction with joint ventures such as Tata Starbucks and NourishCo, the latter an association with PepsiCo.

Yet, the company, which acquired UK-based Tetley in 2000, triggering a spate of buys through the decade in the process, is hardly satisfied with this. At a time when ITC, Nestle, Britannia and Patanjali are upping the ante in the domestic food and beverage market with a presence across categories, Tata Global knows it needs to do more. Partner PepsiCo as well as rival Coca-Cola are also pushing the pedal on investment in the market in their drive to reach out to more people with bigger and wider portfolios. Both Indra Nooyi, chairperson and chief executive officer of PepsiCo, as well as James Quincey, chief executive officer of Coca-Cola, have said that they want to strengthen their non-carbonated beverage businesses and add more regional and local flavours to improve sales growth.

In the case of foods, PepsiCo, according to Nooyi, will continue to bet big on healthy snacks, cutting sodium, sugar and trans-fats aggressively. The initiative is part of her Performance with Purpose programme, version two of which was released recently. Amid all this, talk of a possible buyout of Hector Beverages, best known for its Paperboat brand of ethnic drinks, by Tata Global, is just the beginning of its broader plan to expand its menu quickly, sector experts say.

“With a change in management at the Tata Group level, there is a focus on turning around or selling loss-making entities, saving cost and a thrust on new growth opportunities,” Percy Panthaki, vice-president, research at Mumbai-based brokerage IIFL, said.

From a Tata Global perspective, this means exiting its plantations business and focusing its attention on the branded beverages business instead. In the quarter ended December 2017, for instance, Tata Global divested its holding in Estate Management Services Private Ltd in Sri Lanka and is expected to do more of this in the future.

The company is also contemplating an entry into dairy and is not averse to the idea of getting into foods as well, eyeing segments such as snacks, persons in the know said.

“The possibility of them (Tata Global) getting into foods cannot be ruled out. But it would be interesting to see how they do it,” said Abneesh Roy, senior vice-president (research, institutional equities), Edelweiss.

While the Tatas did indicate in the past of their desire to foray into foods under Tata Global, a clear road map was never articulated by it. But as companies such as ITC and Patanjali increasingly get aggressive in the foods space, chalking out big plans to tap the branded food market, it is now or never for Tata Global, persons in the know said. The company is exploring organic and inorganic growth opportunities in the branded food market as it seeks to expand its footprint in the category.

The joint venture with PepsiCo, meanwhile, has allowed Tata Global to navigate the water vertical better. The company’s bottled water acquisition, Himalayan (done a decade ago), is part of this JV. Tata Global alongwith PepsiCo is also investing in affordable ready-to-drink products such as Tata Gluco Plus, aimed at providing value-for-money hydration solutions, besides pushing fortified water under Tata Water Plus.

At a recent analysts call to discuss its third-quarter results for 2017-18, Tata Global’s management said that NourishCo had achieved break-even and was tracking well in terms of growth. “Sales continue to improve driven by double-digit growth for both Tata Gluco Plus and Himalayan,” the management said without specifying NourishCo’s turnover.

Water, however, according to sector analysts, gives Tata Global under five per cent of its revenue currently. This number though is expected to grow as the company puts greater might and heft behind this vertical. The company is already pushing its copper and zinc fortified variants of Tata Water Plus in the overall mass market to compete with regular bottled water (from rival companies) at the Rs 15-20 price point (for a litre). The company has also launched pouches (200 ml) of Tata Water Plus recently for Rs 3 to push penetration into rural areas, besides coming out with a string of flavours of glucose-based drinks.

Tata Starbucks, on the other hand, focused mainly on coffee, has stores in excess of 106 currently and is likely to close the 2017-18 financial year with a turnover of Rs 3.2 billion, up nearly 19 per cent, according to analysts. “We are seeing better in-store performance and growth in new stores and formats continue,” the management said about Tata Starbucks during the company’s third-quarter results recently.

According to sector analysts, Tata Starbucks, which closed the 2016-17 financial year with a turnover of Rs 2.7 billion, narrowing losses to Rs 320 million from Rs 410 million the previous year, has broken even at the store level. It is expected to reach break-even at the company level by 2018-19.

While tea gives Tata Global around 75 per cent of its revenue, followed by coffee at around 20 per cent, this split could change in the future, say analysts, as the company pushes deeper into spaces beyond tea.

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