Corporate: Tata's Brew Has a Tetley Blend

Tata Tea will use Tetley's brands and market presence to challenge Unilever. but it won't be as simple as making a cup of tea.

The message came piping hot in the tea cup. On March 10, 2000, when Britain woke up to its familiar cup of Tetley tea, it got its first taste of the Rs 33,000-crore Tata Group's globalisation gambit. To the casual tea drinker, the message was an innocuous tag to the Tetley name on the tea bag. For, the new tag merely said: ''Tetley, from the House of Tatas.'' But to the Blackfriar-based, household goods giant Unilever Plc., it was a war cry emanating from the Tata conglomerate's headquarters, Bombay House.

Unilever has reason to be worried about Tata Tea's soaring ambitions. Having steadily eaten into the marketshare of Unilever's subsidiary, Hindustan Lever, in India, the Rs 901-crore Tata Tea is now taking the battle global. More ominously, Tetley-the largest global tea brand, picked up by the Tatas for Ł271 million (Rs 1,897 crore) in February, 2000-overnight transforms the Indian competitor into No. 2 in the global arena. Clearly, Tata Tea couldn't have picked a better vehicle for its globalisation effort. The brief from the company's Vice-Chairman, R.K. Krishna Kumar, is simple, albeit staggering: eliminate competition (read: Unilever).

TATA-TETLEY'S TAKE-ON STRATEGY

Enter all the markets from where Unilever operates

Use subsidiary and franchisee routes in new markets

Acquire tea gardens, and step up auction purchases

Use Tetley's US private-label business to push volumes

Leverage its vertical integration to corner market

Extend the Tetley brand to coffee and, possibly, salt

Tata Tea's global dreams are not yesterday-born, though. Tetley first tantalised the Tatas way back in 1995, when it was put up for sale by its owners, Allied Domecq. But venture capital firm Schroders and Prudential pipped Tata Tea to the post by outbidding its offer of Ł180 million with Ł220 million. In the wake of this, Tata Tea toyed with the idea of turning itself into a Fast-Moving Consumer Goods (FMCG) company.

Once again, the target would have been HLL. With the Tetley acquisition having come through, this plan has now taken global dimensions. For, the tea major will put the 144-year-old Tetley brand on the boil to take some of the vigour out of Unilever's global might. Notes Rana Kapoor, 43, Managing Director, Rabo India Finance: ''Having a brand that is synonymous with tea-drinking, and not taking on Unilever does not make sense.''

Kumar couldn't agree more. A chary vice-chairman is playing his cards close to his chest, but BT learns that the stage is all set. At the top of Tata Tea's agenda is market expansion. At present, Tetley has a presence in 44 countries, including Britain, Canada, the US, and Australia. In contrast, the Anglo-Dutch behemoth straddles markets spanning Canada in the west to Japan in the east, not to mention Russia and African countries.

The Indian challenger lags in volumes too. It sells about 6 million kgs annually in the CIS, and parts of the Middle East, and around 3 million kgs of instant tea in the US. By capitalising on the Tetley brand name, Tata Tea plans to pry open markets in Saudi Arabia, Iran, Iraq, and the CIS countries. ''The alliance opens up huge tea-drinking markets,'' says the 60-year-old Kumar.

The hardest fought battle will likely be in the lucrative US market, where a growing number of coffee drinkers are taking to tea for health reasons. Tetley, which has been in the American market for sometime now, has its own distribution network in the US. Similarly, Tata Tea has a US-incorporated entity which markets instant tea, but its market share is insignificant.

Tetley, however, holds sway over the private-label tea business, with 6 out of every 10 retailers sourcing tea from Tetley to sell under their own brand names. Tata Tea is hoping that the private-label channel will give it an opportunity to push greater volumes into the market.

A key reason why the private label is lucrative is that there are no marketing costs attached to it. That means, by sourcing tea directly from its 26,000 hectares of gardens, or from the auction markets,Tata Tea will be able to boost its margins. But, notes Bhaskar Bannerjee, 53, Managing Director, Duncan Industries: "It will necessitate the acquisition of more tea gardens in India or elsewhere'' Ahead of such deals, the company will be hitting the auction markets in a bigger way.

The Tatas are betting on the synergies which the deal brings to catapult Tata Tea into the big league. For instance, Tata Tea has competencies in managing plantations and processing units, but not so much in blending, branding, and in research and development. Tetley, on the other hand, has no experience of handling plantations, but instead has set the standards in product innovation, and has tremendous experience in sourcing tea from auction houses spread all over the world. Says Kumar: ''The 2 together make a world-class integrated outfit.'' Unilever is in a position similar to that of Tetley. It is only recently that it began to vertically integrate its operations by buying tea gardens in India (thanks to the acquisition of Rossell Industries last year) and African countries like Kenya, Uganda and Mozambique.

The upstream synergies will be complemented by a wider product portfolio downstream. While Tata Tea caters primarily to the lower end of the market segment, Tetley has almost a cult of loyal consumers. The Indian brand's strengths lie in developing packaged tea, and the British brand is well established in the decaffeinated, herbal, lemon tea, and tea bag segments.

It was Tetley which first gave the world the tea bag, back in 1953. In 1989, it launched rounded tea bags, and in 1997, introduced the ''no-drips-no-mess'' drawstring tea bag. Agrees Bannerjee: ''Tetley will give a lot that was lacking in Tata Tea." In other words, Tetley is ideal for Tata Tea to piggy-back on to move up the value chain.

Having the Tetley brand in its portfolio would also allow Tata Tea to extend the name to its coffee and salt businesses. Although Tata Tea did not acquire Tetley's coffee business-which had a modest Hispanic customer base on the east coast of the US-plans are afoot to source coffee from group company Consolidated Coffee, and market it possibly in the Middle East, the CIS nations, and a few European countries, under the Tetley name.

It is also believed the group is planning to transfer the Tata Salt brand owned by Tata Chemicals to Tata Tea. Once again, the idea is to leverage the Tetley name. But critics of the plan feel that the Tatas may be overstretching the name. Says Munish Khanna, 37, Country Head (Corporate Finance), Arthur Andersen: ''I am not sure that indiscriminate extension will not erode Tetley's brand.''

Tata Tea's confidence for taking on Unilever probably comes from the company's success against HLL in India. Over the last 3 decades, the company has been chipping away at HLL's marketshare. In the mid-1970s, it was pinned to a corner with a 3 per cent share, while hll ruled over 75 per cent of the market. However, in 1999, Tata Tea's marketshare figure had climbed up to 23 per cent, while HLL's was down to 40 per cent.

Most of the market that Tata Tea has wrested from HLL comes from the semi-urban areas, where it has been converting consumers from users of loose tea to users of packaged, but lower-priced tea. Consequently, even as HLL consolidated its urban stronghold with brands like Brooke Bond and Lipton, the Tata company made inroads into the bigger rural markets.

Although Tetley has turned profitable beginning 1999, and Tata Tea has not been significantly leveraged for financing the deal (see box), the market-entry vehicles will not be capital intensive. Instead, the business model of Tata Tea (Great Britain)-set up for the Tetley acquisition-will be akin to Unilever's. Local partners will be roped in to form joint ventures, where the controlling 51 per cent stake will be with TT (GB). Even where it is has no option but to set up subsidiaries, the company will give minority stake to the local investors. And the onus of raising capital to grow the ventures will equally be on local stakeholders. Says Kapoor of Rabo India:''This way neither Tetley nor Tata Tea will be financially stretched.''

It is possible that the subsidiary route may not be the standard entry formula. Apparently, the company is open to operating via a franchise system, where the logistics of importing, warehousing, and distribution is taken care of by the franchisee. The company, in turn, will focus on marketing and brand building. Explains Kumar: ''The idea is to fill up shop-shelves.''

While Tetley will continue to retain its operational independence, the Tata group supremo Ratan Tata is likely to be on TTGB's board of directors. The pointman will, of course, be Kumar, who also manages the group's hotel business. Three directors are to be inducted on the Tetley board, although names have not been finalised. It is certain that one of the 3 directors will be Kumar, while the others could be from among S. M. Kidwai (Tata Tea MD), N.A. Soonawalla (Finance Director), or Ishaat Hussain (Executive Director, Tata Sons). As far as manning of the UK operations is concerned, the company plans to retain Tetley's current employees, but also send a crop of talented executives from its own headquarters.

Clearly, Tata Tea is aware that it will need to put its best foot forward to lock horns with the Unilever goliath. It will also probably need to acquire more local brands in some of the markets it intends to enter to be able to rock Unilever's might. Indeed, Kumar admits as much. At the same time, what is clear as well is that Tata Tea has, indisputably, turned over a new leaf.