Tata Coffee will give up its brands to become a pure-play commodity company. Why? It is the ambition of most farm commodity companies to move up the value chain and sell branded products. Brands, after all, can improve profit margins and valuations. Seldom does a company give up its brands to become a pure-play commodity company. But this is exactly what Tata Coffee has done. Over the next few years, it will move its brands like Tata Café, Mr. Bean and Coorg (these brands may not be as popular as Nestlé’s Nescafé or Hindustan Unilever’s Bru but have dedicated customers in certain pockets of the country) to group company Tata Global Beverages (earlier Tata Tea) so that it can focus on commodities. The strategy may look disruptive but has been well thought through.
It is indeed time for introspection. The Tata group has given a new shape to its beverages business. Tata Global Beverages has been identified to lead the global charge. The plan is to transform it into a global beverages company with juices, water, coffee and other healthy beverages, apart from of course tea, in its portfolio. The headquarters of the company has therefore been moved to London. Also, it has formed a joint venture with PepsiCo to explore opportunities in non-carbonated beverages. Where does this leave Tata Coffee? The company, in which Tata Global Beverages holds around 57 per cent stake, straddles the entire coffee chain from plantations, processing and packaging, and marketing branded coffee. Is it viable in the new order? Clearly, a choice has to be made.
In March, the Tata Coffee brass began to brainstorm: What road to take? The result of the long discussions is a four-pronged plan. The first decision is to get out of brands and leave the task to other group companies like Tata Global Beverages. The second is to expand the plantation business by acquiring estates overseas. The third is to reduce the dependence on coffee and sell other commodities as well. And the fourth is to collaborate with Tata companies as well as others so to sell its products the world over. By 2015, 40 per cent of the company’s revenues would come from inorganic growth.
Bye to brands
So the first thing that Tata Coffee is doing is to transfer the management of its brands as well as the blending operations to Tata Global Beverages. This will include some international brands like Eight O’ Clock which the company had bought sometime ago in the US. “Tata Global Beverages will be the company with a portfolio of brands, which will include coffee brands also, and it will be a marketing company” says Huq.
Some rivals say that this could be a recipe for disaster. “Commodity companies need to add value, and the ultimate goal is to sell branded commodities, which gives you the best price realisation. By giving up the brands, Tata Coffee is killing the golden goose,” says the chief executive of a fast-moving consumer goods company. Experts say that a lot of farm commodities in the country are still sold loose to customers in India, and this leaves a huge upside for brands. Indeed, categories like spices, salt, rice and flour have seen rapid adoption of brands in the last few years. This is the opportunity that companies like Nestlé, Hindustan Unilever, ITC and Bharti FieldFresh are eyeing.
But Huq has a different perspective. According to him, there aren’t too many plantation and commodity companies which have succeeded with brands as well. Their core competence remains running plantations and producing commodities. Brands are complex matters which require a different set of skills.
More From This Section
On the other hand, says he, successful global food companies like Nestlé and Unilever either do not have their own plantations or have sold them to concentrate on their branded coffee and tea. Thus, Tata Coffee will be a commodity company.
With the management and growth of the brands out of his way, Huq’s focus is on expanding his coffee plantations which contribute as much as 80 per cent of his revenues. Scale, conventional wisdom says, protects any commodity company in a down cycle. As land is too expensive in India, Huq plans to acquire it in Uganda, Zambia, Ethiopia and Laos. Plantations there are available at prices which are 50 to 60 per cent cheaper than in India. Many of these plantations are located near the equator which is the best place to grow coffee. Labour, of course, is abundant and cheap in these countries. But Huq is clear that Tata Coffee will look only at those plantations which grow Arabica coffee because margins here are better than in Robusta coffee. He has an ambitious target in mind and wants 3,000 tonnes of coffee to come from these overseas plantations — almost 25 per cent of his annual coffee production. Other coffee-growing countries like Vietnam and Brazil are not on his radar screen because they face the same problem as in India: High land prices.
Strengthening supply
With improved production, Tata Coffee will need to broaden its sales pipe. Huq and his team are thus making every effort to get into long-term supply agreements with retailers. One such opportunity it has identified is in Russia with Tata Global Beverages. It so happens that Tata Global Beverages has recently bought Grand, a tea and coffee brand in the country, which has its own packaging unit as well as a strong distribution network. It could have imported freeze-dried coffee from India to feed the Russian market but that would face a 10 per cent import duty. So Tata Coffee has proposed to set up a brand new freeze-dried soluble coffee processing facility in Russia with an investment of $80 million which can produce 4,000 tonnes of coffee annually. Says Huq: “What we want to do is use Tata Global Beverages’ marketing set-up to effectively distribute our coffee produced in Russia.” This is a partnership that Huq can leverage in other markets as well.
The same strategy is under experiment for other commodities like pepper. Tata Coffee does not have the distribution network to sell its pepper. But what about tying up with a maker of branded salt which sells through kirana shops? That is why Huq is talking to group company Tata Chemicals which markets Tata Salt. Tata Coffee can leverage its distribution reach to sell pepper. It will of course be sold under a Tata Chemicals brand.
But the partnerships will not be limited to group companies. Huq is clear that in any commodity where a Tata company’s strengths can be leveraged, it’s great; if not, he will join hands with somebody else. In Europe, for instance, Tata Coffee is looking at supplying packaged coffee to retail chains who sell private labels. “This is one way that you can add value to your product. We are looking at some large retail chains for such a tie up” says Huq. The company is planning to set up a packaging unit in Europe which will meet the quality standards in that market.
Tata Coffee has also realised that it has to hedge its bets with a portfolio of commodities. Dependence on coffee can prove disastrous if there is a bumper harvest and prices fall. Again, the focus is on value addition and partnerships. The company, for instance, has huge timber resources and perhaps the largest rosewood cultivation in the world. Tata Coffee is now looking for partners who will be able to use the timber to make floorings, door frames and windows, which, Huq expects, can fetch the company up to Rs 50 crore in annual revenue. It is of course much more careful on exploiting its rosewood potential. Huq says the company will use it in a limited way if it is able to get a partner who has the technology to produce high-quality furniture which can be sold at a premium.
Diversification into newer commodities is one way to hedge your risks. The other is to go to markets which give you a better price for your products. Tata Coffee had for long depended on the low-paying Russian market to sell soluble coffee. The change it now wants to make is nothing short of dramatic: Russia used to account for 95 per cent of its coffee exports till recently; this year it will be down to only 42 per cent. The company is moving into new markets which include South Korea, Japan and West Africa. “We have been able to make a breakthrough in these new markets because of our sustained quality. These markets pay us 10 per cent premium over the Russian buyers. That is how we are adding value” says Huq.
Just a few months on the hot seat, Huq is clearly brewing a new strategy for the future. The question is whether or not the brew will provide the right aroma for the Tata Coffee shareholders.