The Largest Tea Manufacturing Company In India Marketing Essay

Tata Tea, one of the important group companies of Tata group, is the largest tea manufacturing company in India by volume and currently holds second position as company representing tea operations in global market. The company used the policy of acquisition, joint-venture and sustainability as their key strategies for global growth. During their journey in achieving their milestone in global market, Tata tea faced many political, social, economical and technological issues. For example acquisition of Tetley-UK was the most challenging one as it landed Tata tea into short term debt. But the adoption of firm policies and financial restructuring helped Tata tea to regain their momentum and now it is the second largest company representing tea operations in global tea market.

Tata Group, established in 1868 in India, comprises of 7 business sectors namely communications and information technology, engineering, materials, services, energy, consumer products and chemicals. Each enterprise operates independently and has their own board of directors and shareholders. The revenue for Tata group in financial year 2008-09 is $62.5 billion with a profit of $5.4 billion and 64.7 % of revenue coming from foreign market. Tata group employ around 357,000 people worldwide and has established great reputation in India for 140 years by sticking to its strong values and business ethics. They have 27 publicly listed Tata enterprises with combined market capitalisation of $60 billion, and a shareholder base of 3.5 million. Tata group has operations in 85 countries and its products and services are exported to 80 nations. The major companies of Tata Group are Tata Tea, Tata Motors, Tata Consultancy Services (TCS), Tata Power, Tata Chemicals, Tata Steel, Indian Hotels and Tata Communications.

Tata Tea Limited was formed in 1983 from the formerly Tata Finlay Company, a collaborated company formed in 1964. It is amongst the group company of Tata group that produces 5 major brands of tea and holds the 2nd position in domestic tea business in India. It acquired Tetley Group in year 2000 and became the second largest branded tea producer globally with its goods presence in more than 40 countries. The operations of Tata Tea and its subsidiaries focus on quality product with significant presence in plantation activity in Sri Lanka and India. The global tea business of the Tata Tea group contributes around 86% of the overall business with the remaining 14% coming from coffee, bulk tea and investment income. Tata Tea Limited is headquartered at Kolkata and owns 27 tea estates in eastern and southern India.

Importance of Tata tea in Tata group

Importance of Tata tea can be determined by analysing the BCG Matrix of Tata Group in Figure1

Figure 1: BCG Matrix

Source: (Abhinav-Parakh-Pdf)

From the overall Tata group, Tata tea and two more Tata enterprises has been allotted a star status. Star status is given to those enterprises that are the market leader in their own product field. For example Tata Tea brand leads market share in terms of capacity and value in India and has been complemented “Super Brand” recognition in the country. Moreover all the star industries have growth rate above 12%. And to maintain the growth rate the industries has spend large amount of money in their respective sectors. For example Tata Motors has invested in various projects such as Nano project, etc. Also Tata tea did invested lot of money in preserving its image by investing in jaago re campaign. Furthermore, Tata tea is contributing 9% of overall profit of Tata group. (Abhinav -Parakh-Pdf)

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Strategies for global growth-Tata tea

Tata tea’s global strategy is to become the market leader in tea production in India, increase its reach in the global market and end up being the global tea market leader where Unilever is currently positioned. For this the company has adopted the approach of forming subsidiaries and entering into alliances in countries that have considerable amount of presence in the tea market both form consumer as well as producer side. History of the acquisitions and joint ventures formed by Tata tea are listed in Table1. (Tata Tea limited-pdf)

Table1:-History of acquisitions and joint ventures of Tata tea Limited

Entity

Year of information

Status

Role

Tata Tea, Inc, USA

1987

100 per cent subsidiary

To process and market instant tea from its facility in Florida, based on sourcing of products from facility at Munnar

Consolidated Coffee Ltd

(Tata Coffee Ltd)

1991

Acquisition of 52.5 per cent stake

To diversify into coffee via a company which was Asia’s largest seller of coffee

Estate Management

Services (P) Limited, Sri Lanka

1992

Joint venture

To manage 22 plantation companies

involved in tea, rubber, coconut and palm oil, that were privatised by the Sri Lankan government

“Tata Tetley, India(merged with Tata Tea with effect from April 1, 2005)”

1993

100 per cent subsidiary

Kochi-based EOU that services the

branded business of specific Tetley and Tata Tea markets outside India

Asian Coffee Ltd (later

merged with Tata Coffee)

1995

Acquisition of 55 percent stake

To get into selling instant coffee globally.

Watawala Plantations

Limited, Sri Lanka

1996

Acquisition of 49 per cent

stake thourgh EMSPL

Production and marketing of tea, oil palm and rubber in Sri Lanka

Tata Tea (GB) Limited

2000

100 per cent subsidiary

Special Purpose Vehicle (SPV) established for the acquisition of Tetley, UK

Tetley Clover Pvt Ltd.,

Pakistan

2003

50:50 joint venture of Tetley with Lakson group in Pakistan

To import and sell tea in Pakistan as well as build a tea blending factory in Baluchistan

Tetley ACI, Bangladesh

2003

50:50 joint venture of Tetley with Advanced Chemical

Industries (ACI) in Bangladesh

To distribute Tetley’s products in

Bangladesh

Good Earth, USA

2005

Acquisition of 100 per cent stake by Tetley

Establish Presence in the US and

acquisition of strong product portfolio

Jemca, Czech Republic

2006

Acquisition of 100 per cent

stake by Tetley

Market Leadership in Czech republic with a product portfolio which goes across both mainstream and speciality

8′ O Clock Coffee, USA

2006

Acquisition of more than 50 percent stake, along with Tata Coffee and Tata Enterprises Overseas

To help establish global presence

in coffee and facilitate movement

up the value chain

Glaceau, USA

2006

30 per cent minority stake along with Tata Sons

Presence in unfolding crossover space of the beverages market through enhanced water

Year of Source: Tata Tea limited-pdf

Amongst all that are listed in table1, the acquisition of Tetley, UK was the most beneficial and also challenging for Tata tea.

4.1 Case Study:-Acquisition of Tetley by Tata Tea

4.1.1 Introduction

Tata Tea acquired Tetley from the venture capital investors in February 2000. For this Tata Tea competed with Sara Lee to acquire Tetley, completing its own initial public offering. The acquisition was important for Tata tea because its competitor Hindustan Levers Limited, subsidiary of Unilever was gaining market share and overall growth rate of tea market in India had slowed down at that moment. Before the acquisition, some of the important statistics of both the companies are shown in Table 2.

Table 2: Comparison of Tata Tea and Tetley before acquisition

(31/3/00)-(31/3/01)

Tata Tea

Tetley

Turnover

$207 million

$417 million

Employees

59,740

1,100

Operating profit

$36 million

$42.6 million

Key markets

India

Britain, Canada, US, Australia

Tea estates

54

0

Source: – “A Partnership Brewing”, Far Eastern Economic Review (May 17, 2001)/ Darden Business Publishing, University of Virginia, Tata tea Ltd and Tetley, plc (A)

As shown in Table 2, Tata Tea’s motivation to acquire Tetley was that it provided Tata Tea, to access the market of US, Canada, Europe and Australia. Tata Tea also hoped to earn important marketing and packaging expertise from Tetley. Some of the expected advantages of acquisition were

Technology: Tetley would provide Tata tea access to unique products such as flavoured tea, herbal tea and organic tea. This introduction could be a functional addition at the top end of the Indian market.

Brands: Tata tea could help launch the Tetley brand in India, Middle East and Russia, traditional bastions of Tata tea.

Cost synergies: Both companies could together relocate manufacturing of tea and take advantage of global supply chain approach and shared platform for InfoTech and finance function. While geographical spread of operations can be a constraint of moving people around, but it was expected that virtual teams using information technology, could work together without physically travelling across country boundaries.

InfoTech: the acquisition can help Tata Tea to improve InfoTech infrastructure and improve connectivity to distant plantation and adopting an enterprise resource planning (ERP) system to create a global supply chain based on Tetley’s SAP-based ERP solution.

4.1.2 Challenges for Tata Tea after acquisition

Tata Tea acquired Tetley group for £271 million and it was clear that Tata Tea paid too much for Tetley as it was £100 million more than the next highest bid. After acquisition Tata tea hoped to cover the debt created by leveraged buyout, but during that period many factors such as deteriorating financial performance of Tetley (£29 million in 1999), increasing raw material prices, great demand of substitutes of tea such as coffee, juices and soda and pressure to generate increase cash flow created pressure and conflict internally at Tata tea and between the two organisation.

Some of the challenges Tata tea has to come across are:

Tata tea was half the size of Tetley in terms of revenue and number of upper management and so it feared a domination of Tetley’s corporate culture.

Dealing with diverse skill set, working Culture of employee and objectives of both the organisation.

Financial constraints such as legal and capital control in India that made the listing of Tetley shares in India unattractive.

Problem arising with integration of processes of both the companies to accomplish supply chain.

As it is a leveraged acquisition, there is always a problem of bank coming in between and enforcing constraints in operations carried out by both the companies.

There is a great deal of concern of how British employees would react to Indian manager as India was a part of former British Colony.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=907952

4.1.3 Tata Tea Market after Acquisition

The market of Tata tea suffered a lot after the acquisition as it experienced disaster financial performance. The company’s overall sales was dropped by 8.3% and reached Rs 621.58 crore from Rs 677.86 crore. Also operating profit was dropped down by 19.37% and reached Rs 121.43 crore from Rs 150.60 crore. Market share price considerably dropped within a year as shown in Figure2. (THE HINDU group of publications, Sunday, April 15, 2001)

Figure2: Share value of Tata tea in 2000-01 crisis after acquisition of Tetley group

http://www.hinduonnet.com/businessline/iw/2001/04/15/images/15b053c1.jpg

Source: THE HINDU group of publications, Sunday, April 15, 2001

4.1.4 Factors fuelling Tata Tea’s global initiatives

Though the acquisition of Tetley was seen negatively by the market for the next 3 years, Tata tea cautiously chose the approach of integrating the processes and exploring synergies between the two companies with absence of any time pressure, while maintaining operational independence. For this, the overall emphasis was on growth rather than cost reduction. Also a structure that supports joint working in several areas was adopted. A thoughtful process was adopted for integrating the two companies with some of the highlight being:

Identification of common belief: An international consulting firm was commissioned to identify the common belief between the two companies and suggest ways to bring them closer.

Creation of structure: A strong culture was developed to create a group that includes steering committee, their task forces and managers of both the companies.

Refinement of structure: Tata Tea adopted the hierarchical structure and assigned responsibilities to every level from top to bottom as shown in figure2.

Figure 2: Refinement of Tata Tea organisational structure after acquisition

Source: Tata Tea limited-pdf

Implications that both companies has gone through after merging are described in table3.

Table3:- Merger implications

Merger implication

Tata tea- pre acquisition

Tetley -pre acquisition

Consolidated-post acquisition

Global footprint

Domestic operations in India

UK and USA were the major market

Global presence

Increased outsourcing

Produced 95% of the tea requirements in-house

Outsourced entire requirement from 35 countries

70% of the Tata tea’s requirement are outsourced from 20 countries, thus reducing risk associated with fluctuation in production

Value chain positioning

40% turnover came from tea packet/tea bags

100% turnover came from tea packet/tea bags

84%of turnover came from tea packet/tea bags

Source: Tata Tea limited-pdf

End of case study

Apart from all the acquisitions, Tata tea has adopted the policy of Sustainability as their key business strategy, which addresses many socio-economical and environmental issues that have the potential to increase competitive advantages in the business, if addressed effectively. Some of the global values that Tata tea has adopted are:

Consumer focused: Consider consumer as their heartbeat

Change management: Adapting to changes by going beyond the ways of doing things.

Motivation: Encourage employees to innovate in what they do and take up challenges

Sustainability: Use of ethical conducts in business implications

Playfully professional: Encourage employees to make organisation as a personal space by improving the working condition.

(Sustainability Report, 2008-09)

4.2 Financial Analysis

In order to support all the acquisitions and joint venture listed in table 1, Tata Tea has actively followed operational and financial restructuring. The effect of this is evident from the combined financial results of the company. That is though the sales between 2003 and 2005 remained flat, the operating margin did improved from 14.1% to 18%. Since the acquisition of Tetley the company have taken initiatives such as strict cost control and quality improvement with the help of its R&D centres in order to improve its operational performance. As a result of these initiatives, Tata Tea was successfully able to lower its high cost debt of gearing 2.2 in year 2002 to gearing 1.1 in year 2005. Also there was a significant improvement in Tetley Group’s cash flow which helped the company to invest more behind its brand globally, launch new products and merge its market share in key geographies. (Tata Tea limited-pdf)

4.2.1 Financial restructuring done by Tata Tea

Tata tea changed their orientation from producing tea company to selling tea company as they realised that the level of profit can be increased by selling high quality branded tea products rather than owning plantation. To execute their restructuring process, Tata tea decreased its total wage payment by 12.5%, provident fund payment by 43% and welfare payment by 40%. Also Tata tea also reduced its employee strength from 58,888 workers to 34,596 workers as shown in Figure 3

Figure3: Tata tea directly employed work-force, 1999-2007

Source: Tata Tea Annual Report (various), IFC

Current Positioning of Tata Tea

After the financial collapse in the year 2000, Tata Tea is now moving forward toward the growth. Currently share value of Tata tea has moved up to Rs 700 per share as shown in Figure4

Figure 4: Share value of Tata tea (2008-09)

http://www.blonnet.com/2009/05/25/images/2009052551110401.jpg

Source: – Business Daily from THE HINDU group of publications, Monday, May 25, 2009

Tata tea exceeded its performance with a volume share of 19.2% as compared to its competitor’s 18.6% and acquired the leadership position with respect to volume share of packet tea segment in India as shown in Table 4

Source: http://www.tatatea.com/TATA_TEA_TAKES_OVER_THE_NO_1_POSITON_IN_VOLUME_TERMS.doc

Tata tea has been ranked as the most trusted beverage brand in India (The Economic Times, 2007) The company’s marketing strategy of focusing on continuous innovation in all direction of brand marketing and sales, has helped Tata Tea to achieve excellent growth in recent years (Ms Sangeeta Talwar, Executive Director-Marketing, Tata tea Limited). All products of Tata Tea such as Tata tea premium, Tata tea gold, Tata tea Agni, Tetley green tea and Tata tea life are being well received by the consumer and hence experience great success.

Future plans

As mature markets such as USA, UK and Canada are changing and with the declination of black tea products, Tata tea Limited are now concentrating on sectors that are growing rapidly such as fruit and herbal infusion, green tea and many more. The company has been structuring its business in these high value sectors by supporting key products, responding to changing consumer needs by introducing new products and making acquisition. Recently Tata tea is looking for joint venture with a China based company Zhejiang Tea import and export to manufacture and market green tea extracts, liquid tea concentrates, cold and hot water soluble instant tea and other value added tea beverages (Tata Tea limited-pdf). Also the company entered the Russian market through joint venture with European bank of reconstruction and development to obtain the hydration opportunities in the Russian market (Sustainability Report 2008-09).

Conclusion

Tata tea’s overall success was much depended on its strategies in the critical time. Though acquisition of Tetley-UK was analyzed as a negative move at that particular time i.e. in the year 2000, Tata tea overlooked the acquisition as an opportunity to compete in global tea market. Apart from use of some firm strategies, other key factors that played a crucial role in Tata tea’s global success are

Use of right strategy at the right time

Use of wait and watch approach during critical time

Establishment of understanding between Tata tea and Tetley-UK

It is said that use of high risk results in two ways in business. If the risk doesn’t work the company can go to ground of debt. But if the risk works, the company can experience success like never before and that’s what happened to Tata tea.

References

Abhinav-Parakh (Pdf file) [online] Available http://www.scribd.com/doc/24386829/Abhinav-Parakh (4/01/2010, 14:40)

Darden business publishing-University of Virginia, Tata tea Ltd and Tetley, plc (A) [online] Available http://papers.ssrn.com/sol3/papers.cfm?abstract_id=907952 (5/01/2010, 21:08)

Sustainability Report, 2008-09 (pdf file) [online] Available http://www.tatatea.com/TataTea_Sustainability_Report_2008-09.pdf (12/01/2010, 19:03)

Tata tea limited (Pdf file) [online] Available http://www.ibef.org/download/Tata_Tea_Limited.pdf (5/01/2010, 23:08)