Management discussion and analysis report
Tata Global Beverages is a virtually integrated beverage business with the vision to bea global leader in branded "good-for-you" beverages, through disruptiveinnovation, strategic acquisitions and organic growth. The new name of your Company,adopted in July 2010, united the beverage interests of the Tata Beverage Group under oneumbrella and signalled its global ambition. Your companys markets and operations aretruly global, with 70% of turnover now generated outside of India, up from 65% in theprior year.
The coining of Tata Global Beverages was the logical step in the Groups evolutionfrom its history in tea plantations to becoming a marketing and brand-focusedorganisation. It is no longer a tea and coffee commodity business - over 90% of our salestoday are from branded products. The company has a portfolio of global and regionalbeverage brands, which we develop, market and distribute to customers.
During the year, your Company continued its exciting transformation. Yourcompanys raison detre was established and it has set out "to make theworld a better place through sustainable hydration". Your companys strategy toachieve this mission is based on six pillars - products, brands, distribution, people,process and sustainability. The culture and values of Tata Global Beverages add up tosomething unique that can be crystallised as a sense of "responsibleirreverence".
1. Industry Structure and Developments
Tea and coffee continue to be enjoyed by consumers in many countries around the world.Your company possesses strong, established brands in both categories that enable it tocapture a sizeable proportion of the global tea and coffee market.
A strong trend is evolving as part of the consumers health and wellness agendatowards "good-for-you" beverages, differentiated by function, flavour andformat. Your Company is on its way to seizing and fuelling this trend, such as throughinnovative tea variants and through alliances with third parties who have specificexpertise.
Furthermore, sustainability and environmental concerns are playing a greater role inthe business of consumer brands. Your company has embedded sustainability into its missionstatement and roadmaps are now in place to tackle the issues of packaging, ethicalsourcing, water and climate change. We have committed to source 100 per cent of our keyagricultural raw materials and packaging components from sustainable sources and ensurethat no packaging goes to landfill by 2015. We are also working towards betterunderstanding the Groups water footprint and committed to reducing carbon emissions.
In terms of your companys supply chain, tea crop in India which saw a strongstart in 2010 however ended lower than the previous year due to the impact of adverseclimatic conditions both in South and North India besides pest attacks in certain parts oftea growing areas. The crop at 966.2 M kgs in 2010 was lower than the previous year by12.50 M Kgs .The lower crop further impacted the export of teas from India. India exported193.29 M kgs in 2010 as compared to 200.62 M kgs in 2009.
Domestic demand for teas grew by three per cent to four per cent and coupled with thelower supply led to increase in raw tea prices.
In the current year, there were good rains in the tea growing districts of Assam andthe crop situation looks good. The market remained firm with mostly clean, old season teasbeing well competed for. Quality teas are expected to witness good demand from thedomestic markets and continue to sell at a premium while medium / plainer varieties forboth Orthodox / CTCs should sell in line with quality. The outlook is for a dearer,strong market as new seasons teas go on sale. In contrast, the markets in SouthIndia are witnessing a weak trend as the weather has been drier.
By comparison, the global tea crop position during 2010 was comparatively in line withthe previous year. The position was impacted by adverse weather conditions in most teagrowing areas. There is a risk of volatility, due to the tight supply / demand scenario,but with long rains having started in Kenya, the situation is expected to ease, althoughit is a little early to predict that the rains will translate to good crop. The Kenyan andSri Lankan crop in 2010 was higher than the previous year.
With regard to Coffee, 2010 began on a steady note for both Arabica and Robusta. Goingby the prospects of the biggest ever on year crop in Brazil that wouldultimately result in only a marginal surplus in supply, no changes were witnessed in theprevailing price levels. Even though the market started steady there was a significantupward journey from the end of June onwards which meant that the price of Arabicaappreciated by about 100% by the end of the year. Robusta was not left untouched by theexplosive increase in Arabica but the extent of increase was far less at about 50%, as itshowed a greater supply surplus than Arabica.
The water business from the current year will be undertaken by NourishCo BeveragesLimited, the Joint Venture between your Company and PepsiCo. NourishCo have already drawnplans for distribution of Himalayan and the newly developed fortified water products. Thevision of the water business is to offer a portfolio of leading edge health and wellnessproducts in a wide range of formats and delivery options to straddle the entire consumerpyramid.
2. Consolidated Performance
Consolidated income at Rs. 6,005 crores for the year grew by three per cent against theprior year, despite a challenging trading environment, driven by price increases in thebranded business and the favourable impact of the acquisition.The Group reported ayear-on-year sales growth of six per cent at constant exchange rates. OperatingProfitability was adversely impacted by commodity cost increases and increased investmentbehind brands and new market launches. Further, costs were incurred in creating globalcapabilities across geographies and functions. As a result, Profit after tax for the yearwas at Rs. 292 crores as compared to Rs. 393 crores reported in the prior year.
In the UK & Africa, the underlying income was higher than the prior yearattributable to price increases in the UK and favourable impact of increase in stake inour Joint Venture in South Africa. Canada total income was ahead of prior yearattributable to strengthening in the herbal/ethnic/speciality sales and growth ininfusions (tea-based sachets) while Europe & Middle East sales improved due to impactof acquisition. The total operating income of South Asia growth against prior year wasattributable to volume and price increases in Indian branded tea business. It was achallenging year for the US region resulting in some lower volumes as a result of priceincreases to recover higher input costs.
Strong brands and your Groups investment behind them meant that the Tata GlobalBeverages is both the volume and value leader in Canada whilst continuing to maintain itsvolume leadership in India.
The Group continues to focus on geographical expansion in addition to widening theproduct offerings. Some of the key initiatives included test launch of SUKK (a jelly baseddrink); T4 Kidz, Tetley Green Blueberry and Lemongrass & Honey in the UK; Tetley forSoy, Billy Campfire and Kitchen Brew variants in Australia; Metabolism Boost EightOClock coffee in the US and two new Tetley Infusions flavours in Canada. In terms ofdistribution gains, your company launched products into markets in the Middle East and arange of Eastern European countries.
The consolidated financial highlights for 2010/11 are as follows:
| || || ||Rs. Crores |
| ||2010-11 ||2009-10 ||Variance |
|Net Operating Income ||6005 ||5821 ||184 |
|Operating Profit ||509 ||619 ||(110) |
|PBT before Exceptionals ||485 ||625 ||(140) |
|Exceptional Items ||10 ||16 ||(6) |
|PBT ||495 ||641 ||(146) |
|PAT ||292 ||393 ||(101) |
|Group Consolidated Net Profit ||254 ||390 ||(136) |
With a view to improving competititiveness, across key geographies and functions, yourGroup is undertaking a strategic review of the cost base and this exercise is expected tobe completed during the current year.
We have also embarked on a medium term development plan for the beverage businessidentifying growth opportunities within existing categories and as well as through newbusiness streams.
|3. Standalone Financial and Operating Performance || || |
| || ||Rs. Crores |
| ||2010/11 ||2009/10 |
|Total Income ||1914 ||1837 |
|Profit before tax and exceptionals ||207 ||255 |
|Exceptional Income*(net) ||23 ||240 |
|Profit before tax ||230 ||495 |
|Provision for tax ||49 ||104 |
|Profit after tax ||181 ||391 |
* Exceptional income represents Profit on sale of non core investments offset by officereorganisation costs. In the prior year exceptional income included Profit on sale ofshares in an associate company offset by amortisation of employee separation scheme.
While Total Income improved as a result of a good branded product performance,Profitability was affected due to increase in input costs and competitive pressures. Theprice increases taken by your company however softened the impact to a certain extent.
4. Product / Brand Performance
a) International Operations
Branded income for the year ended 31 March 2011 improved over the previous year on theback of price increases in most of the geographies.
Branded Profitability for the year is adverse to prior year mainly due to the steepincrease in commodity costs coupled with investment for growth. Significant amounts wereincurred during the year on investment behind brands in markets like the UK, Europe andthe US. In the UK for instance, the Tetley Tea Folk returned to consumer advertisingcampaigns after an absence of nearly a decade. In Canada, Tetley Herbal was repositionedto consumers using striking advertising and promotional activity.
The Tetley brand continues to develop a broad range of new and exciting teas to suitall cultures, tastes and moods in a variety of formats around the world. It has recentlyembarked on a sizeable global branding project, which led to a new, unified appearance forthe brand on a global scale. Currently market leader in Canada, the brands stronginnovation agenda includes the first launch of Extra Strong tea, for a fuller flavour, Teafor Soya, specially created to be drunk with soya milk, and Infusions aliquid Real Brew tea mix for water, which is performing well in Canada.
Region wise key performance highlights were as below:
Eight OClock coffee launched a new Metabolism Boost variant and refreshed itspackaging. The brand was also selectively launched in certain European markets.
In Canada, Tetley has become the leader in Speciality tea in addition to Black tea andhas gained considerable share in the last 52 weeks. The year saw the introduction of ourGood Earth brand in the market.
In the UK, the Tetley Tea Folk were launched after many years and attracted quite a lotof press and public attention. Tetley brand relaunch featuring the Teafolk contributed tothe highest spontaneous awareness amongst consumers for three years.
In Europe, the Tetley brand saw significant sales improvement in Poland. The brand wasalso launched in to Middle East markets.
Your Group will continue with its mission to make the world a better placethrough life enhancing sustainable hydration. Towards this, an Innovation Council,with members from cross functional teams across the Tata Global Beverages Group has beenestablished to ensure full engagement in the innovation process, and to bring projects tomarket more efficiently. A slew of growth initiatives are being actively pursued likeTetley Infusions, pack re-design for Tetley brand, Sukk launch, T4 Kidz, Organic tea,Redbush in key markets.
b) Domestic brands
All the key Indian brands performed well during the year and your company maintainedits volume leadership. A major highlight was the success of the Jaago Re campaign, centredon social awakening. Communication was integrated for the four major Tata Teabrands Tata Tea Premium, Tata Tea Gold, Tata Tea Agni and Tata Tea Life - into oneemotional platform that has resonated well with consumers and enhanced brand value. Theintent has been to ensure that consumers of different Tata Tea brands see Jaago Re astheir brand campaign. Your Company proposes to continue with the Jaago Re campaign,interspersed with specific brand communication as and when there is news on any of thebrands in order to capitalise on its success. In pursuance of your Companys strategyto offer innovative "good-for-you" beverages, product development onvitamin-fortified variants is also under way.
Several brand initiatives were taken in India, including successful restaging of theflagship Tata Tea Premium, consumer on pack promotions in Tata Tea Gold and Tata Tea Agnias well as repositioning of brand Chakra Gold with the new thematic campaign whichstrengthens the "open up your mind" proposition, which aided improvement in themind shares and imagery parameters. Several new products were launched in India to widenthe portfolio. The water business in India saw marginal drop in volumes against theprevious year due in part to the restructuring of distribution. This business along withthe proposed launch of functional water products will now be launched from our JointVenture with PepsiCo India, NourishCo Beverages Limited.
The outlook for your company is promising, in light of its refreshed mission and visionand clear strategic framework. Tata Global Beverages leadership team and employeesat all levels are in line with the strategy and working towards making it a success.
The recent brand investment and key campaigns such as Jaago Re and Tetley Tea Folkshould serve to enhance brand value in the consumers eyes so that our brands remaintop of mind.
Disruptive innovation is core to your companys success and culturally andstructurally Tata Global Beverages is in a good position to deliver this with its newGlobal Marketing and Innovation and Research and Development teams that are specificallyfocused on creating growth outside of the core business. The companys productdevelopment team has developed an exciting range of water based and other products whichwill fuel our growth in future.
Your company is also attracting key talent with strong FMCG background who bringexpertise and experience that can be leveraged to fuel growth.
6. The Environment
Consumer confidence remains fragile in many markets, with economies around the worldfaced with inflation, low interest rates, unemployment and minimal GDP growth. Consumersthemselves have been particularly susceptible to grocery bill inflation so areprice-sensitive and looking to economise by either shopping for promotions or tradingdown. In the UK for instance, according to Nielsen research, goods bought on promotion areat an all time high of 40%. This has affected your companys volumes and margins tosome extent. Your Company invested in promotional spend to retain market share such ason-pack promotions. In spite of a fragile consumer mindset, your Group was able toimplement price rises across a number of brands such as Eight OClock Coffee andTetley Tea and your Company continued to invest in marketing-communications initiatives toaugment brand affinity in order to protect market share.
The international retail market is especially competitive in the current climate, asconsumers shop around more in their Efforts to economise. Brand owners, such as yourCompany, are vulnerable to this market scenario because retailers are continuallyfocussing on costs to assuage demand weakness. As a result, your Company has had to investin trade promotions to remain competitive. Promotional spend as % of sales has fallen butremains over 13% of total sales. As in the past, in core markets, the strength of brandsand sales and marketing teams capabilities allows us to mitigate some of these pressures,albeit not entirely.
c) Commodity Prices
In line with other consumer-facing businesses, your company was faced with significantrises in input costs. In particular, raw tea and coffee beans saw significant cost risesduring the year. The commodity costs for tea and coffee have been on an upward spiral:Coffee is at a 30 year high, with Arabica rising by 100% in the financial year. Tea priceshave risen in the past few years and the past year saw further volatility. Your Companycontinued its strategy of hedging and scenario-planning to develop models to manage risingcommodity costs. The cost base faced additional pressure from energy, transport andpackaging costs.
The ambient tea and coffee market is extremely competitive, with all players chasingmarket share. Recent years have seen the rise of retailers own-brands as well asincreasing innovation and brand investment by more established players. Some of the morepremium players have repositioned their offering to tap into the trend for down-trading.Local players holding prices down in India meant your company was forced to reduce pricesfor some products to retain market share. Your company has responded to these competitivechallenges by increasing its brand investment so that customers and consumers pick ourproduct off the shelf ahead of its competitors. Your Company has also invested inpackaging to make products more appealing, modern and engaging.
e) Interest Rates
The economic recovery post the credit crunch, as expected, is taking substantial timeespecially in the developed economies. Consequently, interest rates continue to be low.Within the prevailing environment, strong treasury performance has optimised the returnson surplus funds, whilst at the same time leaving them readily available to supportstrategic growth. To minimise the interest outflow, the Group has repaid its loan in theUK and refinanced its high cost loans in India to a low interest coupon bond.
f) Exchange Rates
We experienced volatile exchange rate movements during the year. Re/$ during the yearhad a high of 47.69 and a low of 44.10 with its median at 45.57. Similarly :$ had a highof 1.64 and a low of 1.43 with a median of 1.55. Our strategy continues to be to takecautious positions with regard to hedging and ensure covering known exposures. For our UKbased business wherein tea is sourced in $ but sold to customers in , change in :$ hashad a material impact, adversely impacting the underlying commodity costs. Our exportoriented extraction business from India was also adversely impacted by the $ / Re exchangerate which was lower than the previous years median of 47.73. With over 70% of ourbusiness outside India, exchange rate movements have a translation impact on the financialperformance when expressed in reporting currency (Indian Rupees).
7. Opportunities and threats
Your Company is well poised to grow its wider beverage agenda across the globe. It hasvery strong brands in its portfolio with an ever diversifying product range. Over the pastfew years the company has extended its geographical reach mainly through acquisitions. Thecompany continues to focus on category enhancement to mitigate the risk of de-growth inblack tea market especially in the western world.
Your Companys "good-for-you" beverage ambition is a key opportunity asconsumers around the world develop a stronger appetite for products with health andwellness attributes. The company is increasingly looking for growth opportunities in thefunctional beverages category. During the year, your Group invested in Rising Beverages,the owner of the ActivateTM brand. It gives us access to the functional watercategory which is one of the fastest growing beverage categories in the US.
Similarly, NourishCo Beverages Limited, in which we and PepsiCo own a 50:50 equitystake, has potential for growth in line with your Companys "good-for-you"beverage growth strategy due to its focus on health and wellness beverage products. TheMoU with Kerala Ayurveda Limited to enter into a 50:50 Joint Venture may yield thedevelopment of leading edge, functional and great tasting beverage and food products basedon proven Ayurvedic recipes.
The non binding Memorandum of Understanding (MoU) with Starbucks Coffee InternationalInc. for a potential strategic collaboration in areas of sourcing and roasting of coffeebeans may yield other growth opportunities.
The integration of the business and strengthening of key business capabilities such asGlobal Research and Development, Marketing and Innovation, give your company potential tocontinue to pursue disruptive innovation to achieve its mission.
Sustainability presents a key opportunity for your company to create competitiveadvantage that builds long term value through stronger, more sustainable brands which willappeal to customers and consumers alike. It will also future proof our supply chains andhelp to secure a licence to operate.
Your company has managed to implement a number of price rises and the customeracceptance is encouraging. We will endeavour to continue to monitor and amend pricing toprotect margins and shareholder value.
As the world recovers from the recession, the challenging trading environment, intensecompetition and fragile consumer confidence will continue to challenge volumes andmargins. Price sensitivity amongst customers will make it difficult to fully protectProfitability by raising prices to recoup any future increases in commodity prices. Thetea and coffee buying teams will maintain their close monitoring of commodity costs andimplement the sourcing strategy accordingly. Ambient tea and coffee and"good-for-you" beverages are highly competitive FMCG categories, so your companywill continue to gather market intelligence on new market entrants and pertinentactivities by existing players.
8. Risks and Concerns
One of the major challenges for our business is the increase in input costs. Astrategic review of the cost base to identify cost rationalisation opportunities andimprove competitiveness is being undertaken.
The year under review had been further challenging due to a tough and competitivetrading environment in the branded space across key regions. Challenges exist in terms ofpricing, intense promotional activity by competition and potential retail consolidation inthe UK.
9. Human Relations and Industrial Relations
Subsequent to the change in name of the Company from Tata Tea Limited to Tata GlobalBeverages Limited in July 2010, the names of most of the Companys overseassubsidiaries were also changed with Tata Global Beverages being reffected in theirrespective new names. The roll out of the new name and identity - Tata Global Beverages has been one of the definitive vehicles of integration of the erstwhile independentidentified businesses.
As the most publicly visible element, your Companys new corporate website,www.tataglobalbeverages.com launched in February 2011 is the vibrant online face of yourcompany giving anyone who visits an insight into our brands, product innovations,performance, people and much more.
Culture change and employee engagement
Our first wave of Culture Champions, a diverse group of people from acrossTata Global Beverages, have worked together as one team to make waves and bring ourculture to life as described by our directional themes. Together they have successfullyactioned 36 initiatives to engage their colleagues and provide catalysts for change. Thisteam of Culture Champions cuts across the traditional hierarchy and organisationstructure.
ThinkBIG!, our unique employee innovation competition and a global culture championinitiative, was a major highlight of our innovation and employee engagement journey. Itcaptured peoples imaginations across the globe, resulting in 1,300 new ideas anddriving both integration and transformation.
In combination with these culture initiatives, the senior leadership team engaged withemployees to share and discuss the Groups newly determined strategic initiatives ata series of regional road shows, supported by other communication vehicles.
Integration and consolidation within India
The complex process of integrating the functions of the pre-existing businesses inIndia has been achieved with minimal disruption and is already bringing about positiveresults. In addition, the sensitive matter of relocating employees from our historicalhome in Kolkata to new offices in
Bangalore was successfully accomplished with employees reporting that they had beentreated fairly and openly. Union negotiations have been successfully concluded.
During the move from Kolkata to Bangalore the opportunity was taken to significantlyreduce the cost of the administrative functions.
The Industrial Relations situation across all the locations of the Tata GlobalBeverages Group was harmonious. The total number of employees on the rolls of Tata GlobalBeverages Limited as of 31 March 2011 were 2,373. The beverage group which includes theCompanies subsidiaries employs over 8,000 people, including plantation workers.
10. Internal Controls and Governance
Your Company has adequate internal controls and robust systems in place to ensure thatall its assets are fully protected. The Internal Audit Department carries out an audit ofthe transactions based on a programme approved by the Audit Committee. The Audit Committeeof your Company periodically review the observations made by the internal auditors intheir reports with specific focus on the control environment and suggest measures forimprovement where necessary. The Executive Office in UK also periodically monitors themanagement information reports received from various units. The Executive Office also hasa direct interface with the respective Regional Presidents at which it reviews theinternal controls and systems besides operational issues. The Company is also looking atstrengthening the reporting/planning system for improving controls and data drill downcapabilities which would be an important element of the decision support system within thebeverage group.The Tata Code of Conduct has prescribed guidelines outlining the keydisclosure and governance requirements besides mandating the observance of applicablestatutory requirements by the Company. Your Company and its senior management have afirmedadherence to the Code.
11. Cautionary statement
Certain statements made in this Report relating to companys objectives,projections, outlook, expectations, estimates etc may constitute forward lookingstatements within the meaning of applicable laws and regulations. Actual results maydiffer from such expectations, projections etc., whether express or implied. Severalfactors could make a significant difference to the companys operations. Theseinclude climatic conditions, economic conditions affecting demand and supply, Governmentregulations and taxation, natural calamity, currency rate changes etc. over which thecompany does not have any direct control.
Your company continued to enjoy growth despite being faced with intense cost pressure,particularly from tea and coffee commodity costs, coupled with a challenging tradingenvironment. Yet the Group was successful in taking price increases and maintaining itsstrong market position in many of its key markets. The Group continues to integrate andbuild global capabilities, whilst investing behind its brands and products and new growthareas.