The outperformers 2020

Tata Consumer Products is not letting the slowdown slow it down

Under new CEO Sunil D’Souza, the FMCG major is adding distribution muscle to crank up its brand engine 

For Tata Consumer Products (TCPL), it has been a busy year. After the salt business was added to its portfolio from group company, Tata Chemicals, it got a new CEO in Sunil D’Souza. With a varied set of brands and businesses – tea, coffee, salt, water and a joint venture with Starbucks – it has consumers across social strata. Tata Salt already has strong distribution and Abhijeet Kundu, analyst at Antique Stock Broking, says it will work in Tata Consumer’s favour. “It is the second-largest player in tea (after HUL) and the largest in salt. They could easily use it to grow the rest of the business especially tea,” he says. 

According to analysts, the pandemic and the lockdown may have worked in the company’s favour. With the first causing people to gravitate to branded foods, therefore Tata Sampann with its dals and spices, and the second forcing more people to eat at home. “The company is tapping the ‘in-the-kitchen’ segment, which is expected to see double-digit growth due to rising in-house consumption,” says Kaustubh Pawaskar, AVP-fundamental research, Sharekhan.

Pawaskar expects the company’s revenue and net profit to grow at a CAGR of 11% and 23%, respectively over FY20-23, on the back of the merger of Tata Chemicals’ consumer business and the strength of the existing portfolio. D’Souza, who took over the reins of the company this April, throws more light on what is in the works.

What is your strategy to build Tata Consumer into a full-scale consumer company?

With a name as trusted as Tata, it made sense to bring together two successful businesses – beverages and foods – to pursue our FMCG aspiration. Right on top is building on our core strength, which is primarily tea and salt today, though I would also count the fledgling brands of pulses, spices, and coffee. There is a huge runway to grow our core business through the shift to branded products. Yes, we are a little behind on distribution compared to competition, though that is being worked on. Our target is to double our direct reach of 500,000 outlets, over the next 12 months. That refers to the number of stores my distributor salesman knocks on. Then, there is the wholesale multiplier which over the next 36 months, will increase our total reach again by 2x from the current 2.5 million outlets. 

Apart from this, we are working on becoming digitally enabled end-to-end. That means, my salesman will be linked to the distributors and from there to the central system. It allows me to capture data in real time and take relevant decisions. Just as with distribution, in innovation, too, there is some distance to travel. We are increasing our focus on innovation structurally, with the target being to double the percentage of revenue from new products in the next 12 months. On synergies, we intend to be at 2-3% cost savings at the topline level. On people management, we now have a new structure, which is category focused. Hence, sales and R&D will report directly to me. The idea is to create a broader FMCG company, where we can look at a category with both common front-end and back-end resources. With this kind of synergy, the salesman can now sell 12 products instead of 10 and the truck driver from five products delivers seven. It allows us to enter new categories. 

 

How do you see the business mix of Tata Consumer change over the next three to five years?

We plan to build the portfolio through three ways — focus on sales and distribution, power up our brands and work smartly on advertising and promotion (A&P), and drive innovation. Our core categories – tea and salt – will grow but other categories are growing and will continue to grow faster. Take the case of Tata Sampann, which is into pulses, spices and ready to cook nutri-mixes. Last quarter, its sales was up 50%. Over time, the percentage of tea and salt in the portfolio will come down. Right now, we are trying to determine which categories we should be getting into. Coffee is a focus area (See: The perfect blend). We do have a big coffee play in the US but not in India. So, you will see an aggressive coffee play. Tata Coffee is today in the plantation and the B2B space. We will activate the coffee brand and make sure we leverage the brand and platform.

 

What will be your capital allocation strategy going forward?

I would like to break this up into two parts – geography and portfolio. India is going to be the growth driver because of the sheer scale it offers. Our international business also has strong cash flow. Going forward, in international business, we will be focused on three markets — US, Canada and UK. In UK and Canada, we have got a strong tea business. Though tea does well in the US, the big one there is coffee. The rest of the international business will either play a growth role or be a profit centre. We cannot be stuck in the middle. I must add that, if there are issues, we will not hesitate in taking tough decisions. 

We have exited China and Russia in the past. This January, we exited the Czech Republic. The one thing we have to get right in international markets is tea. Tetley is a strong brand and we have a good presence in black tea. However, two other segments, fruit and herbal specialty teas, are growing faster than black. The challenge is how we get our rightful share in this. We have a brand called Good Earth in the US, which is known for fruit and herbal tea. Now, we have launched it in the UK and the results have been good. Similarly, Teapigs, a super-premium brand in the UK has been launched in the US and is doing well. Likewise, the US has the best practices in e-commerce, which we are shifting to other markets. 

What will be your strategy with respect to inorganic growth, especially with FMCG business seeing high levels of disruption with players launching innovative products?

We have been happy with our organic growth in coffee, pulses, spices and mixes. But, in some categories, we might need to take the inorganic route since we may lack in brand, technology, distribution system or team capability. However, every acquisition must be a strategic fit and has to come at a price that makes sense. Yes, there have been disruptions in the FMCG business at the product level and with business models. On our part, we are keeping a close watch on them and upping our digital game at all levels, whether it is by communicating to the consumer through e-commerce or through digitization across the organization. 

You have just acquired PepsiCo India’s holding in NourishCo, where growth has been hard to come by. What drove that decision? 

If you look at the business, they have got it right on products, the business model and team. These are the three essential ingredients for a successful business. In the product portfolio — Tata Gluco Plus, Tata Water Plus and Himalaya — each product has its strengths and region. They have a presence in Odisha, Telangana, Andhra Pradesh, to a small extent in Tamil Nadu, and bits and pieces of neighbouring states. If I just expand that business nationally and give differentiated products, keeping a sharp eye on costs, it can be scaled up. I would like to go step-by-step on expansion and make sure it is profitable at each point. Currently, it is under pressure because it is an out-of-home business. That said, NourishCo is delivering better than last year. In fact, numbers have increased on a month-on-month basis. As normalcy returns, I think we will see the business come out on a strong footing. 

Can you tell us how costs have been realigned post COVID-19? 

For us, COVID-19 and integration have come together. In terms of integration of the businesses, we had committed to delivering synergies of 2-3% over 18-24 months through a mix of cost and revenue and we remain on track for that. On the cost front, we have delayered our selling and distribution partner structure. Right now, we are in the midst of creating integrated food and beverage distributors with roughly 1.5x distributor salesmen on the ground. Interestingly, as we were integrating the backend for tea and salt, we realized they were complementary in terms of volume and weight. Salt is high on weight but low in volume while tea is high in volume but low on weight. That creates perfect logistics synergy. 

What kind of margin levers do you have to counter any potential softening of demand? Where do you expect operating margins at the end of the year?

The good part is that we are in the business of essentials, unlike a lot of other companies selling home or personal products or stationery. We sell tea, coffee, salt and pulses, and households can’t do without these. We have seen slightly higher margins because of factory stocking and lower A&P costs in the last quarter. To protect our margins, we will focus on the topline and keep an eye on costs. We should be equal to, if not better than what we have seen in the past. Since we are creating a completely new execution machine, with better distribution and logistics, our numbers when normalcy returns will be much better than what they were in the past. 

In your key existing businesses – tea, coffee and salt – how do you plan to increase profitability? 

In these, we do have decent market share with not very low margins. Besides, we are playing with brands and not commodities. As we move forward, there are a few ways to improve margins. For example, we are building scale through the same number of distributors, so my expenses remain the same. Then there is a lot of scope in both innovation and premiumization. Take the case of salt, for example, where we have variants such as salt lite or fortified salt. Building an efficient distribution channel to drive this entire portfolio is going to be the key. 

What is your strategy for Starbucks? 

Starbucks was close to breakeven and COVID-19 has obviously derailed that. But, we are creating Starbucks for the long term and, unlike many of our competitors, we are not under any financial stress. If anything, COVID-19 will actually be an opportunity since consumers will look for more trusted brands. We opened nine stores in the last quarter, including a new-format one on the lines of a drive-through, in Zirakpur. The response has been encouraging so far. Overall, Starbucks’ business has increased month on month. As the lockdown eases, we expect more consumers to come back, dine-in as a percentage creeping up and an increase in takeaway. We do not plan to close down any of our stores and whatever losses have been incurred will be for the short term. 

Q1FY21 was better for you than most companies. How do you see the rest of the year, in terms of sales growth?

The objective is to continue accelerating the topline and we are confident of doing that. The Q1 bottomline was driven by a set of multiple factors. It was a tale of two cities really. In India, business stopped for about 15 days, when there was a total lockdown. We could not move any products and they just piled up at the backend. But, when restrictions were lifted, demand recovered strongly. In our international business, it was the other way around. There was a lot of buying in the beginning, with people stocking up. At some point, sales has to normalize and that should happen this quarter.

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