We would have more coffee and water in our portfolio in 5 years: Harish Bhat

Interview with managing director and chief executive officer, Tata Global Beverages

Despite bad monsoons and inflationary pressures in the domestic market, Harish Bhat, recently appointed managing director and chief executive officer, Tata Global Beverages, expects continued robust performance in FY13. In an interview to Priya Kansara Pandya, he explains that the company’s strong iconic brands and innovation efforts will help on this front. Edited excerpts:

What are the reasons for a huge jump in consolidated operating profit margin during June 2012 quarter? Whether this is sustainable as company’s high exposure to low growth developed markets is seen as a major hurdle to growth?
Our operating profit margin has improved on account of four factors. Underlying volume growth has been good in most geographies. India has seen  9.5 per cent volume growth (almost kissing the double digit mark) while US (including Canada) and UK has seen lower single digit volume growth (under 5 per cent). All the three regions together contribute around 87 per cent of our total revenues. Secondly we have also undertaken price hikes in these regions. Our focus on operating efficiencies has also helped. Lastly there has been the foreign exchange translation, which of course has benefitted revenues more than profits.

Margins will continue to remain robust. High exposure to develop markets may not impact margins directly though it may impact the rate of growth. Margin improvement is driven by our operating efficiencies, buying costs and ability to price our brands.

Also, I would like to add that Eight O’ Clock coffee (20 per cent of overall revenues) witnessed enhanced profit margins during June quarter. Demand is showing gradual improvement but raw material prices have shown significant improvement. Coffee prices namely Arabica have come off their highs compared to tea. Thus coming quarters will show increasing benefits of that.
 
How do you see tea and coffee prices moving going ahead?
Assam and Kerela have received fair monsoon. Thus drought is not going to have a major impact on production of tea within India. Having said that tea prices in India have shown varying trends. We have seen firm price trends in north Indian teas and some softness in South Indian variety. Firm price trend of premium Assam tea is going to continue in future. But our brands are strong and we have proven time and again that our brands can absorb that cost increase. If commodity prices move up further, it is fair decision to go for price hikes but they will be only be in the 3-5 per cent range and not 15-20 per cent, which will not pinch the consumers pocket so much. In short term there may be a marginal impact on volume growth. But it is better to lose some volume marginally than affect profitability.

But do you think that will lead to a shift in consumption to regional brands?
There is always a possibility that consumers can down trade from larger brands to local players. In June quarter, we have not seen evidence of such a shift. But I would also like to add that any downtrend could happen faster in other categories like soaps, toothpaste and shampoos but relatively less in beverage as usually consumers are used to a certain kind of taste and blends. But it can always happen. We are continuously watchful for that.

How is the competitive scenario in India and abroad? Where is price hike implementation easier?
It is more difficult to undertake price hikes in the developed world compared to emerging markets as cost increases in developed markets are also low and underlying rate of inflation is 3-4 per cent compared to 9-10 per cent in country like India. But volume growth is not the only way to profitable growth. People in developed markets buy more premium products.

Advertising expenditure to sales jumped 116 basis points year-on-year in June quarter? Where are they headed going ahead given the competitive intensity?
Competitive intensity is certainly going up. There is no doubt about that. Our adspends to sales will remain stable though it will not decline from the current levels in the medium term.

What products will be the future growth drivers?
I will divide the answer into three categories namely tea, coffee and water. In tea, specialty tea will be the growth driver. We have launched Tetley Chai Latte in Australia and is doing very well. We propose to extend it to Europe and America. We may bring it to India as well in future. Similarly green tea and flavoured tea, which are doing very well and available in India under Tetley brand, will be our growth drivers.

In water, we have launched Tata Water Plus under joint venture with Pepsi Co and is currently being test marketed in Tamil Nadu and Andhra Pradesh. We are offering water fortified with zinc which is good for the immunity building system. So like value added to tea, we are adding value to water. There is huge opportunity waiting to be tapped in water across the country. And we have priced it very competitively.

And we believe consumers will see value in consuming this kind of water. Then we have Tata Gluco Plus which contains glucose, lemon and water and is again priced competitively.

Eight O'Clock Coffee entered the fast growing and ultra convenient world of single serve coffee through a partnership with Green Mountain Coffee Roasters, Inc. (GMCR), a leader in specialty coffee and single serve brewing systems in North America. The agreement will make Eight O'Clock Coffee, Tetley Tea, and Good Earth tea available for GMCR's Keurig Single Cup Brewing systems and thus available to many consumers. In short, innovative products in each category will be growth drivers.

In the next five years, we want to achieve a better balance among the three beverages as we are not only a tea company. This means we would have more coffee and water in our portfolio while proportion of tea will come down from the current 70 per cent. Similarly coffee will go up from 20 per cent to 30 per cent and water will jump from 1-2 per cent to 5-10 per cent (we aim even high than that).

Please provide a fresh update on Starbucks joint venture?
The joint venture is in place and both parties’ teams are working very closely to make this launch happen. I cannot comment on when the first will store come and where it will come. But first few stores will be launched in FY13.

Any inorganic opportunities the company is looking at?
Currently, we are focused on building our brands that we already have. So I think growing the brands that we have already acquired takes most of our focus today.