Introduction

Tata Global BeveragesTata Global Beverages was set up in 1964 as ‘Tata Finlay’ when the Tata group created an alliance with Indian tea giant James Finlay and Company. In 1983 Tata Tea was born after James Finlay sold his shareholdings to Tata. The company went global in 2000 with the much talked about acquisition of the UK tea giant Tetley. This was followed by a string of strategic acquisitions including Good Earth, Jemca, Vitax, Eight O’ Clock Coffee and Himalayan Water. Today TGB is an integrated business that has set out on a journey to become a global leader in branded good-for-you beverages. It has grown through innovation, strategic acquisition and organic growth.The Tata Global Beverages website mentions that TGB’s main motive is to unite the beverage interests of Tata under one umbrella. TGB is stepping out of its long history in plantations to become a marketing and brand focused organization with a portfolio of engaging and exciting strong consumer brands.Major subsidiaries include

Tata Tea Holdings Pvt. Ltd., India Tata Coffee Ltd., India Mount Everest Mineral Water Ltd., India Lyons Tetley Ltd., UK Eight O’Clock Coffee Inc., USA

A complete list of subsidiaries can be found in Exhibit 1.

Tata CoffeeTata Coffee is the largest integrated coffee plantation company in the world. Tata Coffee is involved in every aspect of coffee making process, with business activities ranging from growing and curing of coffee and tea to the manufacture and marketing of value-added coffee products. Tata Coffee grows coffee on its own estates, processes the beans, manufactures and exports instant coffee and retails coffee with its own branding and the domestic market. Tata Coffee owns 19 coffee estates in Coorg, Chickmaglur and Hassan districts amongst others. Tata Coffee’s uniqueness lies in its ability to produce large quantities of estate specific, strain specific, specialty and premium coffee, while maintaining strict consistency in quality.

Tata TeaTata Tea is the market leader in India and has strong brands in its portfolio such as Tata Tea Gold, Tata Tea Premium, Kannan Devan, Chakra Gold, Agni and Gemini. In 2009-10, Tata Tea Limited made bold strategic moves to take its business in new directions and transition from a tea plantation company to a global beverages company. In order to reflect this transformation, the board decided that the company name should be changed to Tata Global Beverages Limited.

Brands

Tetley: enjoyed in 70 countries worldwide and is the second largest tea brand globally; Market leader in Canada; Brand leader in decaffeinated tea in UK; and Tetley Green is the fastest growing green tea brand in UK; Acquired in 2000

Tata Tea: a household name in India; Market leader; in existence for over 27 years

Good Earth: Herbal and specialty tea business on the US west coast; Acquired in 2005

Eight O’Clock Coffee: One of the America’s greatest brands; fourth largest coffee brand by volume in the US; Acquired in 2006

Himalayan: a premium lifestyle mineral water brand in India; Acquired in 2007

Grand: Russia’s leading beverage brands, known for its great value coffee and tea products; Acquired in 2009

Vitax: a well-recognized brand in Poland, for its flavored fruit and herbal teas; Acquired in 2007

Jemca: leading tea brand in Czech Republic; a strong portfolio of black, green and fruit and herbal teas; Acquired in 2006

Laagar: South-Africa’s most popular rooibos (redbush) tea brands; 2nd largest selling brands in South Africa; Acquired in 2011

Tata Water Plus: brought to the Indian market through NourishCo Beverages Ltd, a JV with PepsiCo India; In 2011

Tata Starbucks: ‘Starbucks Coffee – a Tata alliance’; a 50:50 joint venture; Launched in India in 2012

MAP: R&G coffee and coffee in Pods segments in Australia; Acquired in 2014

The Global Coffee Industry from 2005-2007Coffee being a commodity often experiences price fluctuations in the global market. In the fiscal year 2005-06, the global coffee industry saw an uptrend in prices, as productions fell in key countries while consumption continued to grow. Within a span of a few months in 2006, the industry again witnessed volatility as the industry moved out of a tight situation to a near supply-demand balance situation due to higher production in Brazil and Vietnam. The global

production for 2006-07 was estimated at 72,000,000 Tonnes (120 million bags) while the consumption stood at 70,200,000 Tonnes (117 million bags). The industry was also plagued by weather related problems such as Hurricane Katrina, which led to lower consumption in 2005-06.The demand for certified coffees had also been growing steadily with buyers worldwide becoming more conscious of the type of coffee they bought. The awareness that low prices led to harmful environmental practices, poor standards etc. resulted in buyers seeking responsible producers who are environmental conscious. They were willing to pay a premium for such coffee certified by independent audit bodies for the practices adopted.

Tata Tea Ltd. and Tata Coffee Ltd. in 2005-07In India, Instant Coffee was gaining market quickly. The packaged filter coffee market was shrinking at 10% year on year, while instant coffee was increasing at a similar rate. In the instant coffee segment, Tata Coffee witnessed major competition from Nestle and HUL who were the market number 1 and number 2; while the presence of a lot of smaller brands in the filter coffee segment made it difficult for Tata Coffee to grow domestically.Globally, Tata Tea along with Tetley continued to maximize revenue and growth but the Tata group was yet to make its presence felt in the coffee segment worldwide. The management team at Tata Coffee strongly believed in gaining start up learning in the beverage arena through acquisitions overseas. They also wanted to protect the Company against price fluctuations and were making an effort to move towards differentiated coffee as a buffer against low prices. The parent company Tata Tea Ltd. witnessed a turnover of 4,035 crores in 2006-07, which was a 29% increase of the previous year. The EBIT margin was 15.7% while EBIT itself stood at 148 crores. The Profit After Tax was 144 crores, 48% higher than the previous year. (Exhibit 2)Tata Coffee’s PAT stood at 36 crores before minority interest (up by 59%) and 28 crores after minority interest (up 27%).

Vision of the CompanyTo truly understand the global strategy of Tata Global Beverages, we need to look at their vision first. The annual report of Tata Tea Ltd. for the fiscal year 2005-06 mentions their vision as ‘Challenging for leadership in tea around the world’. They also mention – ‘The geographic scope of our vision; building a global business by leveraging and building our brands and forging partnerships to mutual advantage.’ A more recent annual report of the year 2012-13 states the strategy of Tata Global Beverages as – ‘To be the most admired natural beverages company in the world by making a big and lasting difference in tea, coffee and water.’The clearly defined and well-articulated vision of the company played a major role in the transformation of Tata Tea Group from primarily a plantation company into a branded global consumer goods company with over 80% of the group’s business being contributed by the group’s worldwide branded tea and coffee business. Ever since the acquisition of Tetley in 2000, Tata Global Beverages have been continuously looking out to expand into the global

market, which led to a series of acquisitions of brands in various countries. It has thus reduced its dependence on a particular geography and at the same time also moved into differentiated products to protect itself against price fluctuations of Tea and Coffee, which are basically commodities.

Eight O’Clock CoffeeEight O’Clock Coffee is the brand line of coffee products currently manufactured by Eight O’Clock Coffee Company, a subsidiary of Tata Global Beverages, which is headquartered in Montvale, New Jersey with its coffee production plant located in Landover, Maryland. Tata Global Beverages has owned Eight O’Clock Coffee since 2006.Eight O’Clock Coffee was created by the Great Atlantic & Pacific Tea Company in 1859, which is also that company’s founding year. Despite selling off the brand in 2003, A&P continues to sell Eight O’Clock Coffee today throughout its own family of stores. EOC is also sold in other supermarkets across the country.In 1919, A&P supposedly conducted a survey asking people what time of say they drank coffee most. The majority people surveyed reported they typically drank coffee at 8 a.m. and 8 p.m. This is when the name of the whole bean coffee, which did not have an official name till then, was set as Eight O’Clock Coffee. In the 1930s, Eight O’Clock coffee had gained over a quarter of the U.S. market share and was the most popular brand of coffee in the states. In 1979 the company licensed its branding division, Compass Foods, Inc to sell EOC to other retailers including competing Supermarket chains. In 2003, A&P spun off Eight O’Clock coffee to Gryphon Investors, a private equity firm based in San Francisco, California, which used the brand to create the Eight O’Clock Coffee Company. A few weeks later, Eight O’Clock ground coffee was introduced. Gryphon Investors would soon turn around and sell Eight O’Clock Coffee Company to Tata Global Beverages.EOC when acquired by Tata Global Beverages in 2006, was a leading roaster and distributer of branded “Value Gourmet” and “Whole Bean” coffee with a market share of 52% and 46% respectively in the USA. The company distributed its products at Wal-Mart, Publix, Alberton’s, A&P, Super Valu and Food Lion. Within the broad USA retail coffee category, EOC was the third largest brand by volume, behind Folgers and Maxwell House. The EOC brand was uniquely positioned in the coffee marketplace at a mid-level price point with high quality 100% Arabica beans and 150 years of brand equity. The sales had been growing at a CAGR of over 14% for the last three years then. EOC also enjoyed significant retail distribution strength with approximately 67 percent of all commodity volume penetration of the US retail coffee market.

The AcquisitionTata Coffee Ltd., a 51% owned subsidiary of Tata Tea Ltd., signed a definitive agreement to acquire Eight O’Clock Coffee Company (EOC), USA from Gryphon investors for a total acquisition price of $220 million (Rs.1,015 crores).J.P. Morgan acted as an exclusive financial advisor to Tata Coffee on this acquisition, while Rabo Bank arranged the funding.TO fund this deal along with the Glaceau deal, Tata Tea borrowed heavily about $600 million. This boosted up Tata Tea’s Debt-to-Equity ratio up to 2.5 (a ratio over 1.5 is

considered high). It was estimated that servicing that debt load would cut earnings per share by 3% for the fiscal year 2006-07. But the management was optimistic, as they had witnessed a similar situation during the acquisition of Tetley when the Debt-to-Equity ratio was even higher. It dropped to below one before Eight O’Clock coffee’s deal due to refinancings and rising earnings.

Reasons why Tata Global Beverages acquired Eight O’Clock Coffee

Tata Coffee was non-existence in the global coffee industry and was looking to become an international and fully integrated player in the coffee industry

With the backing of Tata Group, TGB wanted to leverage their brand equity to capture new markets and new geographies

The acquisition gave Tata Coffee a large and instant presence in the US, where people preferred Coffee to Tea as their morning beverage

The acquisition was significant for Tata Coffee as within the road US food category, EOC was then the third largest coffee brand by volume, behind Folgers and Maxwell House

EOC presented a sizable entry platform and an established brand to Tata Coffee in the $21 billion US Coffee market

Tata Coffee had been primarily been a Coffee Plantation Company which had been striving to establish brands in India, this acquisition made sense as it was an attempt to move up the value chain

Eight O’Clock Coffee had a brand presence of over 100 years and an established distribution network, instead of launching their own product their and investing humongous amount in setting up a distribution network

Tata Coffee found it difficult to make an impact in branded coffee with well-entrenched players like Nestle and Brooke Bond, they though it would be easier to move out of India

Immediate Effects of the AcquisitionDuring the 8-month period from its acquisition in 2006 to the end of the financial year 2006-07, EOC registered a sale of 25.772 million pounds and a turnover of Rs. 482.85 crores in terms of value. This had a direct effect on the turnover of Tata Coffee as well. The company’s turnover witnessed a growth of 293% moving from 190 crores to 750 crores, a substantial amount of which was contributed by EOC.The EBITDA of EOC was Rs. 78.08 crores and the PAT was Rs. 10.95 crores. In the value gourmet segment, EOC registered a growth in terms of both value as well as volumes, which was higher than the growth in the segment as a whole.Tata coffee saw its PBT grow by 67%, PAT by 27% and EPS by 15%. During FY 2006, EOC was the fastest growing brand when compared to its competitors baring Folgers.

With the acquisition of Eight O'Clock, consolidated turnover of Tata Tea Ltd. increased from Rs 3124.56 crores to Rs 4043.24 crores in 2006 and in 2007. The increase in turnover was recorded due to higher sales and effect of full year’s turnover as against about eight months in the previous year partly impacted by adverse exchange rates. The turnover growth was 921 crores (29%) out of which Rs. 558 crores (61%) was on account of new acquisitions (Jemca, Good Earth and Eight O’Clock Coffee).

Applying the ADDING Value Scorecard on the Acquisition of EOC

A: Adding volume, or growth – EOC was the third largest brand in U.S. by volume, with a market share of 52% and 46% in the “Value Gourmet” and “Whole Bean” coffee market. Tata Coffee was virtually non-existent in the U.S. market and was struggling to increase turnover in the Indian market due to large players like Brooke Bond and Nestle in the instant coffee segment, and lots of small players in the filter coffee segment. EOC’s sales had been increasing at a CAGR of 14%. Tata also planned to export EOC to UK and other potential markets. All of these factors definitely translated to increase volume and overall growth of Tata Tea.D: Decreasing Cost – Tata Tea was primarily present in the plantation business, which has witnessed an increase in costs throughout the last decade because of increasing labor cost. Also the cost of export their Indian brands such as Tata Kappi led to lower income each year. U.S. Coffee industry in 2006 was about $21 billion, the largest in the world and to set up a distribution network for Tata Tea’s Indian brands was infeasible. The acquisition of Eight O’Clock coffee allowed them the easy entry into the U.S. market and they wished to push Iced-Tea concentrates and ready to drink tea into the U.S. market using the distribution channel of EOC.D: Differentiating Products – They company had understood that the demand for certified coffees had been growing steadily with buyers worldwide becoming more conscious about the type of coffee they buy. The buyers were willing to pay a premium for coffees certified by independent audit bodies for the practices adopted. EOC provided this. Also Coffee being a commodity was expected to experience volatility in prices and to protect the company against price fluctuations, it needed to move towards differentiated coffees as a buffer against low price.I: Improve Industry Attractiveness – Tata Tea was a well established player in the global tea market with Tetley being the world’s number 2 tea brand, but their presence in the coffee industry was minimal. Their vision was to become a global go-to beverage company, which could not have been possible without their presence in other sectors (apart from tea). Eight O’Clock coffee gave them a good platform to launch themselves in the world’s largest coffee market. This can be viewed as a forward integration strategy as well where the company moved from being a primarily plantation company to marketing brands.N: Normalizing Risks – The plantations industry was witnessing an increase in operating expenditure throughout the last decade. There was even an incident where the workers in a plantation because of an on-going labor wages negotiations, abducted a senior executive. This

was the reason why the company wanted to move out of the plantations business and into marketing brands. This acquisition provided them the opportunity. Another factor was that they wanted to protect the company against fluctuating prices of coffee by entering into differentiated coffees as a buffer against low price.G: Generating Knowledge – Tata Tea Ltd. had been a global company ever science the acquisition of Tetley, but Tata Coffee had been primarily a plantation company. The acquisition of Eight O’Clock coffee gave them the opportunity to foray into the Gourmet Coffee segment and that too in the world’s largest coffee market. Also the company wanted to use the well-established distribution network of Eight O’Clock Coffee in the U.S. to push their tea concentrates and ready to drink teas in the U.S market. The acquisition of EOC helped them gain valuable insights into the path of becoming an international and fully integrated player in the coffee sector.

ConclusionTata Global Beverages has always had a vision to become a global beverage brand and they believe that the way to do this is via large acquisitions worldwide. They did this with Tetley in 2000, which was much larger than Tata Tea Ltd. They acquired Tetley by borrowing huge amounts and increased the debt to equity ratio of the company substantially. But through refinancing and higher sales each passing year they successfully brought down their Debt to Equity ratio below one. They replicated this strategy again in 2006 with the acquisition of Eight O’Clock coffee. Their strategy also includes moving away from being only a plantation company to marketing brands which was witnessed when they sold away quite a few of their plantations to the workers in 2005.At no point in time can anyone say that Tata Global Beverages suffered from Marketing Myopia. They accurately envisioned the change of consumer preference from Tea and Coffee to more healthy beverages. They complimented this vision by acquiring Glaceau. They also understood the consumer preference for brands certified by auditors against mal-practices in labor management. Since the acquisition of Tetley, Tata Global Beverages have had a string of acquisitions including brands such as Good Earth, Vitax, Himalayan Water and the most recent Maps.Their future strategy is to make these brands truly global as only Tetley is present in countries across continents and the others being strong brands in their original markets. This strategy can be seen in their move to launch Himalayan Water in Singapore and relaunching Eight O’Clock Coffee in the UK.They are also looking at building a strong presence in the complete value chain by buying out coffee plantations in Uganda and supermarkets in the US (ShopRite retailers cooperative, as part of EOC’s branding and distributing division).Concluding, the figure on the next page depicts the pillars of Tata Global Beverages strategy