Tata Consumer Products Business Analysis| Sleeping Giant Awakened
Hi investors. Welcome to SOIC. So, in today’s business analysis, we are going to discuss about Tata consumer.
Because Tata consumer is such an interesting FMCG company where there are many chances that more than 20% earnings growth can come in next 2 to 3 years which is very rare in this sector. We have divided this video in 6 to 7 parts so in 1st part of the video, I will discuss the mental model. The name of mental model is Michael Porters 5 forces analysis and this mental model is so interesting that you must know the current trend going on in FMCG business, it is necessary to understand it. So, according to this mental model if we see any industry structure then there are 5 competitive forces.
Basically, which are the 5 competitive forces? 1st is availability of substitute products or threat of substitutes means a product is introduced which replace your own product. Just an example, initially we used to use CD, after CD we started using pen drive, after pen drive memory card arrived and after memory card, cloud arrived, right. So, this is basically availability of substitute products. 2nd competitive force is basically the bargaining power of customers and the bargaining power of suppliers. The bargaining power of customer and bargaining power of suppliers from whom you take raw materials so the companies where there is no pricing power and have a lot of competition, there customer bargaining power is very high. Just to give you an example of sugar industry, in sugar industry none of the company have pricing power because all are producing commoditized products, right.
4th competitive force is the threat of new entrance. Can new entrance in industry arrive or not? Yesterday one news came and many of you people told me to make a video on route mobile but yesterday one more news came that their competitor Twilio has entered India through an acquisition. So, we call this as 4th competitive force that a new entrant is coming in the industry, right. 5th competitive force is how much competition exist in existing industry. Here, 2 to 3 things can be possible.
Some industries are concentrated like we have seen amine industries where there is Alkyl amines and Balaji amines so there in spite of industry being very concentrated means there are only 2 to 3 players and all are earning money because the product is such that among them there is no pricing war. Whereas if we see telecom industry then telecom industry has reached from 17 - 20 players to 3 players now. So, the competition between the existing players over there is very high at this time but it may reduce in sometime. So, these are the 5 forces.
Let’s understand what is their application. When we talk about FMCG industry so FMCG industry goods which we buy like chips etc, we buy it through a distributor or we will take it from general trade, modern trade or e-commerce. What is general trade? It is your normal Kirana shop. What is modern trade? Shops like Dmart, Reliance shops so this is known as modern trade.
Even today general trade is of 80 to 85 percent sales. Whereas modern trade has reached close to 12 – 13 percent. E-commerce, if we order biscuit from Amazon or Flipkart then we consider it as e-commerce which is 3% of sales. So, here the interesting trend which is going on is that the growth of modern trade is increasing more than general trade and even e-commerce growth is increasing rapidly as we can see in distribution pie chart so due to this in moder trade when we see retailers like Big bazar, Dmart or Reliance then they are introducing their own private labels.
Now, what is private label? Suppose a Britannia biscuit comes by the name of Bourbon so same biscuit can be copied by Big bazar, right. But he will sell its private label in its own label and will sell on its own shelf but will sell at cheaper rate. So, this is private label. If we look at Warren Buffet quotation here then Warren Buffet had a brand by the name of Kraft Heinz but his investment was wasted in Kraft Heinz. The reason for investment going wrong was that many private labels were introduced means grocery stores or their own national distributors who were distributors in modern trade like Walmart or Costco, they launched their own brands.
Like if we see in Amazon then it includes Amazon Basics too so this is called as private label. So, here what Warren Buffets says that from 100 year Kraft Heinz were doing advertisement but even after doing advertisement from 100 years, a brand of Costco comes by the name of Kirkland and from last 20 to 30 years, it started doing more sales. So, this is the power of private labels.
If we look at private labels all over the world and look at comparison of Europe or country like UK or Spain then in Spain already private labels are more than 40%. In UK also, the private labels are more than 30%. So, this means that a FMCG company who don’t have strong brand, private label affects it the most.
The 2 Michael porter forces which applies here is increase in threat of new entrance and bargaining power of supplier is also increasing because the supplier area is becoming your competitor. So, here we did a lot of scuttlebutt and we went different stores within Delhi so this is what we found. We found a product by the name of Turmeric. So, there were 3 brands of Turmeric. 1st was of Catch, then Everest and 3rd one was of Good life which is a private label own by Reliance.
So, Good life turmeric was for 36 rupees whereas Everest and Catch turmeric was for 56 rupees. All the 3 turmeric was of 200 grams so this was one of the major differences. 2nd we saw was a pasta which is unboiled pasta which we buy so there was Macaroni of Tasty treat which is again a brand owned by Big bazar and below there was Macaroni of bambino. Whereas it was very difficult to tell that which package belongs to which one so again private labels. Thirdly if we see rice here then they had Golden Harvest, Dawat and India Gate. Golden Harvest is another private label owned by Big bazar and I think Golden Harvest in rice category is one of the market leaders.
This is how much the private label has spready widely. Along with this, we observed one more thing that there was a noodle by the name of snack tak and other noodles was there by the name of Maggi Masala noodles. But the difference was that snack tak was again a private label and Maggi masala is owned by Nestle. Even though there is difference in their taste but there was hardly any difference in their packaging.
In shelf space, snack tak was kept above as compared to Maggi masala noodles so again very interesting to notice. We have observed 2 to 3 things more, which I can show you in this video that there were Kellogg’s cornflakes and there were private label cornflakes too. So, again it was difficult to tell which one is branded and which is private label. There was a lot of discount on private label. As private label was discounted so that gives an added advantage and if we see here then there were 2 brands of biscuits too which was of Nutri Choice which is of Britannia and of tasty treat by Marie. It was again very difficult to tell the difference between both and Tasty treat by Marie was very cheap compared to Nutri Choice.
So, again this is how private labels are trying to compete with FMCG brands. So, do keep this complete mental model, Michael porter 5 forces analysis and private label entry in mind because towards the end of this video when we will discuss about anti-thesis points then we will again come to this point when we will discuss about Tata consumer pulses business. So, with this we will get into the business analysis of Tata consumer. But before going to Tata consumer different business segments or Tata consumer deeper analysis, I would like to inform you a very interesting thing.
Because Tata consumer or all TATA listed companies are actually a part of conglomerate by the name of TATA sons. So, whatever happens in TATA sons definitely impacts indirectly to the listed companies. So, recently what was the development brought in TATA sons? N Chandrasekaran has become the chairman of it and after becoming the chairman he gave a very interesting interview. Let’s read an insight of that interesting interview which many investors must know. So, he mentioned in interview that the group has a lot of power.
Even in our eyes Tata group is one of the most respected groups and he said that TATA group have a lot of power. But problem is that there is some negative thing with their balance sheet so they have to fix that negative thing so that the balance sheet becomes great again. As leverage will always make you fall down. It is like when you run a race, you want to run fast. It means you have to run fast to run a race.
How can you run fast? You can run fast only if you are totally fit. Similarly, here they are giving an example that if a company have good profit and loss statement, we will consider it as good and strong profit/loss statement if the balance sheet of that company is strong. If balance sheet is weak then P/L will never be strong, right. So, I wanted to fix the balance sheet and I needed to simplify. So, what does this mean? Basically, if on your balance sheet there is a debt so due to the debt what happens is that as balance sheet and income statement is linked together so due to debt, finance cost will come on your income statement. Secondly as there is debt on your balance sheet means you are doing business on someone else’s money so again outside source of liability.
So, this is what it means and we will see TATA group different companies that how they are reducing their debt. Similarly, they said one more important line here which the investors take such concepts like tangible and intangible insights, if you understand earlier then the streets then this is what makes you an intelligent investor. So, what other lines they said, let’s listen to it. He said that we are looking simplification from structure, number of companies, talents, processes, hierarchy, everywhere which you look at it, if we simplify it will increase agility. It means that what happened in TATA business actually that TATA group listed companies actually started competing with each other. I will give you an example like TATA companies actually had food businesses of salt and pulses whereas TATA global beverages had business of beverages but actually both were part of FMCG.
This is why it make sense to make TATA consumer products limited about which we will discuss further. There were many other TATA companies which started competing with each other. So, here we see that what N Chandrasekaran said, actually he is walking the talk or not.
Because its easy to say but to do it actually is a different ball game. Let’s see examples here, if we look at TATA communication here then in TATA communication, they are trying to raise equity and they are trying to re-finance debt to deleverage. It means they want deleverage from debt; they want to end the debt. If we see in TATA motor then in TATA motor there is 54,700 crore debt which they want to make debt free by 2025. After he has been introduced in TATA steel, the debt has been reduced by some 18,600 crores, right. If we look at TATA consumer products then we discussed about structure so they merged the business of consumer products of TATA chemicals with TGBL beverage business and made TATA consumer.
If we look at 5th point of TATA power then TATA power reduced the debt from 7,552 crores to 36,366 crores. If we look at Rally India then Rally India is doing some around 800 crores capex Rallies India is again a very interesting company because Rallies India have fixed asset base of close to 600 to 650 crores. They have announced 800 crores capex in next 4 to 5 years. So, after N Chandrasekaran entered, all the viewers, investors and SOIC students do an experiment that in last 3 to 4 years since he came in group, compare company market capitalization that in last 3 to 4 years where it has reached. So, this is actually a story of improving capital allocation means capital allocation is improving and the capital structure is getting simplified, right. So, in conglomerates, this is a very strong mental model.
You can use this mental model together. So, with this we will get detailed analysis of TATA consumer. So, TATA consumer actually was formed in 2018 and 2019 after the merger of TATA chemical consumer product business and TGBL beverage business. But to understand the history of this business, we first have to understand TGBL history and in 2019 their consumer product business demerged and merged with it, we will look at that event.
So, let’s first talk about TGBL. So, TATA global beverages limited actually have a history of 1960s. If we check timeline of 1960s then in 1960s actually, they used to own tea plantations so they did investment here and in 1980s their first domestic branded play in tea arrived then they acquired coffee plantations too.
So, if we look at their balance sheet or their invested companies then where they have tea plantation and coffee plantation then actually it was a part of 1960s, 1970s and 1980s. After 1980s if we check this business then in this period between 2000 to 2015 if we discuss then they have done approximately 10 acquisitions, right. They acquired 10 international beverage brands.
Here, their biggest acquisition where in India a domestic company acquired MNC that was in 2000 by the name of Tetley, right. So, the brand Tetley which we see today was actually acquired in 2000 by TATA group and it was first leverage buy out in India’s history. What is it called? LBO. It means they took loan and acquired. Along with it first time an Indian company acquired a foreign MNC. So, this happened in 2000.
From 2000 to 2015, here some around 10 international acquisitions were done. So, let’s check the other acquisitions done by TATA. They acquired a coffee brand by the name of 8’o clock in US as it was very famous brand in east coast of US. They have 4 to 5 percent market share here.
They also did an acquisition of a company in Poland by the name Vitax. If we look at Himalaya water then they invested at the same time in Himalaya too. Also, in 2012 one major JV happened so this JV happened with Starbucks. So, we talk about TATA, Starbucks so that is a 50 – 50 JV between TATA and Starbucks. Here evolution happened and it kept on evolving, if we check in 2018 – 2019 then the merger of this business was announced with TATA chemical consumer business.
So, this merger happened in 2019. So, this is the evolution of the business history of TATA consumer products. After merger, TATA consumer CPP business came and TATA global beverages business came in due to which TATA consumer was formed. Let’s check the reasons of merger, right.
So, 1st reason of merger was that TATA chemicals had soda ash business. So, soda ash is actually a chemical business and TATA global beverage business more or less both of the products are FMCG. But the problem in TATA chemical business was that they both have a dominant business of salt but they didn’t had distributor reach and there was no focus because with FMCG entity if standalone FMCG entity has such businesses then a lot of focus is done. So, after merger if we check then before the merger 16% TATA chemical business was consumer product business. But after the merger if we check then Indian beverage business was 35% of the overall pie.
If the business is of 100 rupees then 35 rupees of business comes from Indian beverages. 21 rupees comes from Indian foods, rest 34 comes from International beverage which we discussed about like 8’o clock brands and rest 10 comes from others. What happened after merger? Actually, when we used to discuss about TATA global beverages so this company had so much heat of investment, it has a reason. The reason was that there was no domestic FMCG play at that time. As they acquired brands like 8’o clock, they were present in countries like UK, US, Canada, Czech Republic due to this it was an international FMCG play. Indian FMCG market is one of the fastest growing market in the world, right.
Due to this reason, the domestic investors never used to respect the valuation of this business. Actually, their international business was growing only at 2 to 3 percent CAGR from 2010 to 2020. But what happened after this merger is that today they have India focus business and India as a percentage of the geography is 56%. So, overnight what happened is that the narrative changed.
If we check geographically, India from less part directly went to 56%. So, now the people have started believing it as an Indian FMCG business, right. If we check brands of TATA global beverages then they have TATA grand, TATA gluco, Himalaya water, TATA tea and Tetley. From TATA chemicals what all they got? TATA salt, TATA sampan, TATA NX. What is TATA NX? TATA NX is basically like we see sugar free; it is similar to that.
TATA sampan is their pulses brand and it is a brand of chilies and different types of spices. It is also pulses brand. So, this was a rational behind the merger. After this we will talk about TATA consumer’s different segments.
So, 1st business segment is of salt business. Many people must have seen TATA salt at home. They have started a campaign too that TATA salt is actually a salt of country and if I observe at my home then I am shocked by one thing at home that I observe all different consumer products and see what we bought. Many times, when I go for grocery shopping with my family or brother then I always check that which salt do they pick up. I always tell them to pick different brand of salt but they always buy TATA salt.
So, what does this proves? All the investors watching this video, do go to the kitchen and check that which salt you are using. More or less, the answer will be TATA salt. So, let’s check the advantage of TATA salt once.
So, this is 17% revenue of their business. Before understanding, there is an interesting thing that I will show you the value chain of this business that how the salt is made. So, their value chain looks like this that first they do sourcing of raw material so TCPL basically partially get sea water brind which evaporates. The raw material sourcing is done in the facility which they have in Gujarat.
Then after that TCPL uses vacuum evaporation process. There are two ways to make salt here. 1st is vacuum evaporation and 2nd is what it is written here.
So, in vacuum evaporation process actually there is less inconsistency in salt as compared to solar. In solar, the inconsistency in salt is more, the greenly taste is more but in vacuum the consistency is little more. The product process is also expensive but TATA chemical produces it and in India they have the largest production capacity. Thirdly, what comes here in production process? We can check here that packaging and logistics comes here. Then in packaging the product will be packaged then the product is made and different type of salt is made like nowadays TATA salt lite, TATA salt crystal, I shakti salt, I shakti cooking salt, Herbal salt then its marketing is done then in the end when we pick the salt, we are able to see TATA salt end product. While researching for this video, I actually got to know a very interesting thing that actually different types of salt has come in the market.
So, let’s discuss about the different types of salts. 1st is super premium salt, if you check on amazon then it is by the name of Himalayan pink salt so Himalayan pink salt is 300 rupees of 1kg salt. Whereas TATA rock salt is close to 100 rupees for 1kg salt then TATA salt plus comes in premium category, TATA salt lite also comes in premium category then comes your mass brand where TATA salt and ITC salt is introduced by the name of Ashirwad so these both are somewhere close to 18 rupees per kg.
Here, a very interesting thing which we get to know is that what are the entry barriers in salt business? Once I had a discussion with my analyst friend so we both asked each other that what is the entry barrier in salt business? So, while reading their con calls actually realization came that there are entry barriers in this business. What is 1st entry barrier? Suppose you are a retailer and you have retail shop so 1st thing what you have is that at your shelf when you keep salt then salt is actually voluminous product means salt takes a lot of space of your shelf. Secondly, it is low value to weight item means if 1kg salt is of 20 rupees then 100 grams of salt is only of 2 rupees. It means that there is very less value to weight, right.
If there is 1kg salt then the rate or price of it is very less. So, due to these 2 things what happens is that retailer actually plays game on salt business on turnover. So, when we did ROCE video, we said that either you can earn ROCE due to margin or you can earn capital employed due to turnover. So, here actually the retailer will try more on turnover that they keep that salt which is most recognized.
Here comes the brand role so brand is actually for consumer and brand is actually for retailer too. So, let’s understand the cycle. Consumer saw the brand of TATA salt and trusted TATA salt.
As there is consumer trust on TATA salt due to this reason TATA salt sale is increasing. Salt is actually low volume item for the retailer due to this reason retailer is stocking salt more. The highest salt will be sold and will be in consumer’s mind, the quickly retailer will be able to make its turnover. So, this is why salt business actually has very high entry barriers.
We can see here that what are 4 sources of entry barriers? Largest shelf space. Consumer mindset. Low value to weight ratio. Last is ownership of proprietary assets.
How? Because TATA chemicals is perhaps the largest producer of salt in India. Here, if we look at TATA salt growth and industry growth then TATA salt growth is actually growing at rapid speed then industry. Industry is growing at 5% but TATA salt volumes is growing at 6.5 to 7 percent because it is taking market share from the industry.
Today, TATA salt has some 30% market share and many industries even now sell salt at loose. TATA salt still has a lot of runway for growth to keep capturing market share. If we check here then there is TATA chemical salt production plant in Gujarat. Even there the capacity is increasing from 1000 tons per annum to close to 1200 tons per annum. Capacity is going to increase by 7 to 8 percent.
Capacity is increasing because they are expecting salt business to grow by 8%. So, this was about the TATA salt business. After this, let’s come to the TATA tea business. Before talking about tea business, I would like to tell you an interesting thing When a business repeat something again and again then actually that thing is inbuilt in their DNA and culture. As we saw in salt then they took a commodity and made it a semi-brand or brand. Similarly, in tea business they took tea commodity product and made it into a semi-brand or brand.
So, today if I see it in tea so there are 2 categories in tea. One is black tea and 2nd is non-black tea. Black tea is high in consumption.
If you live in north then many times the tea which you drink at home is most probably a black tea. But there is non black tea and nowadays there are different types of nonblack tea introduced. 1st is which I see a lot around me, health-conscious people prefer it, that is green tea, right. After green tea, comes herbal tea and nowadays white tea is also introduced.
White tea yield is very less but white tea is very expensive. Lastly there is cold infusion tea coming which they have launched for international markets a lot. If you want to try on amazon then you can try on amazon. So, these are the 2 categories. If we look at tea consumption growth in India then tea consumption growth is 2 to 3 percent per annum as we can see it in the chart.
One of the reasons actually is penetration has come in tea of 97 to 98 percent. Tea penetration has reached almost every home. So, due to this the growth which is going to come more will maybe come due to premiumization or growth will come in more expensive point of view in non-black tea. So, this is tea business.
In tea business if we see here then 35% of revenue comes from Indian beverages. In this tea will be a substantial part means tea will be the highest part in this. If we discuss about tea business and we see the industry structure in India of this business then we get to know that in every region there are different types of tea players. So, in west market there is a tea by the name of Dhunseri. In west market in Gujarat there is a famous tea brand by the name of Wagh bakri.
Then in Maharashtra there is a tea brand by the name of Society. So, I think this brand will be very famous if someone is watching this video from Maharashtra, you must know this brand. Then in east market, there is a famous brand by the name of Gudrik tea. In Kolkata they have 55 to 60 percent market share.
If we talk about north market in North India then TATA tea agni is very famous. Pataka chai is very famous and nowadays a new brand has come by the name of Chai veda even that is very famous. In south India, TATA tea gemini and Red label brooke bond is also very famous. In PAN India, there is TATA tea, Tetley, Taj Mahal and Tata tea gold.
In PAN India, there is HUL and TATA tea. These are actually the only 2 PAN Indian players. If we look at their market share then TATA tea is 20% market share whereas HUL has 22 to 23 percent market share.
Wagh Bakri chai has 4 to 5 percent market share. So, this is about tea business and there is growth in tea business. Why there is growth? Because of distribution let gains. If we look at HUL number of distributors then HUL have some 8 million distributors. Even after having 8 million distributors, HUL market share is 23%. Not all 8 million distributors sell tea, some may sell personal products.
So, maybe 5 or 6 million distributors sell tea. Whereas TATA consumers only have 2.4 million distributors which we get to know if we read their latest con call. As the distribution expands, their market share in tea business expands, right.
So, this is interesting to notice. But the problem in this business is that as the tea prices are very volatile because if we look at tea value chain then we get to know these things. If we look at tea value chain then we get to know that there is a tea garden, then there is an auction and then there is private sale.
As auction happens so here the tea prices always remain volatile. Then TATA tea blending center comes, then there is zone distribution and then from distribution there is retailer and then it comes to the consumers. So, if we read their latest con call snippet then here, they say that Indian tea business had to walk fine line between margin, volume and market share means they have to walk very fine line due to which they had to face the margin pressure. Because the tea prices hyperinflation was happening. So, here in their con call or presentation they gave the data that in last year Q4 the tea price was 104 rupees per kg which in last quarter became 272 rupees per kg. Tea price increased by more than 120 – 130 percent within 3 to 4 quarters.
So, this is also a part of risk in this business. They have a tea business but the interesting thing happening in tea business is similar to what we see in milk industry. In tea industry what will happen is that the national players will slowly keep acquiring the regional players. As we saw TATA geminin so gemini is a famous brand of South India which is a part of TATA now.
If we talk about Dhunseri then they have 2 very famous brand in Rajasthan, Lag godha and I think second brand has also been acquired by them recently. So, TATA can actually play a role of consolidator here that a PAN Indian player can also acquire regional players. What is common in the DNA of salt and tea business? You are actually taking commodity and selling branded good. Before going to next business segment, I will tell you a very interesting quotation of Sherlock Holmes. So, Sherlock Holmes say that you see but you do not observe. It means you see but you do not observe.
So, here there is a very interesting business by the name of Starbucks. So, I am going Starbucks from last 6 to 7 years and Starbucks coffee has become very habitual for me because I study many times while sitting there. So, an interesting thing here is that I was going there from many years but I never observed that why Starbucks is winning compared to other national chains. But from last 1 to 2 years, I have started observing and I actually started writing that what they do exactly. So, let’s understand the cultural difference here. So, I go to Starbucks right so the barista over there or anyone who serve coffee, they really treat very well.
Secondly, they always ask you your name and when your coffee is ready, they announce your name and write your name on the cup. Along with this, they also offer you a card by the name of loyalty card. Now, you can deposit money in loyalty card and take the coffee, you also get different types of gifts from it. Moreover, the interesting thing is that whenever its your birthday month, you get a free beverage.
So, what is happening here? Charlie Munger says it as a lollapalooza effect. What is the meaning of lollapalooza? When you use different mental models and make the business then what happens is that customer actually stays there or a positive lollapalooza plays out in the favor of brand. Now, let’s understand which are the lollapalooza? So, 1st mental model which they did is liking bias. If they know your name and announce by your name for the coffee then you feel identified.
There is an impact of liking biasness. Then if the barista or the one who is serving the coffee greet us properly then you get one more bias by the name of reciprocation. You would also like to greet properly, right. Then there is commitment and consistency.
This is very interesting. If the barista is greeting properly and if the barista is asking your name too after greeting you then they will offer you a loyalty card also that you can buy the coffee with this card. You can deposit the money in this card. If we look at one fact here which is very interesting, actually we didn’t knew while making the video, later on we get to know this thing that TATA Starbucks loyalty card has 1.2 billion dollars if we look Starbucks all over the world. If we compare it will PayPal then it is close to 13.2 billion dollars.
So, the customers are coming again and again, right. So, consumer loyalty is created very interestingly here. Then you must have seen in loyalty card that they give different merchandise for free.
I think they also give 1000 or 2000 rupees cups for free due to which you use loyalty card more and one more feature of loyalty card is that they offer free beverage on your birthday month so that you can use loyalty card more. So, today their sales, if we talk about Indian sales then 32 to 35 percent comes from their loyalty card. So, this means customer is coming back. If customer is coming back then this means there is some kind of brand, right. Some kind of recall is been created.
One more interesting thing which they have created is that all the Starbucks where I have been to that there even on their machines it is written that if you didn’t like the coffee then you can return the coffee and take another one, right. If you compare this with other coffee chains then the cultural aspects are missing, right. So, due to this reason here an interesting competitive advantage is created. Because Starbucks all over the world from last many years is providing these cultural insights.
One more interesting cultural aspect which is not present in other brands or coffee chains is if you notice and which I observed sometime back, even our teammates observed that the employees of Starbucks call each other partners. Why they call partners? Because in psychology there is a very interesting concept that by the name of framing that if you call each other partners then you will actually feel that you are business partners, right. So, through business owner eyes, you can view the business. So, very interesting that through cultural training or cultural training, how can you build such a big empire.
Now, let’s come to Indian potential. Let’s see in India, how many stores are there of Starbucks because they have 50 – 50 joint venture with TATA consumers. So, we get to know that in 2012, there were only 12 stores which in 2020 first nine months have reached close to 209. So, the growth is almost 15x but these numbers are nothing if we compare with China. So, in China there are some 40123 stores of Starbucks, right. If we see in US then in US there are some 15,000 stores of Starbucks.
So, this just gives you an insight that how much runway is there for the growth of the company in India. Because even today the sale is close to 540 crores and if we compare with China then they have 3.2-billion-dollar sales, in China specific region. So, in India there is only 540 crores sale. So, again this gives you an insight into the potential size of opportunity that how much this business can grow, right.
So, this was TATA Starbucks and while making this video, we felt this was very interesting that real investing insights can come lot from qualitatively. So, let’s discuss about the next business segment. Other two segments is of TATA Sampann segment and next segment is of International business segment.
So, we will first talk about TATA Sampann. I think it is less than 10% of other food business and TATA sampan majorly consist of 3 businesses. First is of pulses businesses which we will discuss about. Then 2nd business is of RTC and snacks.
What is RTC? It is ready to cook and snacks business. Third line of business is of masala and spices. Like we discuss about MDH and Everest so we are discussing about same line. Let’s first see the potential size of opportunities. When we talk about TATA dal or TATA pulses in TATA sampan then pulses in India is of 1,50,000 crore categories. Out of which 1% pulses is organized means it is branded and remaining 99% is unbranded.
If we discuss here about spices then we get to know that it is a 60,000 crore category out of which today only 30% is branded. I will tell you a very interesting thing in spices that you must have seen MDH business a lot so MDH business sale is close to 900 to 950 crores. The profitability is close to it means the margin in this business is very high.
Secondly if we see in International spices then there is a world market leader company by the name of Mccormick. If we look at Mccormick ROE and ROCE and long term stock chart then we get to know that if this business works well then this is a very long runway business, right. Because once someone chose a masala or spices then it is very difficult to change because it matches with your taste buds. 3rd if we see RTC business then here they have recently launched pohas and after poha, they have also launched chilla mix and also going to launch Idli batter and this category is also close to 40,000 crores.
So, when they merged TATA chemical with them, merged their consumer business product with them so one of the reasons was that this business category is very huge but in all the categories there is some or the other problem. If we see the problem in pulses that the consumers there is not much brand conscious in pulses because you wash and eat the pulses. So, due to washing it or emerging it in water, the brand element gets carried away.
So, here what they are trying is that as they tried in salt and tea, from commodity to a brand. They are making a kitchen brand of TATA sampann, they want to master kitchen brand. If there is housewife at your home or a cook or anyone else who cooks food then they want to create a kitchen brand. Due to this reason, they have launched all food items of kitchen, right. So, let’s look at the initiatives once that what are their initiatives in pulses. They have taken an initiative of organic pulses.
Then they have taken an initiative of low oil absorb basin means this basin will absorb less oil. Then they have taken initiative of unpolished pulses. Then they have boosted the spices by natural oil. They are taking such initiatives and doing marketing.
Along with this if we will read in annual report then here, they have written that driving the conversion from unbranded to branded products is built into the DNA of the organization across food and beverage. We have a proven track record of creating category defining brands. We have already created TATA salt and TATA tea, if we create TATA sampan also, if we capture kitchen, if we capture the shelf of kitchen then again this could be a very big optionality. But the risk or downside here is like I am able to show you a comparison so like we saw the mental model of private labels so if we compare their pulses prices with Dmart, Jio, Reliance, Big bazar then we get to know that their pulses prices are actually highest. Because private labels are actually selling pulses at cheaper rates and moreover, private labels are showing shelf space more. Due to which they have to go a lot through e-commerce route.
In e-commerce, I think they have 25% market share in pulses. Let’s see how the category evolves but today this category is very niche and fast-growing category. So, this category will be one to watch out for optionality’s. After this we will come towards International business.
Coming to the International business so International business is close to 38% revenue. But in International business they have 3 main geographies. 1st is US, 2nd is UK and 3rd is Canada. In UK and Canada, they have a tea business which is major. In tea business, I think in UK they have 50% market share in black tea. Whereas in Canada they have 30% market share in black tea.
So, here their market share is maximum. But the problem here is as we can see in this graph that black tea consumption all over the world is falling down. It is falling down a lot in western countries.
The coffee consumption at the same time is increasing. What are their reasons? 1st reason is tea has struggled to evolve a changing consumption pattern. It means tea is struggling to evolve changing consumption patterns. What are the reasons? There are 2 major trends introduced in coffee.
1st is out of home coffee means costa coffee, Starbucks, other different coffee houses like in India there is Café coffee day too so these are the out of home consumption of coffee which is increasing. Secondly the curic cups which is by the name of K cups as we can see in this video. Also, if we talk about pods like we can see here that pods consumption is also increasing a lot. Due to this reason, coffee consumption as compared to tea is increasing rapidly. Last reason for reduction of tea is the brands in tea are trying to enter different types of tea like specialty tea, herbal tea and infused tea like we discussed earlier about non-black tea. Similarly, TATA is also trying the same thing today.
So, in Canada if we see the business growth then in this quarter the business growth was very great because there was pandemic lockdown and tea is actually associated with immune benefits. So, this is their UK and Canada business. Along with this, their US business own a very famous coffee brand by the name of 8’o clock.
Overall, I think US market of coffee is the biggest worldwide but they have only 2% market share here. Rest in east coast they have close to 4 to 5 percent market share. They deliver this coffee in 2 forms. 1st you get the coffee in bag form.
You can buy the coffee in bag form. Secondly, they have tie-ups with K-bots like we saw curic machines in 1st video, similarly, they have done tie up with them. So, they deliver in 2 forms. Here the interesting thing is that in this business if we do a rough calculation then they have anywhere between 17 to 19 percent EBITDA margin which is on a good side means it is a lot of EBITDA margin in coffee business. So, this is what makes this interesting.
In International business, they had the business in Czech Republic, Russia and Australia. They have divested these 3 businesses. Since we discussed that group structure is getting simplified along with it they have divest the underperforming international businesses. But going forward, we feel that international business is not their growth market. So, here only 4 to 5 percent growth will come because they are very matured categories and the main thing like black tea, black tea consumption is also reducing.
So, I think this is not a growth area. Along with this, we will move to their triggers for earnings growth, anti-thesis pointers and financials. So, 1st what are the triggers of earnings growth in this business? Like Peter Lynch says it, let’s see what are the sources of earnings growth. So, 1st is that you are introducing a new product.
2nd is geographical expansion. Today, we will just discuss about first 2 growth. New product introduction and geographical expansion. Here if we see an interesting thing then here recently the CEO has changed. So, Mr. Sunil Dsouza who was the CEO of whirlpool have come here. If we see the last 5 years track record in whirlpool then we get to know that in whirlpool the operating profits went from 331 crores to 673 crores.
Whereas sales business reached from 3200 crores to 6000 crores within 5 years. So, again a very interesting trend that you got a CEO who have a lot of industry experience. Because before whirlpool, he has worked 15 years in Pepsi and before Pepsi, he has worked 5 years in coco cola.
So, again management has changed. What are the triggers of earnings growth? We discussed about merger so what happened after merger? A very interesting thing happened. You can see here that their distributor is consolidated due to which close to 63% reduction occurred in distribution. Because they have consolidated food and beverage distributors. Same distributor will sell food and beverage both. Secondly what they have done is that they have increased their sales representatives by 30%.
If we see their accounts receivables then it has decreased by 50%. So, if their trade receivables has decreased by 50% then in business working capital reduction has happened. Again, I will tell you to watch ROCE video who haven’t watched it because what happens with working capital reduction is your business gets more cash, right. So, again a very interesting trend. One more thing which they have done in distributor case is that in the consignee agent system means their salt and tea business, their distribution system was very bad. So, there was consignee agent then distributor then stockiest then retailer.
Now, they have removed consignee agent altogether due to which now there is distributor then stockiest then retailer. Due to which their cost rationalized more. Due to merger, many benefits are playing out due to which we will be able to see margin expansion. So, this is merger which is trigger of earnings growth. 2nd trigger of earnings growth is geographical expansion.
I will give you an example here that recently they acquired a brand by the name of soulful. So, soulful basically makes healthy snacks which is made out of Raghi. So, here as we can see that what soulful does actually.
So, soulful is again present in only 15,000 outlets which they have acquired but their reach is 2.4 million outlets. So, their target is that they want to take distribution from 2.4 million to 4 million. This reminds me a lot of Britannia in 2015. So, for the SOIC intensive students we did a detailed case study of Britannia which is the conclusion version of this video in it, right. So, again here this is also a source of earnings growth that the distributors are going to be from 2.4 million to 4 million.
Direct distribution reach will reach from 0.5 million close to 1 million in next year. Again, in distributions, there will be expansion. If we talk about pulses and other businesses so as today, I have less range of distributor so after expansion when my reach will increase then automatically my market share increase, right. So, again these are the triggers for earnings growth.
If we see anti-thesis pointers here then 1st anti-thesis pointer is that the problem in this business is that even today 40 to 45 percent business gets affected by commodity prices which is a volatile business. So, this is 1st anti-thesis pointer. What is 2nd anti-thesis pointer? If the thesis we made of merger that margin expansion will come etc. if that doesn’t play out then that could be risky to the thesis. What is 3rd anti-thesis pointer? There is a lot of goodwill on balance sheet so if goodwill impairment is done then due to this, I think for 2 to 3 quarters the earnings can get depressed because goodwill is on their balance sheet from many years.
So, these are some of the anti-thesis pointers present in the business and there is one more anti-thesis pointer that if private labels enter a lot then as it is in such categories where creating brand is little difficult. Even though ITC did in Ashirward, Marigold did in Parachute, similarly they did in TATA salt so we have to see this that can they do the same thing in pulses, masalas and spices. I think this will be interesting to watch out for and in financials, if we check their financials then we get to know that their revenue has reached from 7052 crores close to 9637 crores, right. If we see their ROCE then ROCE looks depressed today at close to 8.1%. Why it seems depressed? Because there is goodwill on balance sheet.
If we exclude goodwill and calculate ROCE then ROCE is 28.7%. Now, this goodwill is because of the 10 acquisitions happened between 2010 to 2015. So, many investors says that sometimes if the acquisitions are very old the you can exclude the goodwill and calculate the returns ratios. I think it is up to once own interpretations and if we look at financials here then if we see net profit then it is 457 cores to 460 crores. There is 41% growth in profit before tax from 768 crores to 1084 crores. So, again a very interesting business and possibly what can happen going forward that there can be an expansion in EBITDA margin and in your gross margin also an expansion can come if you preimmunize your portfolio.
So, with this we will conclude the video and for SOIC intensive students, the conclusion of this video and Britannia case study SOIC continuous learning video has been already uploaded on your dashboard. Thank you for joining us. Hope to see you in the next business analysis of SOIC.
2021-03-22 14:26
