Tata Consumer Products Ltd (NSE: TATACONSUM, BSE: 500800), previously named Tata Global Beverages Ltd (TGB), is a natural beverages company with interests in tea, coffee and water. It started out as a domestic Indian tea farming entity and over the years, has strategically evolved as a global, branded beverage play. Recently, the company announced the merger of Tata Chemicals’ (including the iconic brand ‘Tata Salt’) consumer products business into TGB. Post amalgamation of the merger, TGB’s focus is to aggressively expand its existing new products (pulses, spices, packaged foods, beverages, etc.) and to enter into broader FMCG (dairy, home care, personal care), thereby transitioning into a true-blue consumer company.
Tea Business
With the merger of Tata Chemical’s consumer products businesses into TGB, the share of tea business in the revised consolidated revenue in FY19 stands at 57% which was previously at 71%. The company’s Indian tea business continues to be its breadwinner. Sales from tea contribute to 74% of the branded business.
The branded tea category (i.e. sold in packages) represents ~65% of the total market. The share of branded tea has increased over the years due to increase in availability, quality factors and awareness. India is primarily a black tea market, but the wellness/green tea market is growing relatively fast.
Tata Tea currently has eight brands, five national and three regionals. It is present across price-points — various brands cater to a broad range of consumers — from the mass market to the premium segment. Tata Tea reaches over ~1.9-2m outlets, having grown at CAGR of ~4% over the past decade; it is amongst the largest in the beverage category in India. It has ~20% value market share in the branded tea category in India, which it has maintained over the last decade. Tata Tea has been rated as the second most trusted hot beverage brand in India.
The focus of the company has been and remains on taking advantage of the formalizing market rather than the price-driven market share gains, clearly evident from the steady market share of the two largest players over the years.
TGB entered the global natural beverages landscape with the acquisition of Tetley in 2000. Since then, it has strategically expanded its global portfolio through various M&As. However, demand headwinds and intense competition have been dragging overseas performance. The company has also experienced difficulties in scaling up and optimizing operations in smaller markets.
TGB’s overseas tea brands include:
Declining black-tea sales in the UK and Europe — a major market for TGB’s overseas tea business – as consumer preference is increasingly shifting towards herbal/fruit-based teas, particularly amongst the younger generation. TGB’s UK portfolio is 85% black tea. The overall market for tea in the UK has declined ~2- 3% over the years, within which, the black tea market has declined ~5%.
To address the demand side, the management has decided to focus on non-black segment which is growing and is a high margin business. On the cost side, it has sold loss making operations in Russia, China and Czech Republic.
Coffee Business
TGB’s coffee business includes plantations in India, retail coffee in the US (Eight O’Clock) and Australia (MAP), and the recently launched retail coffee business in India (Tata Coffee Grand). It also has a 50% stake in a joint venture (JV) with Starbucks for sales in India. Except for Starbucks and MAP, the other businesses are part of Tata Coffee, a subsidiary in which TGB has 57.48% stake. Eight O’clock is jointly owned by Tata Coffee (50.08% stake) and remaining directly by TGB.
The India (Tata Coffee standalone) business includes the sale of green beans, processed instant coffee, other value-added coffee products, and small sales of pepper and tea. Until 2018, 7,369Ha was under coffee cultivation, while 2,456Ha was under tea cultivation. It also has an instant coffee capacity of 8,500MT. The company has invested in a freeze-dried coffee plant of 5,000MT capacity in Vietnam, which was commissioned in FY19. ~72% of Tata Coffee’s standalone revenue is directly linked to coffee products.
The performance of TGB’s standalone coffee business can be correlated to the movement in global coffee prices. Coffee is a globally traded commodity and hence, global factors drive its prices. The performance is also subject to local weather and plantation conditions, influencing output.
TGB’s coffee business (ex-Starbucks), i.e. Tata Coffee, is facing near-term challenges as global coffee production is outpacing demand and depressing prices (currently at multi-year lows). The commissioning of its Vietnam plant (freeze-dried instant coffee) in FY19 is expected to boost instant coffee capacity from the current 8kt to 13kt, and thus, should translate into higher earnings.
Starbucks (50% JV) is a premium coffee experience, an excellent play on the lifestyle aspiration of Indian consumers. It is well positioned in a market with very little competition coupled with strong brand pull. Currently, it has 185 stores across 11 Indian cities.
Salt and Consumer Business
The merger of TTCH’s consumer business doesn’t just give TGB a strong brand in Tata Salt, but also opens up a plethora of opportunities in the staples market with an addressable size of INR 770 bn.
The merger also increases contribution of the India business to consolidated profitability, which I believe provides stability to earnings and would be one of the factors for stock re-rating.
COVID-19 and lockdown
In the midst of a global pandemic and with the guidance around social distancing to counter the COVID-19 threat, it is logical to expect consumers to over-stock on essential products and commodities. The existing uncertainty around how the pandemic shapes up may result in an uptick in spend by consumers. This may give a slight fillip to sales for FMCG companies, but at the same time this may be neutralised by a drop in levels in stock-in-trade due to potential supply chain disruptions.
The e-commerce sector will also face the challenges due to COVID-19 and may see a dip in growth. There will be increased pressure on supply chain for deliveries of products and another challenge for e-commerce companies is that they will need to equip their employees with the appropriate resources to manage operations remotely with little or no disruptions.
With that being said, the Tata Consumer Products recently partnered with e-commerce company Flipkart to allow consumers to use the Flipkart platform to buy different combo packs of essential products such as beverages (Tata Tea and coffee) and food items (Tata Sampann spices, pulses, and Nutri mixes).
The other challenge for the company is to resume production and deal with shortage of manpower.
While the domestic demand for the company’s products is expected to remain positive, the overseas demand is likely to take a hit. As on February 2019, 61% of the company’s branded revenues are from India.
According to a Tea Board official, since major exporting destinations — the US, the UK, Japan, and Iran — are currently grappling with the pandemic and their economies are taking a hit, the demand for tea, which is a discretionary spend, may go down. Also, consumers can opt to downgrade their purchase, which will hurt Indian exports. This can severely impact the company’s overseas tea business, which has already been facing demand headwinds and intense competition. The blow comes just at a time when unit prices of Indian tea were on the rise for its better quality. The unit price in the UK improved from $2.96 a kg to $3.07 a kg in 2019, while in Iran, the largest destination for Indian tea exports, the price improved from $3.73 a kg to $3.91 a kg. In Ireland as well, the price soared from $6.62 a kg to $8.72 a kg last year. The tea industry is also expecting huge losses, as tea estates during majority of the plucking season could lead to a crop loss.
The company’s Starbucks business is also expected to take a hit as it is finding it difficult to meet rental and maintenance charges due to lack of customers. I expect the business to have a prolonged shortage in demand even after lifting the lockdown, as consumers will be cash conservative and will be delaying discretionary spending. The company is also coming up with initiatives like home deliveries and customer drive throughs to attract customers.
While the company stands to benefit from these short-term demand drivers, the damage from the lockdown won’t be limited to the short-term. As per a recent report by Emkay Global, “While consumer demand remained somewhat resilient after demonetization, the coronavirus disruption seems wider and deeper and may result in a slow recovery”. While the government announced a relief package for the daily wage earners and migrant labours, it “so far looks inadequate to revive the already weak consumer spends”. Several other economists such as Nobel Laureate Abhijit Banerjee have also pointed out gaps in the relief package. Also, while sales may see an initial jump once the lockdown ends, the impact on incomes, especially on the low-income bracket, will take time to recover and will also reflect in consumption demand.
Strategically the company is moving in the right direction and with experienced personnel being added to the top management, company seems to be ticking all the right boxes. However, the management has two big hurdles in front of them – maintain production with limited workforce to meet the uncertain demand and ensure the finished products reach the consumers.
Team 3C Capitals
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