Financial Daily from THE HINDU group of publications
Sunday, Sep 01, 2002
Agri-Biz & Commodities - Interview
`Industry should warm up by end-Sept' Mr Homi R. Khusrokhan, Managing Director, Tata Tea
TATA Tea, the largest integrated tea company in India, is present both at the commodity and retail levels. The glut in the tea industry and the recent erosion in the market capitalisation have made these tough times for Tata Tea.
Business Line spoke to Mr Homi R. Khusrokhan, Managing Director, Tata Tea, to see where the industry is headed. Genteel and articulate, Mr Khusrokhan shared his perspective of the industry and discussed his own company's strategies, including Tetley and the recently announced VRS package.
Excerpts from the interview:
Excess production, low prices and high costs... The tea industry is taking heat from every angle.
Do you see any respite in the future?
Towards the beginning of the third quarter, I think we may see a slight rise in prices. The inclement weather in the North-East and the reduction in volumes that happened in mid-June, and partly July and August is normalising.
I think we should see prices warming up towards end-September.
I do not see any sort of major shifts in trends worldwide. I think if at all prices do go up it would be because of the Indian situation.
Despite branding, you still continue to be exposed to the commodity-like behaviour of prices...
You do have to occasionally correct the retail price of your teas.
In the economy segment, for instance, you cannot afford to hold the price at an earlier price point if the commodity price has dropped considerably.
However, when you approach the premium end, price sensitivity is not that great.
So, in a portfolio of blends there are some that will move in an almost direct correlation to the commodity price and some in which you can hold your branded price. And based on this sort of relative inelasticities of demand you continue to sell at a certain price.
Why is it that though tea prices have fallen they have not been passed on proportionately to branded teas?
They are passed on. But in different ways. One is, of course, that you now find a lot of consumer offers in the marketplace.
People tend to keep the same retail price marked on a pack but it is discounted directly by way of promotional discounts to the trade, some of which get passed on to the consumer.
Take the economy segment today. There is hardly a brand sold without a consumer offer a pack of biscuits, a stainless steel utensil or some other giveaway.
The net realisation for the manufacturer has certainly come down significantly. So, it is a bit of fallacy to say that we do not see variations in the maximum retail price.
Does in-house production still afford a cost competitive foothold against outsourcing and branding as practised by HLL?
I think in a falling market obviously an outsourcing model is preferable. But things will certainly change in a rising market. Therefore, having your own plantation base certainly helps. The other advantage in having your own plantations is that the non-substitutable components in your blends are produced in-house you don't have to depend upon somebody else.
So, you can reserve your best teas for certain blends. You can reserve certain seasonal variants for certain blends. It gives you that extra bit of flexibility.
So, I guess, there are pluses and minuses. At this point of time, with falling prices it is always going to look a little more difficult for the plantation owners as they work on fairly fixed costs.
HLL has charted a clear-cut strategy of managing high-penetration, low-growth categories.
The focus on such products is upgradation of consumers to brands at a higher price point.
How does Tata Tea view this?
Does it have any strategies for offering tea brands at closer intervals along each price point?
This applies more to Tata Tea than to Levers if you ask me. Because we are the guys who have been talking about capturing values at different price points.
From top-end teas like Tetley and Temptation we have teas right down to the low end Agni Sholay.
This is the strategy we have been aggressively following since last year.
We continue to follow this by bringing out variants within an umbrella brand.
But is there a conscious move towards upgrading the consumer from one brand to another at a higher level along the price front?
Selling is going to be difficult to do in a market, which is in a recessionary environment.
The housewife today is looking for the best deals and bargains. It is difficult to get her to move to an up-end premium product on the basis of price.
I think disposable incomes may move down a little over a period of time owing to the drought like conditions now.
Do you feel that economy teas have grown at the cost of premium teas?
Well, I suppose to some extent people are trading down and this has affected realisations.
What checks are you then taking to tone down your exposure to economy segment teas?
I suppose that you have to make sure that whatever you deliver in that segment is good value for money.
Focus on quality again has to come through very strongly and distinguish your product from somebody else's. In this sort of a market there is an incentive for people to trade down go to cheaper blends.
It is, therefore, important for you to bring down your blend costs, even maintain a very good quality blend at a particular price.
But you still cannot afford to ignore the fact that profits are sliding.
You have to take a long term approach and say never mind, we will take a slight cut to our bottomline this year but I want to maintain my quality because I want that loyal consumer base.
Do you view the possibility of setting up an instant tea market in India? (Tata Tea produces instant tea though much of it is exported.)
Still early days, but in the long run we definitely see the possibility of instant teas becoming more important in the market.
In what shape and delivery format we do not know yet. Nobody's talked about a single best model so far - whether it is going to be bottled product or a tetra packed one or even a Rasna-type instant powder.
There is however a thrust towards flavoured teas fruit teas, herbal teas. That is the key. This is a segment that is growing fast worldwide. We are trying to catch up.
Has your company moved towards restructuring debt incurred in acquiring Tetley to take advantage of the lower interest rate regime at present?
The exercise is ongoing. From about a year ago we brought down the cost of our senior debt by a couple of percentage points. We are continuously trying to look into possibilities of exchanging low cost alternatives to what we are carrying on our books.
Is Tata Tea supplying the entire requirement of Tetley Tea's procurement?
Tetley basically buys tea from several countries. The Indian component in this would be approximately 20 per cent Tata's even more miniscule.
Just because we own Tetley there is no point in force-feeding it greater quantities of tea from Tata, because its (Tetley's) entire business model depends on the best sources at the best prices.
And there is no point in saying that just because Tetley is a part of us, it should buy tea from us.
Because it would damage the model of itsr business in which profit is made something that is not easily understood by a lot of people.
Our idea of buying Tetley is that it is a branded business. It was not based on a model based on feedstock integration.
Have you placed emphasis on creating new export markets for tea?
Tetley already services most markets that are fairly large tea-drinking countries. And having acquired Tetley, we now have a presence in those markets.
Between the two companies, we are now looking at geographies where we are not represented.
We are looking at growing in the Middle East, Russia, CIS countries and neighbouring Pakistan and Bangladesh. That's where we see potential.
Since the industry is not doing too well at present, do you see in this an opportunity for take over of others' capacities at knocked down valuations for instance, takeover of plantations from other farmers or smaller companies?
Not at all. The focus is on branding. We are trying to develop better strategies on this front.
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