Urban demand returning, but rural under stress: Tata Consumer MD & CEO

Tata Consumer plans to expand its reach in rural areas by increasing the number of outlets to 1.3 million by the end of financial year 2021-22 (FY22). In an interview with Sharleen D’Souza, Tata Consumer’s Managing Director and Chief Executive Officer Sunil D’Souza talks about the company’s strategy to launch more D2C (direct-to-consumer) brands and the company’s demand outlook. Edited excerpts:

What products are you looking to add to your portfolio?

In the food and beverage space, we worked with an external partner to distill it and narrowed it down to about 30 categories where we could make a tangible difference. We then distilled it to five distinct platforms. On those platforms there are products that we will be able to offer organically, but there are some we’ll have to add inorganically.

One of the acquisitions we made was Soulfull, because we were interested in breakfast cereals, mini meals, and snacks and we had no expertise there. We bought it not only for the brand name and the strength of products, but also because it has got a huge pipeline of differentiated products like ancient grains suited to the Indian consumer. We’ve just started launches in the last quarter, and hopefully by March you’ll find us launching Soulfull into a new category.

How do you expect your margins to expand, since tea prices have cooled?

We delivered 14.6 per cent EBITDA margin, which is a recent high, driven primarily by upside in tea margins. Last year, we had a supply shortage because of lockdowns and costs rose, but we couldn’t price it at cost because we are in a competitive environment. Also, we did not want to shock the consumer with pricing.

We raised it over a period, and now the cost of tea has reduced. Right now, our gross margin on tea is 35-37 per cent, which is normal, and at these levels we’re generating healthy bottom lines for the business. Unless something drastic happens, this is the level of margin that we will be playing at. We will now focus on continuing to build the premium side of our portfolio and drive volume momentum through distribution and innovation.

How do you expect coffee prices to pan out?

Coffee prices have risen in the last six-seven months and are up nearly 70-80 per cent, and that has cascaded across the globe. We see this continuing for at least six months.

Coffee prices impact us in three different businesses. The biggest impact is on Eight O’clock Coffee in the US, where we had already increased prices in August and September and we’re about to raise it further, as all our competitors are doing so. Even in our results for last quarter, volumes were down 2 per cent, but revenues were up. You’ll see that continuing for some time.

The second biggest impact would be the instant coffee division of Tata coffee. But there we buy coffee at a certain price, we process it, and sell it. It is just the differential margins we’ve got to make. There might be a bit of pressure on volumes.

The last and the smallest piece is where Tata Coffee has plantations, and higher prices would be slightly beneficial. We have multiple

moving parts.

Volumes were impacted in the international tea business in Q3. Do you expect that to continue?

Volumes in the international tea business were primarily impacted because of huge pantry loading last year, especially in the UK, US and Canada. Canada had four to five lockdowns. Every time there was a lockdown there was pantry loading. We are coming off a high base and that is unwinding. You will see that in the category numbers. In the US and Canada, the categories went through major growth and now that is unwinding. The good news is that I think they’re settling close to, if not slightly above, where they started.

In the UK, the category is still soft, as black tea is declining, but fruit, herbal and specialty teas are growing. Tetley is in black tea category and is the one that is declining. We are focused on growing our portfolio for Good Earth and Teapigs, which is our fruit and herbal speciality.

How do you expect demand to pan out in the domestic and international markets?

In the international market we’ve already started coming off the high base because by this time last year lockdowns had ended. There was a small hiccup in January, but things are broadly back to normal.

In India, extended monsoons have played truant in some places this year. The urban business should come back with the Omicron wave waning and life returning to normal. However, we are seeing stress in geographies that are more rural and we’re seeing the stress even in our portfolio in brands that are more mass market and targeted towards the lower end of the spectrum.

How do you plan to expand your distribution network?

We said we will build out to a million outlets by September, from 500,000, and we will have 1.3 million outlets by March end. We are slowly shifting our focus beyond the metros and big towns and are moving to the tier-2 towns and rural areas. We have a huge focus on growing the rural network with sub-distributors, rural distributors, and wholesalers.