The Hindu Business Line : Long-term tea supply, demand seen in balance

"Black tea markets in the developed world are stagnant or in slow long-term decline. That doesn't mean that our sales is going to necessarily fall."

MR PETER UNSWORTH

Mumbai , June 22

Unlike Tata Tea, which continues to run plantations in North India, Tetley is wholly in the branded tea segment. Its business model is arguably what Tata Tea is gravitating to. More important, Tetley is a source of learning; for, as the world seeks its share of the Indian tea drinker's daily spend it is through Tetley that the Tatas get their share of the world's cup of tea. Early June, Mr Peter Unsworth, Managing Director (Supply and Support) and Group Finance Director, Tetley, spoke to Business Line. Excerpts:

Tea price

In the short term, the weather may lead to supply shortages, which could push up prices. But they will fall back, as over the long term, supply and demand for black tea will be in balance. However, tea prices have been high generally and "will be high in 2006". The trend should also be seen as opportunity.

The natural thing to do when raw tea price increases is to recover it at the retail level by passing on some of the cost.

Around the world there is a big debate going on — whether to have price increases in the market and what the mechanisms for that are.

Black tea markets in the developed world are stagnant or in slow long-term decline. That doesn't mean that our sales is going to necessarily fall. You can increase market share and use the returns from that to invest behind fast growing categories, like green tea in the UK.

Are there higher margins in those teas?

"I can't say yes in every market. It depends on the market. But generally, the higher value-added products will have higher margins."

Vending machines

At a result briefing some quarters ago, Tetley officials first spoke of their new vending machine for out-of-home business in tea. Trendy coffee had to be countered besides getting a share of consumers' growing out-of-home spend. Crucial in vending is getting the brew right. The experience that consumers have with tea is significantly less favourable than they have with coffee. That's because their expectation is unique.

There is mismatch between an individual's expectation of a good cup of tea and a standard machine-brewed one.

We are looking to make the best cup of tea out of home; we continue to work on that opportunity and have demonstrated our machine.

The technology has reached the commercialisation stage; challenge was to reach that point in vending when a blender wouldn't be able to tell the difference.

Around the world, the share of out-of-home spend is increasing. People are willing to spend more for a good product; you have to be ready with the right products.

But Tetley has always prided itself in being a tea company.

Vending is a different business; we are yet to decide on how to approach the market. Our strategy includes developing partnerships and strategic alliances, where these will further our growth as an international branded tea business. In principle, this could apply to any aspect of our business. We have no plans to announce at the moment

Iced tea

Tetley has done trials of its iced tea in London for the last 18 months.

We are just about to go national.

But hasn't iced tea been around in India for a while now? Why is the world's second biggest tea company only past trial stage yet?

No, it's not about quality; we believe that we have the best quality products. But if you look at the UK market, competition has launched iced tea probably for the fourth time in over 10 years. We are not as big as Unilever, we have to get things absolutely precise. We can't afford to waste millions of pounds getting something wrong.

British consumers are now sufficiently aware of the product to accept iced tea.

Tackling retail

Several months ago, the consolidation happening at retailers had been a concern.

There hasn't been any more consolidation; retailers are tough but fair and they are ever bigger.

Don't big retailers squeeze suppliers' margins?

That may be true, but Tetley's focus has been to overcome that by positioning itself as the "tea expert", particularly because it doesn't do any other business.

Obviously Unilever would be saying similar things, but the difference is that they have got a lot of different products.nThe strategy is working and major retailers in the UK see Tetley as their advisor in tea.

Debt: old and new

Six years ago when Tata Tea acquired Tetley, debt accruing to Tetley through the leveraged buy out was £210 million. The company has repaid and refinanced it; last refinancing completed 18 months ago "at pretty much the cost of corporate debt". Last year's profit and loss benefited to the tune of £3.5 million from lower interest.

With acquisition of Good Earth and Jemca funded out of Tetley Group, its debt, which would have fallen, has risen slightly.

I am absolutely comfortable with the level of debt we have now; its cost is not significantly above what you would pay to a corporate. Personally I feel debt is a good thing. It is a cheap way of growing the business.

But what about rising interest rates and the impact that would have on continued refinancing?

At present, we don't need to refinance. Further, currently in the UK market for debt, the banks are quite aggressive. They are very keen to lend. There is a lot of money in the UK market, which means that the gearing companies can go to is high.

Still, given the fragmented global tea market and its opportunities for inorganic growth, would Tetley and its higher debt be well placed to finance a buy? Or would it have to turn to Tata Tea?

At the end of the day, the decision on how we finance would be made when we put the proposal forward. That is also a company decision."

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Long-term tea supply, demand seen in balance