Tata Tea hunting for RTD beverage opportunities

Opportunity exists in Russia with Nidan and Visma as possible targets, while stiff competition in China should not deter Tata Tea from entry.

Following a relatively calm year in 2008, Tata Tea Ltd is once again in acquisitive mood and is looking for investment opportunities in Russia, Asia-Pacific, Africa and South America.

According to the company, it is seeking to acquire strong national or regional RTD branded businesses which have functional benefits and offer value. The Indian company may then bring the brands to the global arena. Through its British subsidiary Tetley, Tata Tea recently acquired Premium Foods SA, one of the most important distributors of fruit/herbal tea in Poland, to further diversify its business.

The Tetley Group is planning to double the size of its global business over the next five years, and acquisitions can certainly help achieve this. In view of the company’s long-term strategy, all these decisions reflect Tata Tea’s corporate objective: moving up the supply chain and becoming involved in branded beverages on a large scale. Indeed, controlling, marketing and distributing strong consumer brands are more valuable than working hard at the bottom of the supply chain.

Externally, the recessionary climate has unfortunately forced some FMCG companies to rethink their business plans, and some companies such as Cott and Tchibo are scaling back their operations. Conversely, now is the right time for cash-rich players to look for bargains and take the opportunity to expand their categories or geographies.

Nevertheless, this will carry some risk. In South America, a non-tea drinking region, it may prove difficult to convince consumers to drink tea or RTD tea and the persuasion process can be costly and time-consuming, not least because Tata Tea has no presence in either hot tea or RTD tea in the region at the moment.

Euromonitor International’s data shows that RTD tea and RTD coffee are sleeping giants in many markets and there is still plenty of room for growth. The Coca-Cola Co, Nestlé, Unilever and PepsiCo are all keenly developing RTD beverages, with a few high-profile launches and acquisitions taking place in key markets. For example, Coca-Cola has acquired Brazilian company Leão Júnior SA and Nestlé has invested in US Sweet Leaf premium RTD tea.

Tata Tea is determined to become a major comprehensive beverages player and RTD beverages remain one of the weakest links in its portfolio. Euromonitor International takes a look at which specific candidates Tata Tea could possibly target and why. These candidates may not currently hold RTD brands, but they may be able to provide the capacity to facilitate Tata Tea’s expansion.

Four Potential Players US$ Million RSP for Soft Drinks
US$ Million RSP

Euromonitor International.

Russia: Nidan and Visma a good buy?

Russia is forecast to be one of the fastest growing RTD tea markets, achieving absolute growth of 234 million litres over 2009-2013, about 80% more than the net increase expected in Latin America over the same period. RTD coffee is considered to have little potential over 2009-2013 in Russia, and so it is anticipated that beverage players will instead invest heavily in RTD tea for short and medium-term revenue growth.

In terms of competitive positioning, RTD tea is highly consolidated, with Unilever and Nestlé dominating the market through their partnerships with PepsiCo and The Coca-Cola Company, respectively. Ahmad Tea London Ltd, a strong player in hot tea, has a growing presence in RTD tea.

Tata Tea has no presence in RTD beverages in Russia and the company’s interest in the hot tea market is also underwhelming, indicating its underdeveloped infrastructure and sales network in the country. Given the sheer physical size and population of this potentially huge market, finding a partner for production and distribution is imperative before launching a massive operation.

Potential collaborators or acquisition targets would have to have well-established production or distribution facilities to justify any business deal.

Nidan Holding (Cyprus) Ltd and Visma ZAO could be attractive suitors for Tata Tea. Briefly, Nidan, ranked third in the Russian fruit/vegetable juice category, is currently 75% owned by UK private equity firm Lion Capital LLP, while the rest of the company is held by other private investors. Nidan has nine subsidiaries located in major cities and has nearly 3,000 employees.

The company has two RTD tea brands, so it has experience and capability in producing RTD beverages. Importantly, the company has built a solid distribution network and a high corporate profile in small towns, typically with around 100,000 people. This allows the company to enjoy a grass roots consumer base. In 2008 Nidan’s retail value sales of soft drinks amounted to US$590 million, 34% higher than those of Nestlé, according to Euromonitor International. Tata Tea could potentially offer private investors a good price and acquire some stakes from them.

Visma ZAO, ranked fourth in bottled water, has grown its market share steadily over the past few years, underpinned by the strong Arkhyz brand. Visma has widespread production facilities in Russia, although its position in the Moscow region is yet to develop.

The distribution deal with Ost Akva ZAO, signed in late 2008, should strengthen its presence in Moscow going forward. Ost Akva ZAO is part of the large Ost Group, which has a strong distribution network in Moscow and the surrounding region. In 2008, Visma’s retail sales of soft drinks reached around US$100 million, with spring water the company’s core offering. Importantly, Visma’s corporate image as a better-for-you beverage producer should match Tata Tea’s profile. Full acquisition of Visma would mean access to these distribution facilities.

Asia-Pacific: Potential opportunity in China

While Japan is a no-go area in Asia, China is without a doubt the most important market. Although growth of the Chinese RTD tea market is expected to slow over the short to medium term, China will still be the main source of growth and account for over 80% of the regional increase over 2009-2013. It will be crucial for Tata Tea to be present if it intends to improve its position in the Asian-Pacific RTD market.

The Chinese government’s rejection of Coca-Cola’s Hui Yuan deal may mean the unpredictability of the local legal framework, but foreign investment will undeniably still be needed in China, although foreigners should be cautious when approaching prestige brands.

Potential targets could include Guangzhou Pharmaceutical Holding Ltd (flagship herbal brand Wong Lo Kat) or Yangshengtang Co Ltd (Nongfu Spring water). While the Wong Lo Kat brand (US$1.4 billion rsp) may prove to be too expensive, Nongfu Spring (US$385 million rsp) could be considered. Yangshengtang Co Ltd has seven production facilities and Nongfu is an established brand in bottled water and juice and has a presence in RTD tea.

Additionally, Danone has announced that the Wahaha joint venture is no longer a core business and it is considering selling its interest in Wahaha. This could be a good opportunity for Tata Tea to buy into China. Tata Tea has a joint venture with Zhejiang Tea Company to produce tea extracts which are supplied as ingredients, thus the venture has little consumer value.

Other than this, Tata Tea has no other noticeable presence in the Chinese market. All in all, Tata Tea cannot afford to miss the growth opportunities in China if it wishes to improve its regional status. And the time to make that move is now.