How Tata Global is spicing up beverage sales

While tea remains its most profitable segment, accounting for 70 per cent of its revenue, the company has also put its innovation machine into top gear-eyeing emerging segments like herbal teas and fortified water in India and the UK and coffee pods

The American market is becoming a testing ground for a new strategy that the beverage arm of the Tata Group is putting in place: identify new consumer trends and go after them even if it means adopting new distribution and marketing models.

Consider this: the United States is the largest consumer of coffee in the world at $30 billion (Rs 1.83 lakh crore). Tata Global Beverages, the Rs 7,270-crore beverage major, which marked its presence in the US with the 2006 acquisition of Eight O'Clock Coffee, the third-largest coffee brand in that country in terms of volume, is shifting its attention to the in-home segment, making beans and pods for the coffee-making machines at home which offer a growing space in the American coffee market.

Tata Global Beverages, which derives about 25 per cent of its overall revenues from coffee and about 18 per cent from Eight O'Clock alone, has tied up with coffee-machine makers such as Green Mountain Roasters, owners of Keurig, in the US. The latter is the largest single-serve machine operator in the nearly $12-billion (or Rs 73,000 crore) in-home coffee market in the US. It has a 72 per cent share of the market. The tie up with Keurig allows the Indian beverage company to push products such as packaged Eight O'Clock branded coffee pods for Keurig machines (popularly called K-Cups). It has thus ensured that it is not altogether out of the consumption basket in this segment.

The result? In a span of a year-and-a-half since the launch of K-Cups, Tata Global Beverages has managed to garner a share of about 7 per cent of the single-serve market, according to analysts tracking the company.

This spurt has happened even as the regular Eight O'Clock packaged coffee (available in whole bean as well as grounded formats) was refurbished recently in the US to help it stand out in a cluttered beverage environment. Ajoy Misra, executive director & deputy CEO, Tata Global Beverages - who will take over from incumbent Harish Bhat as managing director & CEO on April 1 - said while announcing the company's third-quarter results this January that he saw the new product formats (K-Cups) helping the brand increase its share in a sluggish market.

The overall coffee market in the US is growing at a pace of just 5.6 per cent per annum. But analysts say it is the single-serve segment, growing faster than the overall coffee market, that is expected to fuel Eight O'Clock's growth. Says Abneesh Roy, associate director, research, institutional equities, Edelweiss: "Markets such as the US are highly modern trade-led, where a number of beverage brands are competing for a share of the consumer's wallet. Tie-ups with coffee makers such as Green Mountain, therefore, is the way forward since it gives a packaged brand direct entry into the consumer's home."

While single-serve is clearly the way forward for Tata Global Beverages in the US, in India the company is counting on its joint venture with Starbucks to help it expand its coffee presence. Tata Starbucks, the joint venture between the Indian and American companies, has already led to 34 stores in four cities, including in Mumbai, Pune, Delhi and Bangalore, over the past 18 months and is expected to keep its pace of launches as it looks to grow its business aggressively. Analysts say that the joint venture is expected to add at least 20 new stores in the next six months, crossing the 50-store mark in the process. This, say analysts, will possibly constitute the fastest expansion of retail outlets by a brand in recent years. Misra says that operations of the joint venture are going according to plan, but does not go into details. Last year, Tata Starbucks had increased its authorised share capital by Rs 150 crore in a fund-raising drive aimed at helping it expand operations.

Tata Global Beverages is looking to take revenues from coffee to 35 per cent in the next five years and infusion of capital is expected to aid this process.

Specialty teas and water

There are two other emerging areas on Tata Global Beverages's radar. Around 70 per cent of Tata Global Beverages's revenues comes from tea. But it is specialty teas, which make up 15 per cent of this 70 per cent pie, that the company has sets its eye on. Specialty teas include green and herbal teas. Tata Global Beverages, according to people who know of the company's plans, is looking at increasing its contribution from specialty teas to 30 per cent over the next few years. This comes as preference for green tea grows in India and across the world. According to experts, green tea constitutes 5 per cent (or Rs 550 crore) of the overall 800 million-kg tea market in India that is worth Rs 11,000 crore. It is estimated that green tea will touch 20 per cent in the next few years.

Tata Global Beverages already has a portfolio of six variants under the Tetley brand name within its green tea portfolio in India, commanding a market share of 27 per cent. The company proposes to take this number up in the coming days by introducing new flavours to spice up its offering. Similarly, in markets such as the UK and Canada, the company has been aggressively pushing its green tea range. It has market leadership in green teas in Canada and is number two after Twinings in the same category in the UK.

In water, Tata Global Beverages wants to take its Himalayan packaged water to West Asia and parts of South-east Asia after launching it in Singapore at Starbucks outlets there. This is expected to gain momentum in the next financial year, when Tata Global Beverages's joint venture with PepsiCo, called NourishCo, will also launch Tata Water Plus in Gujarat and Madhya Pradesh.

Currently, Tata Water Plus, a fortified water brand from NourishCo, and Tata Gluco Plus, an energy drink from the company, are available in the southern markets of Tamil Nadu and Andhra Pradesh. Tata Global Beverages is also expected to take the two products to more markets in the south. Water at the moment contributes 2 per cent to revenues, which the company plans to take to 10 per cent in five years.

Tata Global Beverages is expected to support growth in these categories with acquisitions. Misra had reiterated in January that the company had no plans to abandon its inorganic growth strategy despite selling its entire stake in Rising Beverages, a US beverage company, during the December 2013 quarter. Tata Global Beverages, Misra had said, was looking at joint ventures and alliances besides acquisitions in specialty teas, water and coffee.

LIQUID ASSETS

Over the last decade, Tata Global Beverages has transitioned from being a local maker of packaged tea to the second-largest maker of tea in the world. The ball was set rolling in 2000, when the company, then called Tata Tea, acquired UK-based tea maker Tetley in a Rs 1,870-crore deal. The buy-out heralded the start of an aggressive expansive strategy.

Between 2000 and 2010, the company spent over Rs 5,000 crore on acquisitions in the US, Russia, East Europe and South Africa, snapping up players such as Good Earth, Jemca, Joekels Tea, Vitax, Grand and Eight O'Clock Coffee, among a host of others. Of these, Tata Tea, which became Tata Global Beverages in 2010, cashed out of two transactions-its 30-per cent stake in US-based Energy Brands, the maker of Glaceau vitamin water and its 43.1-per cent stake in Rising Beverages, the maker of the Activate brand of functional water, a brand popular in the US.

Despite the exits, notably in the water business, Tata Global Beverages has not given up on its ambition of expanding its presence in the segment. Tea, coffee and water are the three pillars of its business, says the company. It announced last month that it had received the mandatory approval of the local stock exchanges to merge Mount Everest with itself, a process it had set rolling in November 2013. In tea, its focus will be on green and herbal since the demand for black tea is waning in mature markets with people veering towards healthier options.