Looking to go omnichannel, BigBasket may seal deal with Tatas soon

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October 29, 2020

Written By Samreen Ahmad

Reports say the online grocer is in talks with salt-to-software conglomerate to sell around 50 per cent of its stake in the company for around $1 billion

According to sources, the company is in final-stage talks with Tata Group and the deal could be sealed in a matter of days.

Online grocer BigBasket, which is in final-stage talks with Tata Group to sell majority stake in the company, could be doing this because of lack of visibility in terms of investments from large investors, say experts.

With big players such as Amazon and Reliance making serious bets in the space and investments from Chinese players looking unlikely, the company will need serious bucks to stay in the game, they add.

According to sources, the company is in final-stage talks with Tata Group and the deal could be sealed in a matter of days.

“The competition which BigBasket faces now is with the big three – Amazon, Walmart, and Reliance. If BigBasket’s biggest investors want to bet on it, they will have to write out a big cheque. A $10-15-million cheque will not help the company,” says Satish Meena, senior forecast analyst, Forrester Research.

BigBasket is, therefore, looking at someone it can partner with or strategic investors like the Tatas who can top up the investment further, adds Meena.

Reports suggest that the Bengaluru-based online grocer is in talks with the salt-to-software conglomerate to sell around 50 per cent of its stake in the company for around $1 billion, with China’s Alibaba, which is the largest investor in the company, looking to exit.

BigBasket also fits the criteria for Tata Group, which is now looking at something in retail to go omnichannel because it realises that pure-play will not help it in the long run. “It will be a good deal for both if it goes through,” says Meena.

According to a Redseer report, online grocery has seen Covid-induced tailwinds. Coupled with participation from large conglomerates, it is likely to witness high growth. From an overall 0.3 per cent, it could touch 2.3 per cent of the overall food and grocery market by 2024, which would make it a $18-billion segment.

“We keep talking to several firms, but nothing has been firmed up. Our e-commerce play will be really big and we’ll not contend with a minor stake in any company,” a Tata Group spokesperson had earlier said in response to a potential stake purchase in BigBasket.

Earlier reports had also pointed out that the Mumbai-headquartered conglomerate was also in talks with Snapdeal and IndiaMART to buy stake in the companies to strengthen its online presence.

“For them to have serious play online, inorganic is the quickest route. So buying a majority stake in a player like BigBasket makes sense,” says Devangshu Dutta, chief executive, Third Eyesight.

In August, Tata Sons Chairman N Chandrasekaran had also made it public that the group was building a SuperApp that would go live in December. The group’s holding company is overseeing the project, with inputs from consumer-facing businesses, including Trent, Croma, and Tata Cliq, among others.

Source: business-standard

Tea Cafes expand; start home deliveries

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October 26, 2020

Written By Devika Singh

Given the low footfall, QSRs like Chaayos and Chai Point have added more food items in their menus for delivery

Experts say these chains are “stepping away from their core offering”.

Social distancing has thrown a spanner in the works for tea cafés that were originally built around the concept of ‘catching up’. Given the low footfall, QSRs like Chaayos and Chai Point have added more food items in their menus for delivery, and are ramping up their packaged food offerings.

According to a Zomato report released in August, dining was operating at 8-10% of the pre-Covid level, while food delivery was clocking 75-80% of pre-Covid GMV. The food services industry has been making the most of home deliveries to recover the loss in business from dine-in; however, experts say, it hasn’t worked well for tea cafés. “Their core offering is ‘a fresh cup of tea’, which loses effectiveness when delivered to homes,” says Pinakiranjan Mishra, partner and national leader, consumer products and retail, EY India. The fact that tea is an oft-consumed beverage in homes is another challenge.

Beyond beverages

Tea café chains have tied up with e-commerce platforms to deliver items from their expanded food menu. Chai Point’s menu, for example, now includes ‘all-day breakfast’ options like parathas. “Time-strapped consumers are looking for food items that are filling, and hence, we have launched 12 more products,” says Amuleek Singh Bijral, co-founder and CEO, Chai Point.

The company has enabled consumers to place orders on WhatsApp. For deliveries, it has tied up with Dunzo, Shadowfax and other regional players. The effort is to “try and create an alternate discovery channel”, says Bijral.

Meanwhile, Chaayos has added street foods such as vada pav and pav bhaji to its menu. “There has been an increased demand for hygienic street food, as consumers are unable to venture out, and we want to tap that,” says Raghav Verma, co-founder, Chaayos. The company, which would receive a mix of residential and corporate orders in pre-Covid times, has lately seen a rise in order volumes from residential areas.

Both the QSRs are also betting on packaged foods. Chai Point used to offer packaged tea and snacks at its outlets pre-Covid, but now it is retailing these products through its own website. Besides tea packs, snacks such as khakra, cookies, and ingredients used to make tea, such as jaggery, honey and natural sweeteners are being sold on the platform.

Chaayos is now offering instant tea mixes, in addition to tea packs and snacks. It has tied up with e-commerce platforms — Amazon, Flipkart, Big Basket, Grofers and Milkbasket — to sell these.

Not their cup of tea?

Experts say these chains are “stepping away from their core offering”; the only leverage they have is the brand awareness they enjoy. “There are very few synergies between a café and a packaged foods business that these companies can tap,” says Devangshu Dutta, chief executive, Third Eyesight.

Entering the packaged tea and snacks categories puts them in direct competition with the big FMCG brands — Lay’s and Uncle Chipps in the snack category and Tata Tea’s and HUL’s tea brands in the packaged tea segment, for example.

Keeping their pricing in the mid-premium to premium range, experts say, would help these companies recover delivery costs and create a differentiated positioning. That seems to be the strategy adopted by the QSRs. A 250 gm pack of Chai Point’s Assam tea, for instance, is priced at Rs 199, slightly higher than HUL’s Red Label, which is priced at Rs 145. Chaayos’ pricing is more premium — Rs 298 for a 200 gm pack of masala tea.

These companies may be looking at this alternative revenue stream only for the short term, say experts, until footfalls return to the pre-Covid level. A long-term strategy, after all, would require higher investments in distribution and marketing.

Source: financialexpress

Newly rechristened Tata Consumer Products goes beyond beverages

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October 23, 2020

Written By SAMAR SRIVASTAVA

Even with solid tea, coffee and water brands, the company had seen uninspiring returns. Now, the re-invented TCP is writing a new script

Sunil D’Souza, MD & CEO of TCP, is rejigging internal structures and distribution methods Image: Mexy Xavier

Why are we not in the top echelons of Indian consumer businesses, was a question that resounded often within the hallowed walls of Bombay House, the headquarters of Tata Sons. The 152-year-old business house had some of the biggest consumer brands in the country across sectors—from automobiles and jewellery to consumer durables and beverages. Over the years it had shown the capability to invest in any business it wanted to. And a competent set of managers ran these businesses. Despite this, Tata Sons found itself cut off from the 50 times earnings multiples that Indian consumer companies commanded.

The closest it had come to a consumer business was with a company that has recently been christened Tata Consumer Products (TCP). It had a solid tea and coffee franchise—Tata Tea, Tata Coffee—as well as a premium product in Himalaya water. The global portfolio included Tetley Tea and Eight O’Clock Coffee.

But partly on account of the price it paid for acquiring Tetley and the way its business was structured in India, its return ratios were uninspiring for fund managers to consider buying the stock. Return on equity stood at 6 percent in the year ended March 2020, compared to 86 percent for Hindustan Unilever (HUL) and 35 percent for homegrown Marico.

Operating margins were in the high teens and decadal growth rates for sales and profits were 5 and 4 percent respectively. (Voltas, another group company in the consumer durable space, also had an indifferent decade, with profits growing at 4 percent a year.) For much of the last 10 years, the market has priced it at between 15 and 20 times earnings. In short, it was hardly the premium valuation that a top business house would be happy with.

Meanwhile, between 2015 and 2020, Sunil D’Souza (53) was scripting a success story with the India operations of Whirlpool. He had an impressive résumé—he’d worked in HUL, Coca-Cola and PepsiCo in India and Southeast Asia—and industry watchers liked what he had done with Whirlpool; profits rose by 17 percent a year and revenues 13 percent.

Rahul Rathi, who runs Purnartha Investment Advisors, has known D’Souza from his time at Whirlpool. What impressed him was that the company was able to get into a negative working capital cycle for what are essentially commodity products—refrigerators, washing machines and air conditioners. This resulted in the market giving it an earnings multiple of 58 times, a rarity in this business. According to Rathi, this growth mindset often comes from the leader at the top.

With a successful stint at Whirlpool, the opportunity to write a new script at TCP was a logical challenge for D’Souza to take up. He was promised a free hand. Once the plan was in place, he was to make a presentation to the board and would be given the freedom to execute. “That was a challenge that I couldn’t refuse,” says D’Souza, who took over as MD and CEO of TCP on April 4, when the country was under lockdown. More recently, news that Tata Sons may be in the running for a stake in BigBasket shows that the group is serious about beefing up its presence in consumer businesses. Tata Sons declined to comment.

Newly rechristened Tata Consumer Products goes beyond beverages

Dealing directly with retailers can give Tata Consumer Products more visibility and shelf space

Before joining, D’Souza spent time visiting markets, understanding the company’s products, and meeting employees. His first few days were spent in getting permissions for restarting plants, making sure the procurement engine doesn’t come unstuck, and getting shelves stocked. With that out of the way, he began work on simplifying the organisation structure—with beverages, food, Nourishco (a joint venture making non-carbonated beverages that had been run with PepsiCo India and was acquired by TCP) and international businesses as prominent verticals. As a leader, he realised that getting a new structure in place would end any uncertainty among employees.

Next began work on simplifying distribution. This was important as it had the potential to allow the company to add new products as well as add to margins. With a product basket as large and diverse as TCP’s, the company faced multiple challenges here. First, it had a layer called consignee agents that most consumer companies had done away with. They typically reach stores directly through their stockists or through company employees.

While money is saved when a layer between the consumer and the company is eliminated, it also allows for faster access to market intelligence and gives companies more control over how their products are placed at stores. TCP’s basket of products was now big enough to allow for this consolidation.

Newly rechristened Tata Consumer Products goes beyond beverages

Direct distribution is another key metric consumer businesses focus on. In 2010, HUL had unveiled an ambitious plan to treble its direct reach in rural India. “This increase in rural coverage will be a big leap, and to my mind, will be a huge driver of future growth,” then HUL Chairman Harish Manwani had said at its 2010 annual general meeting.

Over the next 12 months, D’Souza plans to double TCP’s direct reach from 5 lakh outlets at present; the 25 lakh outlets (overall) it reaches should double in the next 36 months. This will give the company great say over display and promotions in stores and then allow it to power its brands with advertising spends. With an integrated backend, a single truck would go for both beverages and food, compared to the different routes that are being followed at present.

With a consolidated front- and backend in place, D’Souza believes the future is “about plugging in a category and driving synergies and a better return profile as we go forward”. He hopes to save between 2 and 3 percent of topline on account of these synergies. This can then be invested in the business or moved to bolster the bottom line. How Tata Consumer performs in improving margins and increasing profitability will be key to judging his tenure.

So far, the market has given the company a resounding thumbs up. It is up by 56 percent since the news of D’souza’s appointment, taking TCP’s market cap to ₹43,000 crore. For now, its operating margins at 12 to 14 percent don’t justify this valuation. It remains to be seen how they move up and how the topline grows.

With distribution rejigged, plugging in more categories will be a key focus. A significant growth driver is likely to be the pulses business. Here D’Souza is clear he doesn’t want to play on the mass end and chase topline. Instead, premium products like unpolished pulses could provide an opportunity for the company to capitalise through the Tata Sampann brand. The business received a fillip during the lockdown when consumers showed the propensity to shift to branded products on account of quality and hygiene.

The last decade has seen various agri commodities move from unbranded to branded products. Take wheat, which now has brands like ITC Aashirvaad, or basmati rice that has Kohinoor, Daawat, India Gate or Fortune. “The smart thing they’ve done is go after a category that was ripe for picking as it is still highly fragmented,” says Devangshu Dutta, CEO of Third Eyesight, a retail consultancy. He cautions that while there is a lot of scope to cut out the middleman and keep margins in what is a thin-margin business, it is also a business that takes time to build and scale. For now, its main competition will be from regional brands.

In the tea business, moving 40 percent of consumers who drink unbranded tea to Tata brands is another focus area. With coffee, it is not a conversion opportunity but a market share gain opportunity that TCP has to work on. Salt lends itself to premiumisation. Varieties with less sodium and more iron can retail for 50 percent more than plain salt. In addition the Nourishco business, which has a ₹200 crore topline, and Tata Starbucks should also provide additional growth levers.

While India is expected to be a growth engine, it is the international business that TCP views as a steady cash generating machine, albeit one with low growth. Its Tetley brand has a strong following in the US, the UK and Canada.

It is here that TCP faces a problem. The acquisition of Tetley for $400 million (₹1,750 crore) in 2000 saddled its balance sheet with goodwill costs that currently stand at ₹7,600 crore. This line item has dragged its return on capital employed to 8.1 percent in the year ended March 2020. It’s not clear how the board manages to deal with this, but when asked whether a sale or large impairment charge was the only way to get rid of this, D’Souza clarified “goodwill is something we already have on the balance sheet and am aware that most investors calculate their return metrices with goodwill. Therefore, our endeavour is to continue to improve performance to move these metrices positively”. He added: “On a separate note, we also review our business portfolio periodically to make sure we have the right mix and will not hesitate in taking tough decisions. We have demonstrated this when we exited Russia, China and recently the Czech Republic.”

There could also be some news on the acquisition front. At ₹2,000 crore, the company has significant cash to deploy, but as several of D’Souza’s peers have learnt, a decade of high price multiples of consumer businesses has meant that these opportunities, in India at least, don’t come cheap. (He declined to comment on whether the company would be interested in HUL’s global tea business, which is up for sale.)

Returning the cash to shareholders is another option. “For any business, as long as you are firing up the topline while keeping the middle portion [fixed costs] tight, then a significant portion of the margin comes into the bottom line,” he says. D’Souza is also aware of the challenge of nurturing businesses that are in different stages of their growth cycle—a key task during his last role at PepsiCo. The market did see a glimpse of that in the first quarter earnings when net profit nearly doubled to ₹345 crore even though topline was up by only 13 percent to ₹2,746 crore. As the market waits for news on acquisitions or new product launches, increased profitability is something that will take with both hands.

Source: forbesindia