Tata Tea's Vice Chairman Krishna Kumar: Can't afford any slip-ups

To those given to the romance of an Indian tea company taking over a British one, as a sort of post-colonial globalisation trophy, there are little doubts to entertain-Tata Tea's March 2000 purchase of Tetley was a historic move. And to them, Vice Chairman R.K. Krishna Kumar, the deal's main architect, has good reason to swell his chest and hold his cup high. "Tata Tea," as Homi Khusrokhan, the company's Managing Director, says, "has ceased to be the largest integrated tea company in the India. Today, we are the second largest tea company in the world, second only to Unilever."

If only business were so simple. And business is what it is. Could the Tata group, in all the excitement of taking over a foreign company thrice its size, have suffered a momentary lapse of reason?

Don't dismiss the possibility. Tetley may have been the world's second biggest tea brand after Lipton, but the company wasn't exactly hot property after 1998, when the investors who bought it off Allied Domecq in 1995, gave up their mega-IPO dream and decided to hawk it, all-cash, privately. Sara Lee and others reportedly refused to bid more than £220 million (Rs 1,680 crore), perhaps having seen Britons switching en masse to coffee. But Tata coughed up £70 million (Rs 534.6 crore) as equity funding to set up a special purpose vehicle (SPV) in the UK, which took on over £200 million (Rs 1,527.3 crore) in debt, to buy Tetley for a sum of £274 million (Rs 2,092.4 crore).

Sounds like too much? Well, that wasn't even the end of it. Last year, the Tata group had to inject an additional £30 million (Rs 229 crore)-sorely needed to restructure the debt, which it was barely able to service.

So, that brings us to the big question: is the great takeover really working out the way Krishna Kumar, not to mention Chairman Ratan Tata, actually envisioned back in 2000?

"Tata Tea has ceased to be the largest integrated tea company in India. Today, we are the second largest tea company in the world" Homi Khusrokhan, MD, Tata Tea

Early Blend

Krishna Kumar's mind is partly in Goa-where some 200 executives from Tetley and Tata Tea gathered in March to put their heads together. The goal: to become one global tea company, leading in the world's most advanced markets. "Opinions were aired," he says, "suggestions made, and at the end of the day, we were confident that the Tata Tea-Tetley deal was going to do just fine."

"We have already taken a major step forward-the geographical barriers between the two companies have disappeared," says Ken Pringle, Chief Executive of Tetley's operations under the SPV. Come 2003, all Tetley packs worldwide will boast, 'A product of Tata Tea'.

"As far as management issues are concerned," adds Percy Siganporia, Deputy Managing Director, Tata Tea, "we are already functioning as one company." An integration framework is already in operation, with Krishna Kumar, Khusrokhan, and Siganporia from Tata Tea, and Ken Pringle, Peter Unsworth and John Nicholas from Tetley, on the supervisory board, to which have been entrusted all strategy, portfolio, communication, joint working, refinancing and legal issues.

To make it happen, there's a steering group to oversee eight execution groups that will take up tasks ranging from R&D and US strategy to MIS integration and procurement. "Tetley has huge experience in sourcing and blending," says Siganporia, "and that is becoming a part and parcel of Tata Tea." The idea now is to get the perfect blend, with tea shipped in from any of the thousands of estates that Tetley has access to worldwide, in addition to Tata Tea's own. Tea flavours vary vastly by soil, gradient, climate, altitude and other conditions, so garden diversity matters. The original go-global plan under Darbari Seth (in the early 1990s) was to snap up tea estates across the world. Little did anyone imagine that the company would be bringing an entire company onto its books.

Or, for that matter, that Tata Tea would record an 'intangible asset' worth £234.6 million, or Rs 1,791.6 crore (for the brand Tetley) on its consolidated balance sheet. The purpose, as the 2001-02 Annual Report says, is to represent the extra money paid over Tetley's underlying tangible assets.

The merging of accounts also helps add some gloss to an otherwise poor domestic performance. In India, it's no secret that the branded tea market has been down in the dumps. Tata Tea slid sharply on both net profit and sales in 2001-02, but globally, Tetley raised its topline by 5 per cent, and even managed to emerge into the black. Tata Tea's solo EPS is Rs 12.8. Consolidated, it's Rs 17.5.

"While many have questioned the wisdom of the Tetley deal," says Krishna Kumar, with no detectable trace of regret, "I believe the results in the coming year will prove the doubting Thomases wrong."

The fact is, the SPV is managing to scrape through. According to Anil Goel, Vice President (Finance), Tetley is doing well enough to cover its liabilities. Just about, that is. Tetley's cash flow went up 14 per cent in 2001-02 to £26.4 million, or Rs 201.6 crore, (its interest payout for the year: £23.3 million, or Rs 177.93 crore, down from £26.1 million, or Rs 199.3 crore, the previous year).

Of course, it needed the Tatas' cash infusion desperately. "In July 2001," says Goel, "we initiated a significant restructuring by infusing £30 million (Rs 229.1 crore) into the company by subscribing to a 7-per cent fully convertible bond (quasi-equity)." Tata Sons put in £20 million (Rs 152.7 crore) of that, and the funds were used to rid the SPV of high-coupon debt. Today, things are more comfortable. The UK operations' debt:equity ratio is 1.8:1, down from 3:1 at the time of the acquisition. Tetley expects to save £7.3 million (Rs 55.7 crore) on interest in 2002-03.

Global Diffusion

While the debt burden took away a lot of top-level attention, it didn't entirely sap the company of its market energy. 'Wholehearted living' is the UK theme, where Tetley flaunts its English heritage since the times of Joseph Tetley in the mid-19th century. The brand's tea-bag dominance remains intact, and it claims to be making good headway with its new organic and specialty teas.

The rest is a matter of market adaptation. In Australia, Big Cuppa is Tetley's big draw. In France, the trick is to sell tea by deploying locally relevant humour ('Finally, an English product that can do you good', it says, in French). In Canada, where Tetley is No 1, fruit flavoured tea is doing well. It helps that tea is now seen as a breast cancer preventive (thanks to tea's antioxidant properties), an association that has wider potential too.

What about the US market? "Tetley has had a presence in the US but more in the non-branded segment, where Tata Tea and Tetley ran an instant tea company," says Khusrokhan, ''Now we are confident of pushing it as a brand.'' Expecting a coffee-soaked country to turn tea-happy overnight is a trifle unrealistic. Many Americans think of 'tea' as a word that occurs somewhere between 'Boston' and 'Party', not a stimulant. So specialty drinks-instant, iced, flavoured, organic teas-would probably have to do the trick.

Meanwhile, new markets would be explored aggressively. Vijay Singh, former chief of Sony Music in India, has recently joined the company as Managing Director (Developing Markets), and could play a role in getting the subtleties of flavour variation right, from Brazil to Bahrain. Says Pringle, "Tetley has a global blend, variations in flavours and global sourcing skills. We are big in tea bags. What we are going to do is to merge this with Tata Tea's experience in the packet tea market, and push for growth in the developing markets like Russia and Poland."

Will that do? If not, the company is open to brand acquisitions to straddle the rest of the world. Tetley derives 56 per cent of its sales from the UK market, and this dependence must fall. "This also means changing the rules of the game in the local scene,'' says Krishna Kumar. Launching Tetley's fancy brews would be step one. As Vivek Mathur, Vice President (Marketing), says, ''The aim is to give the consumer a global tea experience.'' Tea bars, a la coffee bars, are under consideration too.

Back at the plantation end, mechanised tea-picking is being tried out, which could crash wage costs drastically. Inspiration? Tetley's multi-million dollar Australian operation, which is run by just four people.

For That Magic Potion

"The targets are clear," says Khusrokhan, "in the next three years, we intend to increase our marketshare of the global tea business from 4 per cent to pose a serious challenge to Unilever's current 11 per cent marketshare."

Even without the global recession to factor in, that sounds frightfully overambitious. Just a couple of years ago, not too many analysts were bullish on Tetley's prospects as a market expansionist. Neither was it a brand striving to transform the market in any significant way. It was, rather, quite the sedate picture of dignity that a British brand would be, servicing largely traditional needs.

What should have changed since then? According to Rana Kapoor of Rabo India, which arranged the buy-out, the old Tetley was a company held by "venture capitalists with little interest in tea and branding". In contrast, Tata Tea is a brand marketer, and this makes all the difference.

Does it? Well, it's true that Tata Tea made quite a dramatic transition from plantation-owner to brand marketer. Remember? It was not too long ago that it stormed the Indian market for branded tea with its 'garden fresh' USP for flagship brand Tata Tea, and gave a big scare to HLL's brands. Tata Tea even set a new trend in India by selling tea as an energy arouser, rather than a 'propah' element of cultural sophistication. Says Mathur, "Driven by our 'garden to the cup' concept, Tata Tea remains the largest packet tea brand in the country with 6.8 per cent marketshare."

Yet, tea brands in India are in trouble, and Tata Tea is looking to its low-end launches, such as last year's Agni Sholay, to revive volumes. Might a relaunch of the main brand be a better idea? "The plan," says Mathur, "is to push it with greater intensity backed by superior blending technologies."

Blending experimentation is something that could, potentially, deliver fresh value to lucrative Western markets as well-no barriers to bother about.

The fine art of tea-tasting is already globalising, and Tetley blenders from the other side of the globe are in touch with their counterparts in Assam and Sri Lanka-to come up with a new global magic potion. The key word, don't forget, is potential. So far, that's all it is.