The Hindu Business Line : `We want to produce the best tea at the lowest price'

IN India, the retail revolution is in its initial phase. But in developed markets the issue is one of coping with the growing size of these companies and the severe competition amongst them.

Mr Peter Unsworth, Managing Director (Supply & Support), The Tetley Group, spoke to Business Line last month about how his company - a major player in branded tea worldwide - tackles this challenge. He also spoke of the growth opportunities for the Tata Tea-Tetley combine and the price outlook for raw tea. Excerpts:

You had cited the impact of large retail chains on sales in developed markets. Can you explain it?

It is difficult to make a generalisation, but there is growing consolidation. More and more grocery spend is through a smaller number of big retailers. Walmart in the US, Tescos in the UK, Woolworth in Australia or Loblos in Canada - they are getting bigger through acquisitions or organically. Tescos' case in the UK is organic. They have 30 per cent share of the market and 12.5 per cent of grocery spend. Walmart, the biggest company in the world, has massive buying globally. What's happening is, as retailers get bigger; the competition between them is getting intense. They push harder for promotions to drag people in. As a result, we suffer.

But we know tea very well. We position ourselves as the tea expert; we don't do anything else. That gives us the opportunity to sell in a different way. In the UK, Canada and Australia, over the past 18 months, we gained category partnership with the leading retailer in the market. Our sales teams act with the retailer's fixture managers to decide on the layout of our products. It is our objective to see that Tetley is the key part of that presentation.

When you compete for shelf space is it not being bit critical?

There are two aspects to it - how tea itself takes up shelf space and how much Tetley gets within that. This depends on the overall profitability of the tea brand. Retailers are beginning to stock a whole range of products like in the US - white goods, clothes and other consumer products. It puts pressure on the space that tea gets. Being big per se is not important; investing in the consumer and maintaining the rate of sale are. In the UK, some of the tertiary brands are increasingly coming under pressure to go off shelves.

Some of the private labels are very big. How do you deal with that in the new scenario when retailers are powerful?

Retailers get more money from branded products so the profitability from branded products is higher. However, some of the private labels are brands in their own right. They are sold at lower prices and margins are thin. What's driven the decline in private label offering is the narrowing of price difference between private labels and branded offerings. There is also the innovation that has gone into the market and the profitability of branded offerings over private labels. We don't worry about private labels. When the price of raw tea changes retailers alter private label prices. An insurance we have is that when raw tea prices go up, the prices of private labels also move up.

Does Tetley's description as a tea expert indicate prospective assistance to others?

My team's responsibility is to produce the best tea at the lowest price. The easiest way to have profitability is to run the factory at the base load with branded products and when we have spare capacity, load it with private labels. However, it would be the wrong thing to do. What makes a brand unique is the product and packaging. What keeps you ahead of competition and private labels is the way you innovate. That costs money. In the UK, getting to soft packaging from hard packaging meant retuning the factory. That cost money plus advertisements - about £50 million. When you have to recover that, you don't want anyone else to have that differentiation. If we had a big contract with Tescos while we had invested in the differentiation, they would probably tell us - we want that as well. Do we say no and risk them pulling out of the contract or say yes and give away our innovation? For long-term financial objective, it is better that we don't have private labels.

Getting tea to the retail market involves sourcing, product preparation and supply chain. Which of these three would emerge important?

We believe that in the model we have - buy centrally, blend centrally to optimise quality and invest in supply chain - we are more efficient than anybody. Where we will continue to develop benefit is in the buying — we buy about 50 million kilos of tea each, separately. If we bring it together, there are additional economies of scale in buying 100 million kilos. Over the past year Tetley and Tata Tea teams have created a common language to create blends. Now, the first step is to create a common buying team.

One of the areas where we can evolve is non-black tea buying and blending. We are evolving expertise in buying and blending fruit and herbal teas. This competence is growing. We can look at acquisitions, as we have not been big in fruit and herbal.

What is the future for black tea?

For the foreseeable future, black tea will still be the largest element of the Tata Tea-Tetley portfolio. The consumption of black tea globally will decline but it is huge and will stay huge for decades to come. Even in the UK where there has been a decline in black tea, it will be the core for Tata Tea and Tetley. It will be the cash cow. There are also some black tea markets, which are growing. We want to get into those markets.

What is the price outlook for raw tea in 2005?

Prices are generally softening. New sources of tea are coming up all the time. Vietnam is growing. East African nations continue to increase their export of tea. As peace breaks in Africa, more and more tea will come from there. There is nothing to suggest that there will be sizable imbalance in demand-supply of tea.

Don't commodity prices impact prospects in acquisitions?

If we are buying a branded business, then commodity prices coming down actually improves its profitability. Unilever has 10 per cent share of the market; Tetley has four and Twinings, four. Three major groups between them hold less than 20 per cent of the market. That means 80 per cent of the market is open. But it is very fragmented.

A lot of them are local, players with family history. There is emotion involved in wanting to sell or hold on; it is not always a rational decision. And that means, they tend to wait a bit too long. But they are beginning to see the benefit in expanding and are looking over their shoulders and asking - at what point do I exit? These opportunities are slowly coming to the market.

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