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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

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.

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.

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.

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

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How sales of toys and stationery products have taken a beating

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September 28, 2020

Written By Venkata Susmita Biswas

As per Euromonitor International, the toys and games industry in India was worth Rs 10,557 crore in 2019

Seasonal categories

Faber-Castell and ITC’s education and stationery business are among those that went through a long dry spell due to the deferment of new academic sessions. Toy manufacturer Funskool, which had anticipated peak sales during the summer season, was stuck with unsold inventory when the country went into lockdown. For both toys and stationery products, the summer months are crucial. Partho Chakrabarti, MD, Faber-Castell, India, says that almost 50% of the company’s sales can be attributed to this season. While for toys, the upcoming festive season, too, is a significant opportunity.

Around the world, the pandemic encouraged people confined to their homes to purchase board games, puzzles, hobby kits and art supplies online. In India, however, this was not possible during the first few months of the lockdown. “Even when e-commerce resumed in India, toy sales did not begin immediately, as toys and games are not classified as essentials,” says R Jeswant, CEO, Funskool.

Both ITC and Faber-Castell overcame the distribution challenge by partnering with Swiggy Genie and going direct-to-consumer. ITC has also activated its own e-commerce channel. Once the e-commerce players started delivering toys and stationery products, companies like Funskool and Faber-Castell saw a spike in online orders. For instance, Funskool’s e-commerce sales have gone up from 15-20% of total sales pre-Covid to 40-45% in the last couple of months.

The pandemic has driven companies to develop products that address need gaps in the market. Funskool, for example, has introduced a new product called Activity Table, which Jeswant says, “is like a child’s workstation”. Faber-Castell has launched an art and craft kit called My Creative Buddy.

ITC’s Vikas Gupta, chief executive, education and stationery products business, says the company introduced smaller pack sizes to stimulate purchase. ITC expects that once school sessions resume, products such as 3D books and poster notebooks that were launched before the lockdown will gain traction.

No reason to splurge

Footfall in malls and high streets remains far below pre-Covid levels. “Impulse buying is critical to offline sales in our category. As children are not accompanying parents, impulse purchases have been hit; stores are reporting only 30-40% of pre-Covid level sales,” says Jeswant.

With no store displays to entice consumers into making impulse purchases, Chakrabarti’s bet is on consumers knowing what they want and ordering those online or from their local shops.

Moreover, Devangshu Dutta, chief executive, Third Eyesight, says the perception that toys are an indulgence make them a discretionary purchase. Therefore, the revival of toy sales will be harder in a recession.

Toy companies are anticipating higher sales during the festive season. But Rehan Dhorajiwala, spokesperson, All India Toys Federation, isn’t as hopeful. “Toys are exchanged for festivals among family members when they meet each other. With such meet-ups on hold, we do not expect a huge revival,” he says.

Lack of fresh products is also impacting demand. Film and comic merchandise elicit significant interest among children, but they have been largely absent. “Since the entertainment industry has been inactive, there have been no new launches of superhero movies or character-themed products for the last few months,” says Dhorajiwala.

Consumers are opting for cheaper alternatives of stationery products and postponing purchases until schools reopen. The toys category, meanwhile, is dealing with a shortage in supply, as Chinese toys account for nearly 80-90% of India’s toy market. The regulatory hurdles with BIS certification could further shrink the toys market in India.

Source: financialexpress

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The reality behind Reliance’s retail rush

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September 28, 2020

Written By Mihir Dalal

Mumbai-based Jain, a computer science graduate from the Indian Institute of Technology, Madras, usually orders groceries from BigBasket and sometimes from Dunzo. He said that he doesn’t plan to use JioMart again.

“A couple of my friends and relatives (in Mumbai and Kota) have also had similarly bad experiences. It doesn’t look like JioMart is ready for online groceries. Their operations and customer care teams weren’t in sync,” Jain said.

Since JioMart expanded to more than 200 cities this summer, scores of customers like Jain have complained about missing products, delayed deliveries and generally poor service. Still, industry executives say that while its service levels have been inconsistent, JioMart is registering similar order volumes to BigBasket, the largest e-grocer, on the back of aggressive marketing and discounts.

These volumes still comprise a small fraction of the overall business of Amazon India and Walmart-owned Flipkart, the two dominant online retailers. But that’s because JioMart is only selling groceries now; it plans to sell other products like fashion and electronics soon. It’s clear that after many years of talk and hype, Reliance, which owns India’s largest offline retail chain, is finally becoming a serious challenger to Amazon and Flipkart, as well as BigBasket and Grofers.

Still, industry executives, logistics firms, consultants and analysts that Mint spoke with said that Reliance will find it tough to break the dominance of Amazon-Flipkart in e-commerce, similar to how Walmart is struggling to challenge Amazon in digital sales in the US even as its stores continue to prosper. Amazon and Flipkart both have deep pockets, proven expertise in e-commerce, popular brands and good knowledge of the Indian market.

“Reliance has the financial muscle, but Walmart (Flipkart) and Amazon are no pushovers,” said Harminder Sahni, managing director, Wazir Advisors, a consultancy. “Today, most people who want to shop online are happy with Flipkart and Amazon. These companies have achieved significant scale and have very few weaknesses. As a latecomer, it will be very difficult for Reliance to make a big dent in the market.”

Reliance did not respond to an emailed questionnaire seeking comment.

Local internet powerhouse

During the pandemic, Reliance has not only moved fast to make inroads into the e-commerce market, it has also consolidated its leadership in organized offline retail. Last month, Reliance bought most of the businesses of Future Group for about $3.4 billion in a deal that will take its retail footprint to nearly 14,000 stores—by far, the largest in India.

In the past six months, Reliance has raised more than $21 billion for its digital unit Jio Platforms. This month, Reliance kickstarted a separate fund-raising spree for its retail unit, Reliance Retail, bagging about $1.8 billion from private equity firms Silver Lake and KKR, two of the investors in Jio. Several more investment firms, including other shareholders in Jio, are expected to join them.

These moves are part of Reliance’s efforts to transform itself into a 21stcentury digital behemoth. It is positioning itself as India’s answer to Amazon, Facebook, Google, Alibaba and other world-class digital giants, and unlike local startups like Flipkart, Ola and Paytm that have or had similar ambitions, Reliance enjoys some unparalleled advantages.

It is now accepted wisdom among politicians and regulators that India needs a ‘local’ internet powerhouse to counter the dominance of America’s Big Tech and the growing influence of Chinese firms, partly because of sovereignty concerns. Reliance’s mastery in lobbying and its political clout makes the firm best-placed to exploit this urgent establishment need to find a domestic internet powerhouse.

Amazon, Flipkart, Facebook and others face many policy-related restrictions that not only serve as obstacles to them but pave the way for domestic firms led by Reliance to enter the fray. For instance, foreign investment rules prevent Amazon and Flipkart from owning inventory or selling private labels (though critics say that these firms do it anyway using clever legal workarounds), while Reliance has no such constraints. Apart from a supportive policy environment and huge capital resources, on the business front, too, Reliance has an enviable digital distribution network and reservoir of customer data on account of Jio.

But despite these formidable advantages, Reliance has yet to prove that it has the chops to realise its ambitious vision.

The war among Reliance and Flipkart and Amazon and other internet firms is also not restricted to retail, but will extend to other sectors like financial services, content and business-to-business commerce. The technology-centric nature of the battle is more suited to the internet companies than to Reliance. There’s little doubt that Reliance will be a major player in the digital business, but the jury’s out on how much value the firm can corner. Its foray in e-commerce and B2B will provide early answers to this question.

Retail battle

After JioMart began testing its service late last year, media reports said that the company would deliver products to customers from local kirana stores. After Facebook invested in Jio in April in a deal that included a business partnership between JioMart and WhatsApp, Ambani said that JioMart would soon connect some 3 crore kirana stores with their neighbourhood customers.

Many analysts, too, expect the partnership with WhatsApp, the most popular app in India, to be a game-changer. In July, Goldman Sachs estimated that Reliance’s entry will help expand the online grocery market by 20 times to about $29 billion by 2024. Reliance’s partnership with Facebook could help the firm become the leader in e-grocery and garner a market share of more than 50% by 2024, Goldman said.

But Mint learns that Reliance is sourcing a majority of orders on JioMart in many cities through Reliance Retail’s supply chain; only a small number of orders are served through kirana stores. JioMart is signing up a few thousand kirana stores every month, but its expansion is happening at a slower rate than many analysts expect. Two industry executives said that JioMart’s average order value is lower than that of other e-grocers, which means that Reliance is losing larger amounts of money on every order.

According to one e-commerce executive, for BigBasket and Grofers, the delivery cost is about 3-4% of the average order value, which exceeds ₹1000. For Reliance, the delivery cost is presently much higher because its order value is below ₹800. The lower order value is partly because most of JioMart’s 200 city-markets are non-metros. BigBasket and others generate an overwhelming majority of their business from the metros. Reliance is betting on expanding the e-grocery market rather, than taking market share from incumbents, which generate an overwhelming majority of their sales from 10-15 cities. But while Reliance may be able to attract customers in smaller cities initially with discounts, profitability will be tough.

“The economics of serving metros are very different from the rest of India. In the mass market, bill values are much, much lower. Right now, Reliance’s main focus is to scale JioMart, so they aren’t worried about the delivery cost,” the executive cited above said. “But eventually, reality will catch up, and they will have to increase basket sizes because this model isn’t sustainable. Grocery has very thin margins to start with. “

Private label push

One obvious way for Reliance to boost margins is by selling more private label products. In the grocery category, Reliance Retail already generates 14% of its revenues from private labels. People familiar with Reliance’s plans said that the company wants to push its private label products to kirana stores. While there are hundreds of well-known brands in FMCG, the grocery category (products like rice, pulses and flour) is largely unstructured. Reliance plans to sell its private label products both in grocery and FMCG.

Apart from retail, Reliance is also rapidly expanding its B2B business. Its private label products form a key component of its retail and wholesale business plans, the people cited above said.

The private label push, however, is making large FMCG companies like Hindustan Unilever, Marico and Dabur, which sell competing products, wary of working with Reliance’s B2B arm.

Like Flipkart and Amazon, which are also expanding their B2B businesses, Reliance’s grand vision over time is to have an integrated ecosystem of wholesale and retail in which it connects consumer goods makers with kirana stores and retailers, supplies a large number of private label products across many categories to retailers and end-customers, and becomes the biggest omnichannel retail firm in the country. But realising this vision will require Reliance to work seamlessly with millions of kirana stores, thousands of brands, modern retailers (all of which will see the firm as a rival to an extent)—and provide exceptional service in a profitable manner to retail customers.

Analysts and industry executives said that Reliance has a higher probability of finding success in categories like fashion (in which it already runs a portal called Ajio) and grocery that are mostly unorganised and have a shortage of established brands. In these categories, Reliance faces fewer barriers from existing players and has a better chance of pushing its private labels in both the wholesale and retail markets. But in categories like electronics and FMCG, which are dominated by entrenched brands, kirana stores and e-commerce firms, Reliance may struggle to scale as fast.

For instance, Flipkart and Amazon dominate online sales of electronics and fashion, which together comprise more than 75% of all e-commerce. To win significant share in electronics, Reliance will have to spend enormous amounts on discounts, marketing and offering favourable terms to brands . But, in fashion, Reliance can tap its low-priced private labels to lure customers without resorting to value destruction.

“The market is too varied for one player to be big in all categories,” an investment banker said. “Reliance will have to carefully choose its battles. There’s a risk that it may spread itself too thin, so it’s wise for them to have started with grocery.”

Meanwhile, while Google and Facebook have together invested more than $10 billion in Reliance, both companies are continuing to expand their own businesses in India. Google and Facebook have ambitions to enter e-commerce and expand in other sectors like payments and content. What this means is that while Google and Facebook will end up collaborating with Reliance in some areas, they will also compete with the firm in others, joining Flipkart and Amazon in the war of the digital conglomerates.

Flipkart and Amazon have already stepped up their lobbying efforts with the emergence of Reliance as a threat. Because of the pandemic that has made e-commerce indispensable, there has been a thaw in the government’s attitude towards the US e-commerce firms. A more antagonistic attitude may return when the pandemic passes.

Eventually, though, the war will be decided by customers. Here, experts are divided on whether Reliance will emerge as the winner. “Reliance still has to do a lot more on getting the customer experience in place, but given the strides they’ve made, it is well-placed to compete in the digital space,” said Devangshu Dutta, head of retail consultancy firm Third Eyesight.

Source: livemint

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The FMCG aftershocks in a Reliance Retail-Future Group earthquake

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September 28, 2020

Written By Shruti Venkatesh

Source: the-ken

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Filling up the cart with Korean labels

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September 25, 2020

Written By CHITRA NARAYANAN

The sentiment against Chinese products is helping retailers of Korean products in India

“Over 90 per cent of them are Indians,” says the Korikart founder. After K-pop, K-drama, and K-food, it is now K-beauty that is really being loved by Indians, he says. And while vocal for local may be trending, Young-Doo says the sentiments against China that spurred this movement has helped Korikart, as customers are picking up Korean products instead.

Toy sales spike

For instance, he says in recent months, there has been a spike in sales of toy products on the Korikart site. Beauty brands such as Innisfree and foods such as Ramen noodles continue to do well.

The trend is not limited to Korean products alone. Across Delhi NCR, there are now stores stocking Japanese products exclusively or shops that sell Thai and Japanese labels.

On Nykaa, there are over 1,100 Korean beauty products, and it is a category in itself. Similarly, on Ubuy India, you can pick up a plethora of food products from sauces to condiments to noodles from Thailand, in addition to toys, bags and fashion items.

Gone are those days when expats had to trudge to INA market to get their favourite Thai or exotic ingredient.

“This was a trend waiting to happen,” says Devangshu Dutta, CEO of Third Eyesight, a consultancy for retail.

He says back in 2004 when the Japanese and Korean companies had started arriving in huge numbers, he had forecast this was a retail opportunity.

Source: thehindubusinessline