Tempest in a Teacup

Tata Tea8217;s 677-million acquisition of Glaceacute;au signals a complete strategic transformation into the high-margin world of speciality beverages, reports Sanchita Das

We cover only 45 per cent of the global beverages space. We have to grow beyond that.8221; Coming from the Managing Director of the world8217;s second-largest branded tea company, this is a clear statement of intent to breach the borders of tea, even by shedding its core identity.

With a target of growing to a Rs 7,000-crore company, there is just no looking back for the Rs 3,000-crore Tata Tea, since it made its partial exit from the plantation business last year. Inspired by the global prospects thrown open by the acquisition of Tetley in 2000, the company has gone on an international rampage this year.

The past week saw Tata Tea make its fourth major international buy in the past one year. In October 2005, it acquired California-based FMALI Herb Inc and Good Earth Corp for 50 million. In May this year, it acquired Jemca of the Czech Republic for an undisclosed amount. Then in June, its subsidiary Tata Coffee pitched 220 million to acquire Eight O8217;Clock Coffee Company, again in the US.

What sets apart the 30 per cent stake Tata Tea is now acquiring in Glaceau, is that this 677 million investment will herald the Indian company8217;s entry into alien turf8212;energy drinks and flavoured water8212; pitching it that much closer to covering a bigger pie of the global beverages space. Glaceacute;au brands include vitaminwater, which is nutrient-enhanced, smartwater which is electrolyte-enhanced, and fruitwater, which is flavor-enhanced. Tata Tea will now have access to the 10-billion US bottled-water market.

Analysts are impressed. If one wants to spread one8217;s wings in the beverages space there is nothing like the functional drinks that Glaceacute;au serves up, they say. Colas are stagnating, but for the emerging markets. With the mature markets getting calorie conscious, the global cola market today has fallen to a compounded annual growth rate CAGR of 5-10 per cent. Fruit juice, again largely pushed by the emerging markets waking up to it, are growing at a pace of 15-20 per cent CAGR. Tea, a product of the emerging markets inching into global mature markets, has a CAGR of 6-7 per cent. Coffee is doing better at 12-13 per cent. On the other hand, functional beverages are sporting a CAGR of 50 per cent.

Glaceacute;au, which is yet to cover the whole of US, has a CAGR of 200 per cent. 8220;Mind you, with the takeover of Tetley, the Tatas have gained a lot of knowledge about the US and European markets. So Glaceacute;au is a well thoughtout acquisition,8217;8217; says Rajesh Srivastava, Managing Director, Rabo India Finance Pvt Ltd, who has been closely associated with the Glaceacute;au deal.

8220;The Indian tea industry is very bullish about this acquisition,8221; says C K Dhanuka, Chairman of the Dhunseri group of companies and also former Chairman of the Indian Tea Association. He views the acquisition of a major US brand as a more definitive launching pad for Indian tea in that market. True, Tata Tea has already made inroads into the US market with the Tetley tea bags and Florida-based operations of Tata Tea Inc which processes and markets instant tea sourced from Munnar, Kerala. However, having a major US brand such as Glaceacute;au as platform will make an immense difference for Tata8217;s tea products and Indian teas in general.

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Sure, the Tatas are moving away from tea production, going the HLL way, but industry is not willing to see this as an overriding trend. They, however, agree that the plantation business requires micro-level management that big players are no longer willing to engage in.

For its part, Tata Tea has become very gung ho about the US market and the gateway its offers to the global market. 8220;We can move to Europe and then skip to Russia and China,8221; R K Krishna Kumar, Vice Chairman, Tata Tea explained earlier this month. The company has been nursing plans for entry into China8217;s 1.3 billion tea market for some time now.

Having shrunk its presence in the plantation business, Tata Tea, sees itself emerging more as a products company and is looking to spread its footprint with global brands. Its strategy stems from the fact that worldwide branded tea contributed 88 per cent of the Rs 3,151.12 crore consolidated turnover of the company and its subsidiaries in 2005-06.

The 30 per cent stake in Energy Brands Inc popularly known as Glaceacute;au has set the ball rolling. Question is how much management control does a 30 per cent stake in the company afford the Tatas? 8220;It is not the size of the stake but the strength it carries which is important and the arrangement is such that the Tatas will have a lot of say in the management, 8220; Srivatsava explained. For now, we know that the Indian group will get to appoint the Chairman and two directors on Glaceacute;au8217;s board. Beyond that, nobody is willing to talk. 8220;The Glaceacute;au Chief will be here next week and then we will talk,8221; Managing Director, Percy Siganporia, briskly responds to any queries on the acquisition.