Tea, coffee... or water?

Tata Tea has defied convention to buy into Glaceau's fortified beverages market in the US. The key players spoke to Surajeet Das Gupta about the motivation behind the acquisition.

All it took was four weeks and a blind date to shape a $677 million deal "" the largest overseas spend by an Indian company.

Neither Glaceau's J Darius Bikoff, nor R K Krishna Kumar, vice chairman of Tata Tea, would have known that when they met for dinner in New York, that they would soon be crunching numbers before they met again, this time for a drink.

As a result of those meetings, Ratan Tata found himself on a US bound flight, to Glaceau's New York headquarters where, in a boardroom, he shook hands after buying a 30 per cent equity stake in Energy Brands Inc (EBIL), America's number one company in the enhanced water category, best known for its Glaceau brand.

For the Rs 3,000-crore Tata Tea, it was an unusual purchase. What would a tea (and coffee) company have in common with another that sold fortified water or energy beverages?

"Convergence," explains Krishna Kumar, almost as if it's the most natural thing in the world. "Like in telecom where there is convergence of technology, we see the same thing between tea and enhanced water."

But, er, just what is enhanced water? In the US, dominated as it it by such popular carbonated beverages as Coca-Cola and Pepsi, it is the hottest new growth area in the beverage category and consists of water enhanced with flavours, minerals and sometimes a tinge of fruit.

On the face of it, the deal is a mystifying one. What sense did the Tatas see in it? According to Kumar, though, it's part of a well-orchestrated move to transform Tata Tea from just a tea (it is the third largest tea company in the globe) and coffee company into a global beverages giant.

"What is our business? Our business is not just tea, our business is beverage. And it's about healthy beverages like tea and, now, enhanced water," he insists.

But behind the seeming dysfunctionalism of the deal are some interesting facts. Globally, tea and coffee sales have been stagnating, so diversification into newer beverage categories makes sense.

Tata Tea has a relatively minor presence in the US market, something that could be advantageously addressed now that it has a stake in EBIL. And surely there are synergies in distribution and technologies that can be leveraged in the marketplace between the two companies.

Tea consumption has been growing at a mere 1.8 (against an Indian average of 3.3 per cent per annum). Says P T Siganporia, managing director of Tata Tea, "You can either grow in width by entering tea-drinking markets that you have not gone into, or go into high growth beverage sectors with a health plank attached to it. Enhanced water is a perfect fit to get into high growth."

Of course, Tata Tea-Tetley (the company it acquired and merged into Tata Tea) is available only in 40 per cent of the tea drinking countries. So it is growing in width too.

That is why it has been entering newer markets, like it recently did in the Czech Republic where it bought over Jemca. And just last week there was news that it was setting up a joint venture in the green tea-dominated Chinese market. And there's a buzz that the ready-to-drink tea market is also booming.

Still, entering the enhanced water biz is a no-brainer. EBIL has grown at a whopping 200 per cent annually so far, and should "slow" down to between 60-100 per cent in the next few years.

With reported sales of $355 million (and a 50 per cent market share in this category) in 2005, Tata Tea expects it to hit revenues of $2 billion over the next few years. With a 30 per cent stake that could go up to 40 per cent, a substantial portion of the revenues would skew Tata Tea's topline and profits in favour of enhanced water.

Analysts are projecting that by 2010 the overall enhanced water segment could be worth $8.6 billion, and there's no reason Energy Brands should not have a large part of that market share.

For Tata Tea, this means that its key challenge "" of trying to make a substantial dent in the US beverage market "" could bear fruit. Siganporia admits as much. At $100 million, Tata's "business in the US has not been substantial and we need to grow by getting into high-growth areas".

If enhanced water is a high-growth category, Tata Tea's efforts will also be bolstered by its recent acquisition of Eight o'Clock coffee, also in the US. The brand is the third-largest in the mid-gourmet coffee market in the US.

Not everyone seems as happy about Tata Tea's hasty acquisition. Analysts say the price paid for the enhanced water might be too high. A recent Merryl Lynch report, though overall "positive" on the acquisition, points out that "in the near term the sharp increase in interest cost to fund these acquisitions and rising raw tea prices would deteriorate earnings outlook".

Points out another analyst: "The Glaceau brand might be on top now, but could face tough competition from the new age beverages "" Cadbury Schweppes, Coke and Pepsi are all in it."

He adds that though Glaceau has 200 independent distributors to sell its products, "any expansion of this chain will take a lot of cash and, like most others, might require dependence on Coke- and Pepsi-aligned distributors. If you don't, you are in trouble".

The challenge must be clear to both Tata Tea and Energy Brands. The Tatas expect Glaceau to ride on Tetley's distribution channels in its non-US markets (UK, Europe and even India) where it has its own networks in place. Industry experts say it could also leverage the Eight o' Clock distribution chain in the US, which reaches more than 60 per cent of US retail stores.

More potent could be bringing in the expertise of tea and enhanced water together. Darius Bikoff, CEO of EBIL, hints at one such area of cooperation "" ready-to-drink iced teas. EBIL already has some tea beverages and could extend that range.

Also, there could be new formats and a new line of beverages that might hit the market emerging from the shared knowledge between the two. Bikoff admits they are already working on these. But in India, the greater challenge will lie in delivering Glaceau at a price point consumers will accept.

Kumar says Tata Tea had offers to acquire juice companies in the US but preferred enhanced water, which is on the cutting edge of technology. His logic was simple.

"In the coming decades, water is going to be one of the most strategic resources for the world. I'm buying a stake in purified water. And that stake is like buying a piece of the future." The challenge is to ensure that it will also be good for the shareholders and future of Tata Tea.

THE HEALTHIER ALTERNATIVE
J Darius Bikoff

His father "" a metals importer "" sometimes bought steel from the Tatas, but that was many decades ago. But Darius Bikoff "" sceptical about carbonated drinks "" decided to make a product that was healthy enough to be given to his kids. Bikoff's enhanced water has become a raging success in the US. The founder of the Glaceau brand, who tied up with the Tatas last week, talks about how he made it in a world dominated by Coke and Pepsi

You entered a market dominated by Coke and Pepsi. How did you cope with their financial and brand power?

If I had worried about them, I would never have launched enhanced water. It is very difficult to compete with Coke and Pepsi, but what they do not have, despite all the money they spend, is a bonding with consumers, which we have. Initially, both offered to buy us and we said no. Pepsi tried again and with Sobe they copied us completely.

We filed a law suit against them this year and won. When you look at the history of Coke and Pepsi, they don't innovate, they just imitate. But young people today know the difference between an authentic product and one which is not.

India is a difficult market, will you get in here?

Yes. India is a sophisticated market "" you see traditional drinks and also newer, modern products. We want to make vitamin water available. We will manufacture it here, but there is no time frame yet. Coke and Pepsi have done a great disservice to customers, especially in high schools, and at the same time you have a controversy on soft drinks in India. There is an awareness that there can be something healthy [as an alternative].

But how do you resolve the question of pesticides in water? Soft drinks companies are saying water quality in India is poor. You will have to use the same ground water.

There are water quality issues in the US too. We have resolved it because we make our own water of high quality, and that is expensive. Soft drinks giants don't do it. It is not a matter of not being available, it is a matter of whether you want to spend so much money. Coke and Pepsi are trying to take cost out, we are busy taking the cost in.

Which are the markets you are looking for enhanced water, beyond the US?

We have only scratched the surface in the US. We will go to markets nearer home, in Canada, Mexico and the Caribbean. We might be able to reach distribution agreements with Coke and Pepsi in some markets.

Is there a market in India for a product that costs Rs 75?

It is a bridge we have yet to cross. Red Bull sells in India for Rs 75. If they can sell at that price, so can we.

But it does not sell much because it's much too expensive.

When we launched in the US for $1.50-2.50 a bottle, experts said no one would buy us as they paid only 50 cents for Coke. But there are consumers who were ready to pay a premium for a product which is healthy. Maybe that will happen in India too.

WATER FOR TEA
R K Krishna Kumar

For a deal that was closed in a record four weeks, precious little is known about what motivated Tata Tea to move into the global market for enhanced water. Here, Krishna Kumar, the pivotal force behind the acquisition, talks about what it means for Tata Tea

Is Tata Tea moving from being a tea company to a beverages giant?

Tata Tea is not only in tea, but in its many forms. It is in instant tea, flavoured tea, green tea. And it is in coffee. We always wanted to be a strong player in the beverage space.

More importantly, we wanted to be at the cutting edge of the beverage market. And one common thread was the health consciousness of people. Are we going to remain only in tea? The answer is no. I think we must define ourselves. What is our business? Our business is not just tea, our business is beverage. And it's a healthy beverage.

Why did you acquire a company in the US?

The biggest market in the world is the United States. Fortunately, in spite of our acquisition of Tetley, the US was a different cup of tea altogether. We needed to make our presence grow. We found a very interesting development "" the growth of enhanced water. And when we looked at that, we found its brightest star was Glaceau.

The US market for beverages is difficult to crack. How will the enhanced water acquisition help you?

The tea market in the US is changing. Younger, newer customers are looking for a more exciting experience. That's why people go to a Starbucks coffee shop, not because they can't have it at home.

The tea market is also undergoing a change. Flavoured teas are now riding the crest. It is not mainstream black tea, it is speciality teas that are growing in double digits. That's why we acquired Good Earth (in speciality tea) last year, and that's what we will keep looking at. The partnership with Glaceau will add tremendous power to make the US market grow for us.