A presentation that Tata Global Beverages Ltd made last week to US-based investors gave a spring to its share briefly, before it cracked along with the market in the aftermath of India’s “surgical strike” across the border. After gaining 5% mid-week, it closed the week ended 30 September below the previous week’s close.
One item in the presentation, in particular, may have caught the attention of investors.
“Going forward”, it says, the company wants to increase focus on India, beef up its presence in Asia and the Middle East, and re-evaluate stressed businesses. That may be a good thing.
Now, the focus on India may seem strange. After all, South Asia (mainly comprising India) already contributes to 42% of turnover. Other important markets are Great Britain and EMEA (Europe, the Middle East and Africa) which contribute to 30% of sales, and the US, Canada and Australia which contribute to 28%. Tea is the major product, accounting for nearly three-fourths of sales except in the US, where it’s coffee. The coffee business is mainly under its listed subsidiary Tata Coffee Ltd.
So, why is this shift in focus important? Black tea consumption is going down in many developed markets, although it’s not a new development. Over the years, Tata Global has ventured into newer forms of tea, such as green, speciality, fruit infusions and the like. But the going is not easy. For one, the market is competitive and retailers drive a tough bargain to give consumers good prices. Second, the market for other types of tea is relatively fragmented.
Also, the lowering of black tea consumption is not being replaced fully by other forms of tea. In the UK, for instance, sales of ordinary tea bags are estimated to have declined by 14% between 2013 and 2016, according to market research provider Mintel. While sales of varieties such as green, speciality and herbal grew, that was not enough. Overall tea sales are estimated to decline by 5% in 2016. In markets such as these, across Europe and Canada, Tata Global’s focus is on growing in the non-black tea segment, and growing or at least maintaining share in the shrinking black tea market. That’s an uphill task.
That explains the focus on markets such as South Asia, where India is the main market but neighbouring countries are tea drinking markets too. The Middle East too is a good opportunity. These countries will have established and strong incumbents, making it difficult to grow market share. In India, where it’s the market leader, the opportunity is to convert more people drinking loose tea to branded tea, and then nudge them up to drink its premium stuff.
In South Asia, at least the core black tea market is still a growing one. A relook at stressed businesses could mean a lowering of losses, which should benefit profitability. Tata Global had taken impairments in some Eastern European markets earlier.
Eventually, all this has to translate to higher growth and returns from the tea business. In FY16, the company’s operating income rose by 1.4% while operating profit fell by 17%. FY17 is off to a good start with the June quarter operating profit rising by 32%. Some of that is attributable to lower commodity costs, which can change depending on annual global tea leaf output.
Tata Global’s share has risen by over a fifth in the past three months, partly on expectations of a better performance. If it does embark on a path that promises to lower costs and grow revenues, investors would be happy to come along for the ride.