A time for blends

Tata Coffee's buyout of US-based Eight O'Clock Coffee is a deal of only $220 million, less than the $430-million its parent firm Tata Tea paid for UK-based Tetley six years ago. The deal is interesting all the same for one special reason: coffee now represents a market where the gap between commodity and brand prices is enormous. In Bangalore, you can pick up Arabica beans at Rs 37 per kg. Sold in retail packs in the US, the same coffee can fetch three times that price. And of course, at a Starbucks outlet in Seattle, you pay four times the Bangalore price for a hot cup of Latte, which uses only a few grams of coffee.

In other words, a coffee company need not be just another coffee company. The Starbucks example may not be very relevant, especially since Tata has divested its stake in Starbucks' domestic copy-cat, Barista. But mergers and acquisitions, properly done, are supposed to follow the rule of gestalt value: the whole must be greater than the sum of parts. This is why, beyond the simple calculation of add-on business, it is important to gauge the acquirer's strategic intent. Indian business houses have increasingly been acquiring businesses overseas, but almost all of these have been with a view to getting a technological foothold, capturing customer bases, or using production efficiencies by moving back-end activities to India; almost none have been pure brand play.

That throws up the obvious question: is this acquisition a brand play on Tata's part? That it gels well with the group's go-global agenda is more than obvious. Ratan Tata, quoted recently on his acquisition policy, said that he picks up businesses that "fill a product gap" or bear a "strategic connection with what we do", regardless of their geographical location. In the case of tea, Tetley gave Tata instant access to millions of kitchen cabinets as a brand, though apart from the launch of new flavour variants, it's not clear how much further headway it has made in the global tea market; the company's results, so far, have not been spectacular. At first glance, in coffee, the logic of having gained a readymade consumer franchise is fairly obvious: Eight O'Clock "" which sells beans and ground coffee packs "" fights for the price-sensitive kitchen stock buyer, by and large. It sells gourmet coffee too, but the bulk is beans sold in pouches. A 350-gm pack of Eight O'Clock Original Bean Coffee retails at only about $3 (or Rs 140). By getting in at both ends of the price chain, Tata's latest move could mean aiming for business integration and the capturing of greater value.

But it is also relevant that Tata Tea has signaled a shift away from the production end of the business, and a move towards the consumer end of the value chain, where intangibles spell higher profit potential and where savvy marketing makes the difference. Tata Tea, for example, is shaving itself of plantations and trying to steam its way into the consumer's mind with brands that boast of genuine consumer loyalty and command market premia. It is reasonable to assume similar ambitions with coffee, which in this case could possibly mean value-addition at the point of service. Eight O'Clock Coffee has huge retail brand recognition in America, having had "breakfast staple" status for so long ("Since 1859" says the logo, though the name was adopted only in 1919, to appropriate a slice of the clock for itself in popular perception).