Tata’s State of Play in Global Coffee and Earth Rules Acquisition

Tata Global Beverages Ltd’s (TGBL) global ambitions are clear and well laid out. The company is aggressively acquiring and building a comprehensive beverages portfolio through both the extension of existing core brands and new brand acquisitions. Geographical expansion was also a priority from previous acquisitions. The company aims to achieve revenues of US$5 billion by 2015. This is achievable if it sustains its rapid expansion. TGBL’s long-term corporate goal is to become a major player in tea, coffee and bottled water. While the company is already a leading player in tea globally, it would take many years to replicate that position in coffee if relying solely on organic growth over the medium term. Its recent acquisition of Australian company Earth Rules is a positive move in this direction. Bronski Eleven Pty Ltd Australia was the holding company of Earth Rules Pty Ltd. However, the country’s limited growth potential may have an insignificant impact on TGBL’s global coffee position unless it expands its newly acquired business to other countries.

Narrow Geographical Coverage Means a Still Weak Position in Coffee

In tea globally, TGBL has cemented its ranking of second with a 3.3% share, maintaining a decent gap between itself and Associated British Foods Plc (ABF) with 3%. Tea remains a cash cow for TGBL, accounting for around 78% of the company’s hot drinks retail sales in 2013. It is safe to say that the company is integrating its acquired tea businesses and working on adding value and leveraging its acquisitions. The revenues, contacts and experience obtained from its tea businesses may be helpful in growing its relatively underdeveloped coffee business.

In coffee globally, the company has not specified a timeline to achieve its grand plan to become a major player. However, to be “a truly major player” in the global arena means TGBL will have to rub shoulders with Kraft, Lavazza, JM Smucker, Starbucks and Tchibo. Without a major acquisition of the retail units of these companies, its grand plan may be too ambitious to be realised within the next 5-10 years. With the impending merger of Mondelez’s coffee operations and DE Master Blenders, the global landscape is becoming more complex and competitive.

Thus far, TGBL is still very much a secondary player in coffee globally, ranking 20th in 2013 with retail sales of just US$363 million. The company’s two major brands are Eight O’Clock Coffee, which offers standard fresh ground coffee and fresh coffee beans, and Grand, an instant coffee brand. TGBL’s retail coffee interests are limited in part because of their narrow geographical spread, with the US and Canada almost exclusively accounting for sales of Eight O’Clock and Russia sales of Grand. Nevertheless, these two brands combined cover various coffee categories, thus offering the company potential for further development. TGBL also has a presence in coffee pods thanks to a licensing agreement with Green Mountain Coffee Roasters, the global leader in the category.

In India, TGBL has entered into an alliance with Starbucks to expand Starbucks café outlets so as to obtain some revenue from supplying raw materials and branded beverages (tea and bottled water etc), but not directly boosting its branded coffee business. TGBL ranked fifth overall in coffee in India in 2013, with its weakness being its absence from instant coffee, which is anticipated strong growth.

Although TGBL is also active in the Canadian coffee pod market through its Eight O’Clock K-Cups, it has yet to penetrate the Western European coffee pod market despite agreements with Delta Q and Tassimo to produce Tetley tea pods for their respective systems. While tea pods are increasing in popularity, they are unlikely to have the same impact as coffee pods. Therefore, it would take a considerable effort from TGBL to become a major player in coffee globally.

Earth Rules Acquisition

Nevertheless, the acquisition of a local company in coffee pods is a quick way to gain a share of the category’s growth. In May 2014, TGBL’s UK subsidiary acquired a 100% equity stake in Australian company Earth Rules Pty Ltd to expand its offerings and strengthen its single-serve business. TGBL ranked fourth in tea in Australia in 2013 with an 11% share, way behind Unilever on 30%. TGBL has seen some success in instant tea but is absent from coffee in the country. The Earth Rules acquisition is a cautious but positive move. Euromonitor International expects the coffee pod category to see absolute growth of around US$100 million in Australia over 2013-2018.

Earth Rules owns the Map coffee brand which is present in single-serve capsules (hard pod), fresh ground coffee and coffee beans, according to TGBL’s press release. Map is also a branded coffee machine system, serving both homes and offices. In the pod coffee machine category, leader Nespresso held a 28% volume share in 2013 while Map remained a small player. That said, Earth Rules offers certain brand awareness which can serve as a working platform and starting point for TGBL. Prior to the acquisition, TGBL had no pod machine brands in its own right. From an acquiree perspective, Earth Rules is looking for TGBL’s resources to further develop and compete against multinationals and the growing competition from smaller players and private label. From the investor’s point of view, Bronski Eleven Pty Ltd might seek this opportunity to cash in on its investment. At this stage of the pod market’s development, this is important as the pod beverages and machines categories are seeing growing competition and an increasingly crowded marketplace. Some entrepreneurs might be worried about running out of cash before their business concepts fully take off. Differentiation in terms of services, drinks offerings and machines will also be important for sustained growth. In terms of coffee beverages, Map offers products ranging from single origin, fairtrade and chai tea to premium drinking chocolate. Fairtrade products are reportedly popular with consumers. Although TGBL has not disclosed the financial terms of the transaction, Earth Rules would appear to be a small purchase and thus the financial risk should be manageable.

Despite the relatively healthy macro-economic climate, Australia has a small population, thus the growth potential of fast moving consumer goods in the country is small and may sometimes be insignificant on a global scale. Therefore, TGBL should be encouraged to build and expand the brand to other Asia Pacific countries to justify its purchase, although Earth Rules claims it is already doing this. And this is nothing new. Unilever acquired the T2 premium tea specialist outlet in Australia in 2012 and set up a store in London in 2014 to explore its potential. TGBL may well follow in Unilever’s footsteps.