Tata Global Beverages is a global natural beverage business with brand presence in over40 countries. Your Company is the second largest player in branded tea in the world andhas growing interests in tea, coffee and water. Over 250 million servings of its brandsare consumed every day around the world. Your Company focuses on creating 'magicalbeverage moments' for its consumers through its stable of innovative regional and globalbeverage brands, including: Tata Tea, Tetley, Himalayan natural mineral water, TataWater+, Tata Gluco+, Good Earth tea, Grand Coffee and Eight O'clock coffee.
Your Company, being in the natural beverage category, follows an overall strategy tobuild on its strengths -differentiated offering, understanding consumer requirements,scale, internal competencies and strong brands. Whilst tea accounts for around 74 % of ourrevenue, coffee accounts for 25% and water and other products contribute to the rest. YourCompany is also a global player with 62% of the consolidated revenues coming from marketsoutside India such as United Kingdom, United States of America, Canada, Russia, France,Australia and Europe.
industry Structure - Global economic, consumer and competitor trends
The year under review continued to present a mixed picture in so far as the globaleconomic trends were concerned. Whilst there are positive trends in GDP outlook incountries like India, UK and US, in Europe, the outlook appears to be muted with severalcountries passing through difficult conditions. Russia witnessed significantmacro-economic volatility during the year.
Based on the economic scenario a few customer behavioral trends are emerging.Customers, especially in the international markets, are continuing to seek better valuethereby increasing competitive intensity. The consumer product choices are increasinglyshifting towards health, wellness and lifestyle. There is also a growing trend for morepremiumised products of higher quality in many markets.
The global challenges have led to a category decline in black tea in certain developedmarkets, change in retail promotional strategy and high competitive intensity. In additionto this, since customers have become value conscious, there are instances of private labeland regional players gaining in market share.
Your Company continues to constantly strive to meet these challenges with a continuoussupport to brands, category expansion, innovation, investment in new ventures and costrationalisation. Our focus on natural beverages translates to focus on health andwellness. Your Company has kept pace with today's lifestyle, understood the palate uniqueto each region and offers a range of interesting and innovative products across ourbeverage portfolio.
Industry Structure - Commodity Trends Tea
The Indian tea industry experienced extreme weather patterns, high temperatures and avery uneven scattered rainfall coupled with crop loss, increased pest activity due tochange in the bio-diversity and long spell of droughts. Assam's tea industry in particularhas, during last two decades, faced the challenge of rising input costs, challenges onproductivity and unremunerative prices. It is therefore imperative that measures beadopted to increase production by stepping up yields. In recent years, the shortage oflabour in tea estates had also thrown up a challenge to meet targets. On the plantationside, all these factors can have an adverse impact on return on investment while on thebranded side these factors can create inflationary pressures.
India's tea output stood at 1,184.8 million kgs in 2014 behind by 15.6 million kgs or1.3% over previous year. India clocked an export volume of 201.2 million kgs in 2014, downby 17.8 million kgs over previous year. 2014 witnessed a hard commodity environment acrossall categories in North India, primarily due to lower crops in Assam and a steady growthin domestic tea consumption. The Tea Board of India had issued Plant Protection Codeguidelines which came into effect from 1st January 2015.
In the global arena, Kenya saw a record crop for the second year in succession withoutput reaching 435 million kgs, up from 431 million kgs in the previous year and up 15%versus the previous 5 year average. With inflated supply lines and production far inexcess of weekly uptakes, prices fell from a high of $2.56 at the beginning of the yeardown to an auction average of $1.89 in December 2014. It is unlikely that we will see arepeat of record production of the past two record years and therefore prices will beabove the average levels we have experienced in the last 24 months.
Globally, black tea production in 2014 decreased by 11.9% with lower than previous yearproduction in most producing countries.
According to the World Commodity Forecast from The Economist Intelligence Unit, much ofthe growth in global tea production will come from a rise in green tea output which hasoutpaced black tea in recent years. Green tea has risen from a quarter to one-third ofglobal production in a decade. In China green tea accounts for 84% of production andVietnam over one half. Green tea consumption has risen in both producing countries and inkey markets such as the US and Western Europe.
The global coffee production of the 14-15' season is estimated at 142 million bags andconsumption was 149 million bags.
As per ICO estimates, the total consumption grew at the rate of 1.5% in 2014-15.Brazil, the world's largest coffee producer country faced a severe drought and effectswere reflected in their coffee output. Similar concerns faced in other parts of the worldresulted in sharp increase of Arabica Coffee price in the second quarter of 2014-15.However, Vietnam who are one of the biggest producers of coffee recorded a bumper coffeeproduction. The escalation of the Robusta price was comparatively less. The consumption inthe exporting countries continues to increase significantly and the total consumption grewat the rate of 2.7% in the year 2014-15.
In the domestic scenario, there has been an increase in the production of RobustaCoffee and pepper for the financial year 2014-15 whilst Arabica has witnessed lowerproduction being a biennial off year. The domestic coffee consumption has also beengrowing steadily over the years.
Consolidated Financial and Operating Performance
The consolidated financial highlights for 2014-15 are as follows:
Rs. in crores
| ||2014-15 ||2013-14 ||Variance |
|Operating Income ||7,933 ||7,738 ||195 |
|Operating Profit ||642 ||623 ||19 |
|Profit before exceptional ||630 ||618 ||12 |
|items and taxes || || || |
|Exceptional items (net) ||(130) ||89 ||(219) |
|Profit before tax ||500 ||707 ||(207) |
|Profit after tax ||284 ||522 ||(238) |
|Group Consolidated net profit ||248 ||481 ||(233) |
Despite the recessionary trend which was prevalent in many parts of the internationalmarkets, Tata Global Beverages achieved a steady growth in revenue. For the year ended 31stMarch 2015, Income from operations at Rs 7,933 crores was 3% higher than previous year. Atprior year exchange rates, the increase translates to 5%.
For the year under review, operating profits at Rs 642 crores is higher than theprevious year mainly due to improved profitability in the branded business despite higherspends in new ventures/initiatives.
Standalone Financial and Operating Performance
Rs. in crores
| ||2014-15 ||2013-14 ||Variance |
|Operating Income ||2,885 ||2,683 ||202 |
|Operating Profit ||297 ||268 ||29 |
|Profit before exceptional items and taxes (inclusive of intra-group dividends eliminated in the Consolidated Financial Statements) ||418 ||413 ||5 |
|Exceptional items (net) ||(69) ||172 ||(241) |
|Profit before tax ||349 ||585 ||(236) |
|Provision for tax ||(60) ||(138) ||78 |
|Profit after tax ||289 ||447 ||(158) |
Income from Operations grew by 8% over the prior year attributable to improvement inbranded operations driven by higher volume sales and price increases. Profit fromoperations was higher than previous year mainly on account increase in sales volume.
The current year results detailed above are inclusive of the results of Mount EverestMineral Water Limited which amalgamated with the Company from the appointed date of 1stApril 2013.
Product / Brand Performance - Tea & Coffee
Overall, despite the challenging environment in the international markets, the brandedbusiness reported a steady growth led by Canada, Australia and India. Sales in Australiagot a boost through the acquisition of MAP brand, which gave your Company entry into thecoffee segment in Australia in roast & ground coffee category, as well as in the fastgrowing single serve segment. Though in some major markets, such as UK and US, we grappledwith challenges to improve top-line, profitability has been better aided by consciousspending and effective cost control. The international tea commodity markets remainedsubdued which also helped improve margins. Your Company is pleased to report that thepremium segments have performed well. To leverage the change in consumer trends, whereinthere is more demand for premium products, your Company is expanding the Teapigs brand,which is in the premium segment, across various markets. To further our health andwellness strategy, we have launched
various green tea products which have health benefits, in some major markets and saleshave been robust. The Global marketing structure has been revamped with a focus indeveloping a strong global brand portfolio coupled with enhanced global innovation agendaand providing global consumer insights. Towards this, TGB will focus on 4 power brands,namely, Tetley, Tata Tea, EOC Coffee and Himalayan. These power brands will be managed ina globally consistent manner including creating the global brand identity. All otherbrands in our portfolio will be treated as local / regional brands. A new brand identityand packaging has been developed for the Tetley brand and is being progressively rolledout across major markets.
Plantation business was impacted due to seasonality and pest infestation which hadresulted in lower crops available for sale.
Performance of Key Geographies/ Segments
Your Company's operation in India reflects top-line improvement and improvedprofitability despite adverse tea costs. Overall volumes and value growth over FY 2013-14helped in growing top line by around 8%. Your company maintained volume and value marketleadership. The branded tea segment in India is one of the most highly penetratedsegments. While tea as a category in India is growing at around 4-5 per cent, green tea isgrowing around 30 per cent .With increasing disposable income and awareness on productdifferentiation (aroma, origin, taste etc), the loose/ standard tea is making way for morepremium variants and flavours.
In the Indian market, your Company is building its green tea portfolio under the Tetleybrand. The green tea range in India taps into the growing number of people who want tomake healthy lifestyle choices and in-builds them in their daily routine. Tetley green teain India launched a refreshing campaign, which urges wellness seeking consumers to cleansefrom within. Our study revealed that green tea consumption occasions cover multiplepoints- be it at home, the workplace or during travel.
So Tetley has kept pace with today's lifestyle, understood the Indian palate and nowoffers six delicious flavours of green tea, customised to the Indian palate. The Tetleygreen tea portfolio has grown double digits as compared to the prior year. In addition,Acti Green, a new product launched under the Tata Tea brand, aims at popularising greentea and making it accessible to a wide range of consumers, keeping tea drinkersrevitalised and active through the day. It is available at convenient price points andmilder blends, in exciting Indian flavours of 'Elaichi' (Cardamom), 'Tulsi-Nimbu'(Basil-Lemon) and regular 'Green Tea'.
key performance highlights of india branded operations:
Your Company is proud to consistently maintain value and volume leadership inthe market.
Good value and volume growth in the branded segment mainly attributable toimprovements in the flagship Tata Tea brands and to a lesser extent regional brands.
The growth in Tata Tea brands are mainly attributable to improvements in Tata TeaPremium, Tata Tea Agni, Tata Tea Gold, Tata Tea Lyfe whilst the growth in regional brands
is mainly attributable to Chakra Gold and Gemini. These brands were supported byvarious campaigns and onground activities during the year.
Double digit growth by the Tetley brand led by the Green tea category in whichyour Company is the market leader.
The tea business in India achieved record sales volumes which translates to5,000 crores cups of tea served to consumers across the country!.
We are pleased to announce that Tata Tea's Jaago Re and Power of 49 brands havewon awards in three categories at the Effie India 2014 Awards organised by The AdvertisingClub. The Effie Awards is an international advertising award that was launched in Indiamore than a decade ago in partnership with the Advertising Club. It recognises advertisingthat has succeeded in building brands and increasing sales.
In the UK, black teas as a category continue to dominate the market with around 80% ofvolume sales and 63% by value. This sector however experienced a decline during last year.Green tea continues to be the 'star sector' with significant growth on a year on yearbasis.
This market witnessed challenging market conditions wherein we are faced with retailerconsolidation, retailers price promotion strategies, customers seeking better value andincreased competitor intensity. Despite battling through these adversities, your Companycould achieve sales close to the prior year levels. However, operating profit improvedover prior year driven by lower tea costs, operational efficiencies and consciousspending.
key performance highlights of uk operations:
Despite decline in the black tea category, few premium segments registeredsignificant improvement in performance.
Teapigs, our super premium brand reflected robust growth. This brand is nowbeing expanded to various other international markets.
Tetley Decaff regained MAT volume leadership.
Increased investment behind brands with good store visibility. Tetley was chosenby one of the large retailers to be a select group of brands to partner the retailer whichresulted in strong in-store visibility.
Tetley ran an impactful communication campaign showcasing its 175 year heritageof tea blending expertise, reinforcing its credentials in delivering quality products.
Your Company recorded good growth in Tetley Greens and launched a range of'super green teas' that are the first functional green teas in the UK with proven healthbenefits. The new Super Green Tea variants are supported by European Food Standards Agency(EFSA) approved health claims, relating to supporting immune system and helping reducetiredness and fatigue.
Variants like Tetley Decaf, Tetley Estate Selection and Tetley Green Mango andPassion Fruit have been confirmed as 1 star quality winners in the 2014 Great TasteAwards, organised by the Guild of Fine Foods.
United States of America
In the US market, we predominantly operate in the coffee segment under the Eight O'clock Coffee brand (EOC). This market is also facing various challenges, shift in consumerpreference to growing alternative formats, namely, pods, and stiff competitor intensity.In the Pods segment, your company has a brand licensing arrangement with Keurig GreenMountain who is a significant player in that category. In 2014-15, there has been asignificant increase in royalty from sale of pods. K-cup volumes increased significantlyyear on year due to growth in the single serve business and addition of four new EOCSKU's. Overall, the traditional business witnessed volume pressures resulting in lowersales in the first half. However, in the second half, EOC volumes increased driven by itspopular consumer programs and effective promotional listings. Profitability of EOCimproved over the previous year.
Key performance highlights of USA operations:
Successful marketing initiatives and timely promotions improved topline in thesecond half of the year reflecting signs of improvement.
The brand launched an impactful promotion campaign together with Warner Bros.centered around the 20th anniversary of the Emmy award winning TV series'Friends. The campaign met with enthusiastic response from coffee lovers.
Good cost control and prudent spending.
The Company's manufacturing plant underwent a recertification audit by theBritish Retail Consortium (BRC) and achieved the top rating. This certification is givenfor food safety and quality.
Canada business fronts our innovative product agenda. The business saw the launch of apremium line of specialty teas called the Tetley Signature Collection. This contemporaryline of teas was created to reinforce Tetley's leadership position in Specialty teas inCanada and to provide consumers with a string & tag/ drawstring tea bag.
key performance highlights of canadian operations:
Canada tea sales recorded significant increase compared to the prior yearbenefiting from the change in distribution model and increase in promotions.
Our premium brand, Tea pigs has started to make inroads in the market andstarted to gain distribution
The Tata Tea brands have found niche among the Indian diaspora after being inthe market for the last 2/3 years. The brand is gradually improving its market share.
Canada maintains and remains market leaders in both value and volume terms.
A new campaign launched invites the customers to explore Tetleys diverseportfolio of teas. From green to herbal, premium blends to fruity flavours, Tetley has 45vibrant blends to suit the various consumers persona.
Tetley in Canada was voted the most trusted brand in the tea category as a partof the 2015 BrandSpark Most Trusted Awards programme. Over 65,000 Canadian consumersparticipated in the survey conducted by BrandSpark International, a leading brand,marketing and product innovation research company. Consumers' reasons for citing a brandas their "most trusted" for the food and beverage brands are driven by qualityperceptions and taste.
The Australian market reported steady growth in sales on a year to year basis. Inaddition, the acquisition of Earth Rules Pty, owners of the MAP brand has given yourcompany entry into the coffee segment in Australia in roast & ground coffee as well asin the fast growing single serve segment.
Key performance highlights of Australian operations:
Sales were higher than previous year driven by improvements in fruit and herbalteas, green and mainstream black coupled with increase in stores in a retailer where weare the only tea brand.
Significant improvement in green tea sales which is now the number three playerin the Australian market.
On a year on year basis, tea profitability reports an improvement.
Europe and Middle East
European markets are trying to break out from the shackles of recession. Currencymarkets are volatile. In addition, trading condition is tough with competitive intensityand consumers being cautious in spending. Additionally there is black tea market declinein many markets in which we are operating.
key performance highlights of European operations:
Russia - Significant macro economic challenges persist. Political sanctions anddrop in crude oil prices resulted in a significant depreciation in currency and rise ininterest rates. This led to slowing down of growth, liquidity issues in the bankingsector, increasing credit risk from small distributors and very high inflation. The marketwas further impacted by a faster decline in traditional channels and de-growth in sprayand agglomerated coffees. Despite these adverse market conditions, in underlying terms,Russia reflects a pricing led improvement in performance.
Middle East - Significant increase in sales aided through distributionimprovement, expansion of the Tetley range and new product launches in a few countrieswithin Middle East.
In other markets such as France, Poland and Czech Republic, decline in the blacktea market impacted topline. However, France reflects good green tea performance.
The water vertical, operating primarily out of India, reflected significant growth on ayear on year basis. The Company has extended the reach of its fortified water brand TataWater Plus to Gujarat and Uttar Pradesh. Initially, the Company had introduced Tata WaterPlus and Tata Gluco Plus in Tamil Nadu and Andhra Pradesh. We are now present in 7 statesin India - Maharashtra, Gujarat, UP, MP, Karnataka, Tamil Nadu and Andhra Pradesh.
Tata Gluco Plus underwent a brand refresh including a packaging change and a catchy TVChighlighting its glucose energy benefit. Himalayan natural mineral water launched itssparkling variant-a natural, mineral enriched water with added mild carbonation.
A new ad campaign was launched for the Himalayan brand narrating the story of itsunique source and how the brand can play a role in our busy urban lives by helping us to'Live Natural.'
In the international arena, we are expanding our footprint in Singapore by entering inretail stores and evaluating options to scale up in other international markets With anincreased focus on its research & development projects, your Company has built apipeline of new products to drive the Company's future growth.
Non Branded Business
Our non branded business is split between plantation and extraction operations. Inplantations, we primarily manufacture and sell tea, coffee and other plantation producelike pepper whilst the extraction business is split between instant tea and instantcoffee. In the current year, though there have been improvements in the Coffee extractionbusiness, the plantation business was impacted due to seasonality and pest infestationresulting in lower crop. In the instant coffee business, to avoid over dependence onselected markets such as Russia, your management has continually focussed on newergeographies and witnessed improvements in sales by identifying new customers in variousnew countries. In line with the group focus on innovation, the Company launched newinstant coffee products and new packaging as a hedge against commoditisation.
Outlook - Consumer, Commodity and Competition
As detailed earlier in the document, the market environment continues to be differentacross continents and these operating challenges are likely to continue. In addition,there are category declines in black tea markets in some developed markets reflecting ashift in consumer consumption patterns.
However, there are some trends which are emerging in the various markets. First, thereis a continual shift of consumers towards health, wellness and convenience segments.Secondly, especially in the developed markets, due to the continuing recessionary trends,the consumer spending is cautious with higher value demands which are giving rise to highcompetitive intensity in those markets. Finally, contrary to the above, there is also agrowing trend for more premiumised products in some markets.
We expect these challenges and trends to remain for some time to come. In our developedmarkets, we expect the retail environment to be very competitive with aggressivepromotions to sustain growth. We also expect the significance of modern trade to increaseover traditional trade in the developing markets exacerbating the competitive environment.In addition to this, we also foresee private own-label brands and local brands to continueto be major competitors.
On the commodity front, forecasts are predicting a higher than average probability ofan El Nino effect. This can typically result in inclement weather conditions withunseasonal patterns with potential impact on crop bearing regions.
The outlook for tea is mixed with increased production in most producing countriesaccompanied by strong consumption growth in developing countries. In coffee, the pricescontinue to be low and stable as the market heads towards the next large on- cycle Brazilcrop in 2016.
The Group continues to constantly strive to meet these challenges with a continuoussupport to brands, category expansion, innovation and cost rationalisation.
Outlook - Interest Rates and Exchange Rates
Given the global operations of your Company, both interest rates and exchange rates invarious currencies / geographies are of significant importance to our business.
The interest rates remained flat in most of the geographies that we operate in, mainlyas inflation and inflationary expectation remained subdued. Interest rates eased in Indiatowards the last quarter of the fiscal and are further expected to drift downwards. In UKinterest rates remain unchanged, as inflation fell well below the target on the back ofsharp drop in crude oil prices in international market. In US, interest rates remainunchanged as the central bank was waiting for evidence of sustained economic recovery.Inflation and inflationary expectations fell sharply due to unexpected decline in crudeoil prices.
The rupee witnessed some appreciation on the back of election results, strongsentiments in local equities and fiscal consolidation measures announced by the governmentin the budget. But it gave up its gains on account of global risk aversion due to Russia -Ukraine and Middle East crisis and overall dollar strengthening. The rupee is expected totrade with some negative bias on uncertainty over the monsoons, but is expected to remainrange bound in the long term.
Sterling weakened against USD, from the second half of the fiscal given the fear overinterest rate hike by US, massive quantitative easing programme by ECB and global riskaversion due to Russia - Ukraine conflict. It showed some recovery post the outcome of thegeneral election and is expected to remain range bound.
Russia macro- economic conditions remain volatile. The market saw a significant surgein interest rates and significant depreciation of currency. However, there were some signsof recovery and the currency/interest rates saw some reversals post year end. There arealso related macro economic uncertainties over Greece's exit from the Euro Zone .
The Company hedges its exposures arising out of interest rate risks and foreignexchange risks, based on Board approved treasury policies through various instruments andare reasonably covered in respect of its immediate trade flows.
Your Company's products and vision focuses on natural beverages which presents a goodopportunity in the health and wellness segments - a segment which is in a growthtrajectory. Our innovative products in green tea, super green teas, decaff coffees,fortified mineral water and natural mineral water sourced from the Himalayas specificallyaddresses this consumer trend and we see significant growth potential in these areas.There is also a growing demand for premiumised products and, amongst other things, ourTea-Pigs brand and our alliance with Starbucks in India is fronting growth in thissegment. This, added with the wellness of the Himalayan brand is going to drive growth inthe premium segment. We also see significant growth opportunities in alternate channelssuch as coffee pods in the developed markets and to participate in the growing channels,we have operations in US and Canada. The acquisition of MAP brand has given your Companyentry into the fast growing single serve segment in Australia. We feel that theseproducts/segments will give your Company significant opportunity to grow in the nearfuture.
Threats, Risks and Concerns
Your Company is faced with decline in black tea category in developed markets assignificant part of your company's operations is dependent on the black tea category.There is risk of significant change in commodity and currency markets and the Company'smanagement is conscious of the consequences and are actively monitoring these parameters.Significant increase in commodity input costs may lead to a dilution of margins which canlimit the scope to innovate and expand. In addition, increased competitive intensity andconsumers seeking more value may reduce earnings. There are economic uncertainties in somemarkets like Russia which may pose challenges in the short term. Your Company continues tobe committed to its brands and focuses constantly on innovative products to satisfyconsumer needs and perceptions. In addition it also focuses on increased distribution andgeographical expansion to manage the declining black tea market trends.
Your Company is a small player in the coffee segment and is looking at ways to expandto a bigger business. The focus of your Company is to grow through product innovation andimprove distribution. In addition, acquisition opportunities, such as the MAP acquisitionin Australia, also aid your Company to expand into new geographies and categories.
We are in a nascent stage in the water business. There is a stable set of products inthe water business and your company now needs to scale up profitability with growth involumes. Though this business has significant growth opportunities, competition is intenseand existing brands are well established global players. Additionally we will also need agood distribution network to grow our fortified water business in the mass segm