TEA INDUSTRY Tea plays a vital role in the lives of millions of Indians. They take it as arefreshing drink as part of daily ritual. Tea offers livelihood to millions of people who areassociated with this industry. India produces some of the world‟s finest quality and alsothe largest variety of tea. Among the famous specialty flavors are Darjeeling tea, Assamtea and Nilgiri tea, which are grown in the Bengal, Assam and Tamil Nadu. Tea isnormally classified based on the processing, leaf size and grade. Fermentation createstwo major classifications, black and green tea. Black tea is further classified into CTC(cut, tear and curl) and orthodox tea.Indian Tea Industry Features India is one of the largest producer and consumer of tea in the world, accounting for around 23% of world demand Tea is currently the second biggest in beverage category after the carbonated soft drink market Total turnover of package tea was approximately Rs 10,000 crores in 2009-10 In the packaged tea category, the unorganized sector accounted for over Rs 1500 crore The labor intensive tea industry directly employs over 1.1 million workers and generates income for another 10 million people approximately. Women constitute 50% of the workforce.Special Features of India Tea Industry: Production dependent of agro-climatic conditions Same plant and same agro-practices give variations in quality in different regions Product Life is for limited period Labor intensive High Cost due to high input cost No priority for Scientific Cost Management Huge proportion old tea & Low Productivity
Types of TeaHerbal Tea Black Tea Green Tea CTC OrthodoxIndustry Size Indian tea industry stood at 988 million kg as of 2011, with the share to globalsupply accounting for 23 %. It is currently the second largest producer of tea in theworld. In 2009, the size of the Indian tea industry was estimated at Rs 140 billion. Totaltea exports were approximately around Rs 2842.07 crores in 2011. TEA Production by various Countries in 2011 (Figures in Million Kgs) 1800 1623 1600 1400 1200 988 1000 800 600 378 345 400 328 177 145 200 119 59 47 54 32 0 (Source : http://www.teaboard.gov.in/inner2.asp?param_link_id=41008)
Tea Production in India (Figures in Million Kgs)990 988 986985 980 979980975970 966965960955 2007 2008 2009 2010 2011 Production in Domestic Region (Source : http://www.teaboard.gov.in/inner2.asp?param_link_id=41008) Change in Production in Recent Years (Figures in Million Kgs)25 22201510 4 5 0 2007 2008 2009 2010 2011 -5 -1-10 -8-15 -13 Change in Production (Source : http://www.teaboard.gov.in/inner2.asp?param_link_id=41008)
Domestic Consumption of Tea in Recent Years (Figures in Million Kgs)900 837 856 802 819 771 786800 735 757 693 714700 673600500400300200100 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Domestic Consumption (Source : http://www.teaboard.gov.in/inner2.asp?param_link_id=41008) Area under Tea in India (Figures in Hectres)590000 578458 579353580000570000 567020560000 555611550000540000530000 521403520000510000500000490000 2004 2005 2006 2007 2008 Total Area (Source : http://www.teaboard.gov.in/inner2.asp?param_link_id=41008)
(Source:http://www.teaboard.gov.in/map-of-india.html?param_link_id=730&mem_link_name=Tea%20Map%20of%20India)AN OVERVIEW OF TATA TEA LIMITED
TATA Tea was set up in 1964 as a joint venture with a UK based James Finlay and Company to develop value added tea. From a mere share of 3% in the mid 70s to become Indias second largest tea producer, Tata tea has come a long way. (www.Tatatea.com) The operations of Tata tea and its subsidiaries focus on branded product offerings in tea but with a significant presence in plantation activity in India and Sri Lanka. The Tata tea brand leads market share in terms of value and volume in India and has been accorded the „super brand recognition in the country. Tata tea also has 100% export oriented unit manufacturing instant tea in the state of Kerela, which is the largest such facility outside the United States.AN OVERVIEW OF TETLEY In 1837, two brothers, Edwards and Joseph Tetley started to sell tea and became so famous that they set up as tea merchants. In 1856, in partnership with Joseph Ackland, they set up “Joseph Tetley and Co., wholesale tea dealers”. Tea was rationed during World War II, it was not until 1953, just after rationing finished, that Tetley launched the tea bag to the UK and it was an immediate success. The rest, as they say, is history. The tea bag had captured the public‟s imagination and desire for convenience. Within 10 years it revolutionized how Britons drank their tea and the old fashioned tea pot had given way to making tea in a cup using a tea bag. 1974 Tetley Tea Company was bought by J Lyons who merged it with the Lyons tea business to form Lyons Tetley. 1978 Allied Breweries acquired J Lyons‟ Businesses then as Allied Domecq sold them in the 1990s. The Tetley Group was created in July 1995, when a group of investors bought what was then the world-wide beverage business from Allied Domecq. On 10th March 2000, The Tetley Group was sold to Tata Tea Limited, one of the world‟s largest integrated tea businesses. After a long drawn out battle first with Schroder Ventures, followed by a bitter retreat in 1995, and then with Sara Lee, Tata tea finally tasted victory on March 10, 2000 when it bought Tetley for a staggering INR2,135 crore ( 305 million sterling)
Porter’s Five Force Analysis Threat to New Entrants Threat of New Entrants High Cost of Investment FDI High Labor Cost Untapped Rural Markets Unorganized SectorBargaining power of Rivalry among Existing Players Threat from SubstitutesSuppliers Approximately 700 Tea Coffee Large number of Companies Pepsi producers Unorganized Players Coke Low switching cost Industry growth at 2% Energy Drinks Bargaining power of Buyers Large number of buyers Product differentiation Other Options available Large number of consumers
Industry Rivalry (High): There are approximately700 tea companies in India hence there is intense rivalry amongst them. Market is dominated by a large number of unorganized players. Industry growth is slow at 2%.Bargaining Power of Buyers (High): There are a large numbers of buyers purchasing the product. The bargaining power of buyers is extremely high as the buyers have many options available.Bargaining Power of Suppliers (Low): There are a large no of producers of tea in India. Supplier‟s product creates low switching cost.Threat of Substitutes (Moderate): Substitutes available are coffee, juice, cold drinks. Existing customers are loyal Preference towards coffee can become a major threat because of increasing café culture.Threat of new Entrants (High): Large untapped rural market for branded tea segment in rural India FDI – 100% FDI in tea business.Barriers to New Entrants (Moderate) High cost of doing business because of the time it takes to grow and become ready for sale. High labor cost Unorganized sector can be a barrier to certain extent by lowering the attractiveness of he industry.
PEST Analysis:Political factors Economical Socio – Cultural Technological factors factors factors• Government Interest • Lifestyle New Machinery Policy Rates Changes Advertising• Foreign Laws • Language through Internet• Stability of the Government POLITICAL FACTORS Government Policy The political arena has a huge influence upon the regulation of businesses, and the spending power of consumers and other businesses. Non-alcoholic beverages fall within the food category under the FDA. Here the Government plays a role within the operation of manufacturing these products in terms of regulations. There are potential fines set by the government on companies if they do not meet a standard of laws. Stability of the Government Political conditions, especially in international markets, including civil unrest, government changes and restrictions on the ability to transfer capital across borders. Foreign Laws Companies‟ ability to penetrate in developing and emerging markets, which also depends on economic and political conditions, and how well they are able to acquire or form strategic business alliances with local bottlers and make necessary infrastructure enhancements to production facilities, distribution networks, sales equipment and technology.
ECONOMICAL FACTORSInterest Rates Marketers need to consider the state of a trading economy in the short andlong-terms. Rate of interest raises depressing business and causing redundanciesand lower spending levels. The company had challenging year due risingcommodity costs for tea and coffee and intense promotional competitors campaignacross key regions, but it did not affected company‟s profits. The Grou p reported ayear/on/ year sales growth al constant exchanges rates, because of strength of thebrands, improved performance by instant coffee and favorable impact ofacquisition. Profit from operations for the year was impacted by commodity costincreases, investments behind the brands, product development, new marketlaunches. Tata l ea has reduction in consumer duty.SOCIO-CULTURAL FACTORSHealthier Lifestyle The social and cultural influences on business vary from country to country.Many people are practicing healthier lifestyles. This has affected the non-alcoholicbeverage industry in that many consumers are switching to herb drink and bottledwater instead of beer and other alcoholic beverages. The need for bottled waterand other more convenient and healthy products are in important in the averageday-to-day life. Consumers from the ages of 37 to 55 are also increasinglyconcerned with nutrition. There is a large population of the age range known asthe baby boomers. Since many are reaching an older age in life they are becomingmore concerned with increasing their longevity.Language Language is another element which often requires adaptation in differentmarkets. Consumers generally prefer labels and instructions in their ownlanguage. Sometimes brands and logos are translated as the source languageconfers a certain prestige and image.
TECHNOLOGICAL FACTORSIntroduction of new Machinery Technology is vital for competitive advantage, and is a major driver ofglobalization. As the technology is getting advanced, there has been theintroduction of new machinery all the time. New technology help to develop newproducts, for example comic vending machine launched in US recently to sell realbrew iced lea. Due to introduction of these new machineries the production ofBeverage Company‟s has increased tremendously than it was a few years ago.The Company invested heavily in innovation and new packaging of the products.Advertising through Internet The effectiveness of companys advertising marketing and promotionalprograms. The new technology of Internet and television use special effects foradvertising through media. They make some products look attractive. This helps inthe selling of the products. This advertising makes the product attractive. T histechnology is being used in media to sell their products.
IFAS of TATA TEA (Before Merger)Strengths’ Weights Rating Weighted ScorePlantations 0.16 4 0.64Brand Name 0.15 2 0.30Strong Management 0.15 3 0.45Weakness Weights Rating Weighted ScoreWeak Distribution 0.18 3 0.54ChannelLack of Technology 0.16 3 0.48availableLess or No Global 0.20 2 0.40PresenceTotal 1 2.81
IFAS of TATA TEA (After Merger)Strengths’ Weights Rating Weighted Comments ScoreMarket 0.15 4 0.6 With a value share of 21.4%Leader in 2010, Tata Tea is now the market leader in the Rs7,000-crore branded tea market, having overtaken peer Hindustan Unilever (HUL)Resources & 0.13 3 0.36 Tata Tea Limited ownsCapabilities approximately 51 tea estates in the states of Assam, West Bengal, and Kerala in India. Having plantations in varied agro-climatic zones enables Tata Tea to cultivate distinct tealeaves. In addition, it also have a big R&D infrastructureBrand Name 0.12 3 0.36 Tata tea Brand is ranked the second most trusted beverage brand in brand equity. The companys best- selling brand is Agni which caters to the mass segment and other brands include Tata Tea Gold, Chakra, Gemini and KananDevanExperience 0.11 3 0.33 Tata Tea has been one of the oldest companies in India and has the advantage of skill and experience on their sideStrong 0.14 3 0.42 Tata tea has the access toManagement highly efficient management pool from Tata groupPresence in 0.15 4 0.60 Present in every contient ofmore than 40 the world.
Weakness Weight Ratin Weighted Comments s g ScoreNo product 0.15 4 0.60 One of the major problemsdifferentiatio Tata Tea faces is the lack of much product differentiationn hence loyalty of consumers is a major area of concernDistribution 0.05 3 0.15 The distribution network ofNetwork Tata Tea comprises on 1.25 lakh distributers this is not much when you compare to HUL who have the strongest dealer network in the countryTotal 1 3.42
Tata Tea Tata Global Beverages (formerly known as Tata Tea) is an Indian MultinationalNon Alcoholic Beverage Company headquarter in Kolkata, West Bengal. It‟s asubsidiary of Tata Group. It is the world‟s second largest manufacturer and distributor ofTea. The merger was also important for Tata Tea, because its main competitorin India, Hindustan Levers Limited (HLL), a Unilever subsidiary, was gaining marketshare and also because overall growth of the tea market in India had slowed. Tata Teaacquired the Tetley Group for £271 Tata Tea used a leveraged buyout structure toacquire Tetley, with the hopes that the cash flows from Tetley would repay the leverageover time.History 1964 Tata Creates alliance with UK based giant James Finlay to form TATA FINLAY 1983 Tata Tea is born, Finlay is bought out 1991 Tata Tea enters Brand business 2000 Tata Tea acquires The Tetley Group 2001 Tata Tea acquires Good Earth, USA 2006 Tata Tea acquires Eight O‟Clock Coffee, USA Tetley acquires Jemea in Czech Republic Tetley acquires 33% stake in Joekels Tea, South Africa 2007 Tetley acquires Polish Tea brand Vitax 2009 Tetley acquires Grand Coffee, Russia 2011 Tetley increases stake in Joekels Tea, it now a subsidiary business
MAJOR TEA PLAYERS TATA HUL Duncun Goodricke Others TEA Group GroupTata Tea Red Label Sargam Goodricke Wagh BakriAgni Taj Mahal Double Zabardast TezTata Tetley Taaza Diamond Castleton Jayshree TeaChakra Gold Lipton Green Shakti Caddy
Technology used in Tea Manufacturing PLANTATIONS PLUCKING & LEAF HANDLING WITHERING ROLLING FERMENTATION DRYING SORTING
Structure of Merger Tata Tea Inc Tata Tea 60mn Rabo bank Tata Tea GB Prudential SPV Mezzanine Schroder Capital Ventures 215 mn Equity 70mn Debt 235 mn 10 mn 10 mn 10 mn Tetley Legal Services & Tetley’s Working Acquisition Bank Charges Capital requirements 271 mn 9 mn 25 mn DEBT Repayment Structure A B C D Amount 150 Million 75 Million 30 Million 50 Million Loan Type Long Term Long Term Long Term Revolving Purpose Funding Funding CAPEX WC Acquisition Acquisition RequirementsYear of Maturity 2007 2007 2008 2007 Pay Back Semi Annual 2 Installments 2 Installments Cessation of Method Installments in 07-08 in 07-08 Credit Interest rate 11% 11% 11% 11%
THE CHALLENGES Tata tea was half the size of Tetley in terms of revenue and number of upper management and so it feared a domination of Tetleys corporate culture. Rising competition from African nations such as Kenya and Malawi, where production of tea is new and expanding, posed potential threats to tea exporters from India. Dealing with diverse skill set, working Culture of employee and objectives of both the organization. Financial constraints such as legal and capital control in India that made the listing of Tetley shares in India unattractive. There is a great deal of concern of how British employees would react to Indian manager as India was a part of former British Colony. Adding to the woes was the fact that the Indian tea exports to Russia had been continuously declining. In fact the exports to Russia fell drastically over the last decade. In 1999, the exports were around 87million Kg, which was almost half of 160 million Kg exported in 1989. The overall export also fell substantially. During the last fiscal itself, the exports saw much volatility. The total exports fell of tea fell from 27,839 ton recorded in August 1999 to 9,766 ton in February 2000. The UK and the Ireland accounted for one-third of the world‟s tea consumption in 1955. However their share in tea consumption currently is around 5% only. The tea prices have falling worldwide because of an oversupply in production. While world market prices in real terms have declined the cost of production, on the other hand, has increased steadily thereby putting pressure on the producer‟s margins. Big buyers like Russia, Iran and Iraq have become inactive due to political reasons. Above all, the fact that Sri Lanka is selling tea to Russia at far lower prices than India has also been causing major concerns. How to Integrate: Tata decided that the best way to integrate was not to integrate initially but to maintain a joint venture type of arrangement. Furthermost the integration process was not rushed in order to protect Tata tea from risk of Tetley‟s debt. TATA tea did not want to change that Tata tea until debt level was manageable. Size difference: Tata tea was half the size of tetley in terms of revenues and number of upper management. Tata tea feared a domination of Tetley‟s corporate culture.
Tata Tea Market after Acquisition The market of Tata tea suffered a lot after the acquisition as it experienced disasterfinancial performance. The companys overall sales was dropped by 8.3% and reached Rs621.58 crore from Rs 677.86 crore. Also operating profit was dropped down by 19.37% and reached Rs 121.43 crorefrom Rs 150.60 crore. Market share price considerably dropped within a year. Though the acquisition of Tetley was seen negatively by the market for the next 3years, Tata tea cautiously chose the approach of integrating the processes and exploringsynergies between the two companies with absence of any time pressure, while maintainingoperational independence. For this, the overall emphasis was on growth rather than cost reduction. Also astructure that supports joint working in several areas was adopted. A thoughtful processwas adopted for integrating the two companies with some of the highlight being: Identification of common belief: An international consulting firm was commissioned to identify the common belief between the two companies and suggest ways to bring them closer. Creation of structure: A strong culture was developed to create a group that includes steering committee, their task forces and managers of both the companies. Refinement of structure: Tata Tea adopted the hierarchical structure and assigned responsibilities to every level from top to bottom.Financial restructuring done by Tata Tea Tata tea changed their orientation from producing tea company to selling teacompany as they realized that the level of profit can be increased by selling high qualitybranded tea products rather than owning plantation. To execute their restructuring process, Tata tea decreased its total wage payment by12.5%, provident fund payment by 43% and welfare payment by 40%. Also Tata tea alsoreduced its employee strength from 58,888 workers to 34,596 workers
Current Positioning of Tata Tea After the financial collapse in the year 2000, Tata Tea is now moving forward toward the growth. Currently share value of Tata tea has moved up to Rs 700 per share. Tata tea has been ranked as the most trusted beverage brand in India (The Economic Times, 2007) The companys marketing strategy of focusing on continuous innovation in all direction of brand marketing and sales, has helped Tata Tea to achieve excellent growth in recent years (Ms Sangeeta Talwar, Executive Director-Marketing, Tata tea Limited).TATA TETLEY Merger implications:- Position in the value chain 305 mn GBP Tata Tea –pre acquisition:-40% of turnover came from packet tea /tea bags Tetley – pre acquisition:- 100% of turnover came from tea / tea bags Consolidated – post acquisition:- Company has moved up the value chain-84% of turnover came from packet tea/tea bags. Merger Implications:- Increased Outsourcing Tata Tea –pre acquisition: Produced 95% of its tea requirement in- house Tetley – pre acquisition :Outsourced entire requirement from 35 different countries, with an estimated Procurement of 3 million kilograms of tea every week Consolidated – post acquisition: Today, 70% of Tata Tea‟s tea requirement is outsourced from 20 different countries, thus reducing the risk associated with fluctuation in production arising out of various factors. Merger Implications:- Predictable Margins Tata Tea –pre acquisition:- Margins highly correlated with tea cycle Tetley – pre acquisition:- Margins inversely correlated to tea cycle Consolidated – post acquisition- Margins hedged Merger Implications:-Global Footprint Tata Tea –Pre acquisition :Predominantly domestic operations Tetley – pre acquisition: UK and USA account for bulk of sales. Consolidated – post acquisition :Global presence
Revenue by Geography; Geography Sales Revenue (Rs. Lakhs) India 150816.83 UK 123942.34 USA & Canada 144671.83 Rest 65356.48 Total 484787.48 13.48 31.11 India 29.84 UK 25.57 USA & Canada Revenue % RestRestructuring the debt (28th Feb 2003)In order to reduce the burden, the interest payment burden promoters (Tata Tea and TataSons) infused £30 m in June 2001 and retired £20 m of high-cost debt taken at 18%. Thisincreased the equity base of the company from £70-million to £100-million. It helped reduceits debt equity ratio to 1.7:1.
Details of the transaction (2003):Single-tier debt: The existing debt of £171m (comprising£114m of senior debt, £49m of mezzanine debt and £8 million of secured loan stock debt)has been repaid and, simultaneously, a fresh debt for a value of £174 million, all of which issenior debt, has been raised. Tranche A is of £90m and is subject to bi-annual repayment over seven years. Tranche B and C are of £42m each with bullet repayment between seven to nine years. 350-bps reduction in interest cost: The weighted average interest cost will reduce to 6.7% from 10.2%, thereby saving approximately £ 6m per annum in future interest costs. Of the total debt, about 2/3rd has been switched to fix LIBOR while the balance is at floating rate. All debts continue to be ring-fenced with no recourse to Tata Tea, whereby the banks will have rights only on the assets and cash flow of the Tetley Group. Implications of debt restructuring: The debt restructuring has been possible owing to an improvement in the financials and a fall in the interest rates, thereby leading to a re-negotiation of better terms with lenders. There is no change in the debt: equity ratio which is 1.7:1 (excluding quasi-equity) / 2.9:1(including quasi-equity).The restructuring will have a two-fold benefit: Interest saving of £6 m per annum Re-negotiation of the covenant structure has eased pressure on the company. The management now has relatively more freedom to plan its long-term investment and growth strategy.The refinancing of high-cost Tetley debt in favor of LIBOR-linked rates has resulted in a onepercent reduction in the cost of debt.
Sales of Tata Tea (Figures in Crores) Sales of Tata Tea 2500 2000 Axis Title 1500 1000 500 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Sales 899 810 750 812 820 981 1058 1297 1415 1540 2090 1966 2222 (Source: http://www.moneycontrol.com/financials/tataglobalbeverage/balance-sheet/TT#TT ) PAT of Tata Tea (Figures in Crores) PAT of Tata Tea 450 400 350 300 Axis Title 250 200 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 PAT 124 100 72 70 91 129 187 306 312 159 391 180 302(Source:http://www.moneycontrol.com/financials/tataglobalbeverage/balance-sheet/TT#TT )
FLAVOUR OF SYNERGIES In the backdrop of the difficult domestic scenario and dwindling exports to Russiais was not difficult to conclude what prompted Tata Tea to go for an acquisition, that tooat such INR1900 crore of sales, on the other hand, Tetley was supposed to benefit fromTata Teas competencies in managing plantations and processing units. Tata Teathough didn‟t have expertise in blending and branding. It was here that the acquisitionwas coming handy to Tata Tea, as Tetley had proven expertise in the area of productinnovation and in sourcing tea from auction houses and which also was a majorblending and packaging company and owns a host of well-known international brandswhich the latter can leverage. Tea is usually exported at a relatively early stage in the production chain andblending and packing, the most lucrative part of the tea trade, is mostly done by the teacompanies in the buyer country. The large profits therefore don‟t accrue to the teaproducing countries. The big money is made abroad. In Europe, 30% to 50% of theconsumer price of tea goes to blending, packaging, materials and promotion. It wasthere that the acquisition would help Tata Tea to take advantage of the existing scenarioby virtue of Tetley‟s proven skills an blending and branding, not to mention exoticpackaging, which too fetches higher premiums. Also, many producers try to sellprocessed tea bags or repacked consumer units, but the export of ready-for-use tea isoften hampered by poor market information and the absence of funds for expensivemarketing strategies. It could be rightly said then that the deal was supposed to bring together the twocompanies, one of which was the largest integrated tea company (Tata Tea) in theworld, while the other worlds largest brand (Tetley). Together they make a world-classintegrated outfit. But the rival Unilever was not far behind either. In fact, it became evenmore aggressive after the Tata Tea- Tetley deal came through. The Unilever through itsIndian outfit HLL acquired Rossell Industrys tea gardens, and stepped up efforts tovertically integrate its operation by acquiring some more tea garden in India and African
nations like Kenya, Uganda and Mozambique.The deal was supposed to facilitatedownstream segment also. Tata Tea has over 60 tea gardens in India and Sri Lanka, besides its ownblending and packaging units. Tetley on the other hand, buys tea from the major auctionmarkets of the world and processes them to be sold under its own brands like EarlGrey, English Breakfast and Traditional Afternoon - in the US, Canada UK andAustralia. Both the companies were supposed to streamline their downstreamoperations quite efficiently thereby cutting the costs. Tetley plans to give special thrustto the US market, which has been fast emerging as a growing tea market, withconsumers shifting from coffee to tea due to health reasons. This is turn was thought tohelp Tata Tea to push greater volumes in the instant tea segment, where it had so farstruggled to get a strong foothold. In the domestic market, on the branding and packaging front, there has been amajor Strategic shift towards brand consolidation. In fact, with increase in the valueadded segments over the years, the share of this segment has risen quite significantly.The value additions, through changes in the product forms, branding, consumerawareness and delivery systems, which has been part of the winning tool in theinternational markets was bound to be replicated in the Indian markets too. And it wasthere that the Tata Tea - Tetley combines wider product portfolio downstream wouldcomplement the upstream synergies. As while, Tata Tea catered primarily to the lowerend of the market segment, Tetley had presence in the premium segment. Apart fromthat, adding to Tata Teas brand strengths in developing packaged tea was Tetleyswell-entrenched presence across a wider range of categories such as decaffeinated,herbal, lemon tea, and tea bags, etc. As far as other major benefits from the deal were concerned, the domesticcompany can benefit from the standardized management practices including qualityperformance norms and consumer focus of Tetley, the world leader in tea bags. Thiswas supposed to be more so when new products are envisaged for the Indian markets.
On the other hand, Tata Teas strong R&D base and expertise in tea cultivationand manufacturing was immensely helpful to Tetley. Post-acquisition, the decision wasthat the two organizations work under a unified global strategy. The combine strengthswere thought to be helpful to create opportunities to expand sales in both the existingand new markets and realize synergies. Apart from that, the two companies‟ breadth ofexperience and vertical integration was equipping them to compete anywhere in theworld and that assumed importance in the context of WTO, which would terminate teaimport curbs under its predetermined timeframe. The joint buying power and commercially relevant use of tea produced by TataTea was also supposed to facilitate cost control. Also among the other immediatepriorities was the strategy to increase tea bag sales in East Europe and to improve uponthe currently token presence of Tetley in the packet tea segment. On the product size,Tetley proposed to promote the draw size string bags in a bigger way, because of thehigher margins and planned to replace all the round tea bags cartons with an innovativesoft-pack format then. Another area that Tata Tea was eyeing was the private label tea business in theUK. Tetley which holds sway over the market, with 6 out of every 10 retailers sourcingtea from it to sell under their own brand names, was a perfect launch vehicle to pushgreater volumes into that highly lucrative segment, more so when its exports to theRussian markets had been had been on a continuous decline. The key reason why theprivate label was lucrative was that there were no marketing costs attached to it. Thatmeant, by sourcing tea directly from its 26,000, hectares of gardens, or from the auctionmarkets, Tata Tea would be able to boost its margins. The acquisition impact on Tata Teas presence in the global tea trade aside,Tata-Tetley ltd., the already existing joint venture between the two companies, wasseen aligned with the group‟s international operations. Equally significant was thedomestic companys plan to open an instant tea factory in South India, which wasimproved for the instant tea shipments to the US, where Tetley had a major presence.
Tata tea hoped to garner greater market share and stave off the competition,riding on Tetleys strength. Acting swiftly, Tata Tea initiated a comprehensive operationrestructuring of the world‟s second-largest tea company, in a bid to move a step closerto unseating Unilever Plc. The restructuring took forms of the broader plan to ventureout into new market in East Europe, Russia, the CIS and West Asia through both thejoint venture and franchise route. The move was critical to increasing the UK basedtransitional earnings potential as Tata Tea had leveraged the company‟s future cashflows to fund the 271 million pound acquisition.Comparison of HUL and TATA Tea Ltd., Profitability of Hindustan Lever LTD TotalYEAR Net Sales Net Income Assets ROA Total Equity ROE (INR (INR (INR % per (INR % per millions) millions) millions) year millions) year2001 67441 14188 39563 36% 304369 5%2002 71232 17358 40423 43% 365887 5%2003 74103 24359 34198 71% 209270 12%2004 77002 22483 36157 62% 213872 11%2005 88632 23870 42118 57% 209270 11%2006 96820 24240 40300 60% 230562 11%2007 105447 22050 48553 45% 272348 8%ROA is calculated as net income/total assets.ROE is calculated as net income/total shareholders‟ equity.
Profitability Of TATA TEA LTD. TotalYEAR Net Sales Net Income Assets ROA Total Equity ROE (INR (INR % per (INR % per millions) millions) (INR millions) year millions) year2001 67441 89116 146923 61% 89698 99%2002 71232 81606 15230 536% 96799 84%2003 74103 80648 154024 52% 97863 82%2004 77002 83845 142017 59% 97524 86%2005 88632 95024 152908 62% 104897 91%2006 96820 104017 169743 61% 116126 90%2007 105447 114611 270461 42% 156555 73% From the above chart one can clearly observe the significant increase in the sales, whichhad grown gradually from INR 68772.00 millions in the financial year 1997-98 to INR.105447.00 million in the financial year 2006-07.Hence one can conclude that the acquisitionactivity contributed an increase in sales volume.Before Merger: TATA TEA TETLEY Turnover $207million $417 million operating profit $36 million $42.6 million Employees 59740 110 Tea Estates 54 0 Britain, Canada, Key Market India Australia, US
After Merger:Merger Tata tea Tetley PreImplications acquisition acquisition Consolidated Post acquisition 40% ofPosition in turnover came 100% turnover Company has moved up thethe value from packed came from packed value chain 84% of turnoverchain tea bags tea bags came from packed tea bags outsourced entire requirement from 35 today 70% of TATA Tea different countries requirement is outsources from produced 95% with an estimated 20 different countries thus of its tea procurement of 3 reducing the risk associatedIncreased requirements in million kgs of tea with fluctuations in productionoutsourcing house every week arising out of various factors. Margins highly Margins inverselyPredictable correlated with correlated to teamargins tea cycle cycle Margins hedged UK and USAGlobal Domestic account for bulkfootprint operations sales Global presenceThe financial performance of Tata Tea improved though at a slow rate and both ROAand ROE had been positive so far.CULTURE Initially, culture was a huge issue and had to be handled very carefully. Forexample, Tata executives would complain about being kept waiting when visitingTetley‟s UK head office reception centre, despite being the senior partners. Meanwhile,Tetley people would complain about being run by Tata which knew only about India andnothing about Western markets.Management The companies were different but were learning from each other. For instance,Tetley is very process oriented while Tata Tea is quicker to respond and more actionoriented. Tata was quite aware that it needed to be sensitive to the potential culturalchallenges of combining the two groups.
Objectives of companies: Tata had dual emphasis on plantation and domestic marketing. Tetley focusedon global marketing.Geographical spread: Tata Tea is mainly present in Asian Sub continent and its business focus on bulktea. Whereas Tetley was into brand marketing with a sizable international presence.Differences in skills: Tata Tea is a plantation company whose major strengths were managing theestates, dealing with a huge work force, and making teas. On the other hand, Tetley isstrong inbuying quality teas all over the world, in blending, in packaging innovation and combinegood logistics with management skills.Branding: Both companies had very strong brand names in their respective regions.INTEGRATING: A executive board fumed with 6 people from both companies to plan and devisethe integration plans. Simultaneously a board of non-executive members were formedwho were neutral with the objective of introducing Tetley in India.Also as last and final measure individual committees were formed to look at scope forintegration in different areas like Commercial business, Supply chain, IT team etc.
However, as planned the synergies of the companies were not so strong.For most part it was quite impossible to fuse the working of Tata Tea and Tetleytogether as they both had different structures Tetley focused on producing tea the packaging and selling, whereas Tata focused on producing tea in own plantations and then selling. Tetley was a global brand and hence had more standardized product mix, which focused on quality, whereas Tata was a Asian brand and as per customer preference focused more on making product as per local taste. Hence apart from exchange of R & D and technological know – how, and help to grow in each other market both the companies could not be integrated to achieve better results. Hence the CEO of both the companies felt that allowing independent operation for both the companies along with a kind of Co-integration alliance.
Mergers & Acquisitions Merger Of “TATA & Tetley”Submitted To: Prof. Tazeentaj MahatSubmitted By: (Group 3) Laxmi. C Bibi Asma Hardeep S. H Jervin.J Shekher.G