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STRATEGIC MANAGEMENT II
Section: C
Arul Sood K S Santosh Pooja Agarwal Priyanjali Vashisht Rishabh Agarwal Suneel Nanduri Yogesh Yadav
TEA INDUSTRY ............................................................................................................................................... 4 Indian Tea Industry Features .................................................................................................................... 4 Market Trends........................................................................................................................................... 4 Special Features of India Tea Industry: ..................................................................................................... 5 Industry Size .............................................................................................................................................. 6 Market Growth Rate ................................................................................................................................. 6 Supply Determinants............................................................................................................................. 8 Major Tea Growing Regions: ..................................................................................................................... 8 Characteristics of Indian Tea Industry ...................................................................................................... 9 Competitive Structure............................................................................................................................. 10 SWOT Analysis of Indian Tea Industry .................................................................................................... 11 PORTER'S 5 Forces Analysis of Indian Tea Industry ................................................................................ 12 Major Events ........................................................................................................................................... 13 TATA TEA LTD .............................................................................................................................................. 14 Global Footprints .................................................................................................................................... 15 Major Acquitions..................................................................................................................................... 15 Value Chain Analysis of Tata Tea ............................................................................................................ 16 Profitability Analysis of Tata Tea............................................................................................................. 16 SWOT Analysis of Tata Tea: .................................................................................................................... 18 Present Business Strategy of Tata Tea .................................................................................................... 19 Problems at hand for Tata Tea................................................................................................................ 20 Suggested Business Strategies for Tata Tea to follow ............................................................................ 20 Tata Teas new Business Strategy ........................................................................................................... 20 Tata Tea Core Competency ..................................................................................................................... 21 HINDUSTAN UNILEVER LIMITED ................................................................................................................. 21 Major events for HUL .............................................................................................................................. 21 Brands of HUL ......................................................................................................................................... 22 HUL Segmentation of Indian Tea Market ............................................................................................... 22 Profitability Analysis of HUL .................................................................................................................... 23 SWOT Analysis for HUL: .......................................................................................................................... 24 2
Present Business Strategy of HUL ........................................................................................................... 25 Core Competency of HUL ........................................................................................................................ 26 Recommendations: ................................................................................................................................. 26 Comparing the current market position of Tata Tea and HUL ................................................................... 27 References: ................................................................................................................................................. 28
TEA INDUSTRY
Tea plays a vital role in the lives of millions of Indians. They take it as a refreshing drink as part of daily ritual. Tea offers livelihood to millions of people who are associated with this industry. India produces some of the worlds finest quality and also the largest variety of tea. Among the famous specialty flavors are Darjeeling tea, Assam tea and Nilgiri tea, which are grown in the Bengal, Assam and Tamil Nadu. Tea is normally classified based on the processing, leaf size and grade. Fermentation creates two major classifications, black and green tea. Black tea is further classified into CTC (cut, tear and curl) and orthodox tea.
Market Trends
The tea market in India is witnessing a sea change in recent times. Changes in the life style of Indians have influenced tea consumption pattern. In particular, it has caused the growth of the so-called branded or packaged tea category. Earlier, tea was mostly sold in a commodity form. However, now-adays the branded form has gained popularity and led to the entry of packaged tea and tea bags. Out of the 750 million kg of tea consumed in India, around 300 million kg was sold in the branded form. The branded tea is now estimated to account for 60% of the annual turnover of the tea industry, valued at Rs 6400 crores. The major players in the branded tea business have been undergoing a restructuring process. Not long back, 80% of Tata Teas income used to come from its plantations, but now the emphasis has almost reversed. After Tata Tea sold its tea plantations to its wholly owned subsidiaries, plantations contributed just 14% to the companys turnover. It is also making efforts to strengthen its brands, and its acquisition of Tetley in 2000 has helped a lot in this regard. Following a similar step, HUL had quit plantations business and concentrated on the branded segment alone. After the sale of Tea Estates India Ltd, HUL has totally withdrawn from the plantation activity. Unlike Tata Tea and HUL who sold off their plantations, smaller players are still holding their plantations business.
TYPES OF TEA
HERBAL TEA
BLACK TEA
GREEN TEA
CTC
ORTHODOX TEA
Black Teas are oxidized and fermented during processing, to give them their distinctive flavors. Black tea has a full, rich taste. Oolong Tea is tea that falls between a black and a green tea. It only undergoes a small amount of fermentation during processing Green Tea undergoes less processing than black teas, and have a much lighter flavor. The health benefits of green tea are seemingly endless. Since the leaves are not fermented, the taste is pleasantly fresh and herbal White Tea comes from the Camellia sinensis plant. But the leaves are picked and harvested before the leaves open fully, when the buds are still covered by fine white hair, hence the name. White tea is scarcer than the other traditional teas, and quite a bit more expensive. Loose Teas are typically whole leaves or at least large pieces of leaves Tea bag is a small, porous paper, silk or plastic sealed bag containing tea leaves for brewing tea
Industry Size
Indian tea industry stood at 979 million kg as of 2009, with the share to global supply accounting for 25 %. It is currently the second largest producer of tea in the world, following China which overtook it since 2006. In 2009, the size of the Indian tea industry was estimated at Rs 140 billion. Tea is a significant foreign exchange earner and total tea exports were approximately around Rs 26.2 billion in 2009.
Demand
Domestic Consumption Exports Total 844 191.5
1035.5
Supply
Production Imports Total 979 28 1007
1035.5
India has over 13,000 tea estates with a combined acreage of about one million, most of it in northern India. The sector employs close to one and a half million people with foreign participation in the majority of tea plantations at 25-30% Registration with the Tea board: 1655 registered Tea Manufacturers 2008 registered Tea Exporters 5148 number of registered tea buyers Nine tea Auction centers
As can be seen from the above graph the market growth rate has been hovering around the 2% mark since the mid 90s.
The traditional tea business has been witnessing stagnant growth for the company over the last three years since 2007.
Supply Determinants Tea production and yield depend on the age profile of tea bushes. A tea plant is its most productive between 11-20 years after it is planted. Although the productive life of a tea bush starts declining after a period of 50 years. Around 45% of the tea bushes in India are above the productive age of 20-40 years. In Kerala and Karnataka, the age profile of tea is poor with almost 79% and 77% of the bushes above 40 years. Yield or Productivity is the production per unit of land. It is directly related to the age of the tea bushes and the altitude at which they are grown In India, the effective yield per hectare declined from 1844 kg/hectare in 1998 to 1705 kg/hectare in 2007. This has been attributed to inadequate investments in re-plantation and rejuvenation activities, the age profile of bushes, indiscriminate use of fertilizers and problem of pest attack. Climatic and soil conditions are crucial for the growth of the tea plant. Appropriate intensity and quantum of rainfall, temperature and humidity conditions are required.
4) Long gestation: Tea bushes mature for commercial exploitation in 5-7 years and remain productive for an average 50 to 60 years. Major part of capital expenditure is to be incurred in first five years, which then yields return over the next 100 years. 5) Domestic Competition: The major share of tea market is dominated by unorganized players. There are about 1000 of tea brands in India, of which 90% of the brands are represented by regional players while the balance of the 10% is dominated by Tata Tea, HUL, Wag Bakri Chai, Duncans, Goodricke and others. With the growing shift from loose to branded tea, regional players are now expanding their reach and also getting premium with their offerings.
Competitive Structure
Tea industry is highly fragmented with a large number of small companies. The branded tea market in India is dominated by two major players Hindustan Unilever Ltd (HUL) and Tata Tea with a combined market share of more than 50%. Other players include Duncans Tea, Goodricke and some well-known regional players like Jivaraj and Wagh Bakri
TATA TEA
HUL
DUNCANS GROUP
GOODRICKE GROUP
OTHERS
Strength: Demand for tea has been growing at some 2% per annum Technical & Manpower Skill: Due to a huge population base in India Technical & Manpower Skill is available in abundant Good Research Support by tea growers has will help industry grow further
Weaknesses: Labor intensive industry: The second generation labors are reluctant to join this industry hence it could pose a problem of skilled labor in the near future No Effective Cost Management system adopted by companies and other regulatory bodies Supply from more efficient players like Kenya, China, Sri Lanka Declining Export of India over the years
Opportunities: Export Potential if India can increase its production capacity To make tea more acceptable and fashionable like coffee To come up with new flavors/formulation of the tea, tea houses etc. to popularize the concept of tea in India Large untapped rural market for branded tea companies like HUL and Tata Tea
Threats: Global competition Low Cost in some countries like China, Sri Lanka and Kenya Import of Tea from other countries Cost escalation on account of increase in the cost of production
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Bargaining Power of Suppliers (Low): There are a large no of producers of tea in India Suppliers product creates low switching cost
Threat of Substitutes (Moderate): Substitutes available are coffee, juice, cold drinks Existing customers are loyal Substitutes price may be lower. As there are so many players a price war is unavoidable The substitute products quality & performance may be better
Threat of new Entrants (High): Large untapped rural market for branded tea segment in rural India Encouraging government policies like food and beverage act
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Major Events
The domestic tea industry is governed by the Tea Act, 1953. And Tea Board is the apex body in charge of the development of the tea industry. Government policies in the form of the Land Ceiling Act, 1956 and the National Forest Policy have affected growth in the area under the cultivation of tea. In the past decade, significant expansions were made in India o During 1994, 7000 hectares were added o During 1998-2000, 70000 hectares were added o Following a strong price trend in 2004, 35000 hectares were added in 2005 In the 1960s, India was predominantly an orthodox tea producing country. Due to the domestic demand, since the mid 70s most tea producers have shifted to CTC tea manufacturing o Given the constraint on increasing the land area under cultivation, CTC cultivation turned out to be more lucrative due to its low cost of production o However, this shift to CTC cultivation has negative impact on exports, as Russia (Indias largest export destination) has slowly reverted back to the consumption of the orthodox variety. Indias tea imports are minimal, meant chiefly for re-export. Imports for domestic consumption are insignificant because of the 100% import duty levied on tea. In 1994, the Commerce Ministry Promulgated the Tea Making Control Order (TMCO), which required tea producers to sell 75% of their output through seven auction centers located at Guwahati, Siliguri, Cochin, Calcutta, Cunoor, Coimbatore and Amritsar. However, in 2003 a new TMCO order was formulated in order to regulate the market and improve the price discovery mechanism. In 2001, tea has been shifted from the restricted items category on the negative list of imports to the free list in line with Indias commitments to the WTO. As a result, all the quantitative restrictions on the imports of tea have been removed. In 2002, the Indian Government has allowed FDI up to 100% in tea sector. EXIM Policy: In order to safeguard the domestic tea industry, Indias tea import policy has been reframed and tariff rates have been progressively hiked from 19.6% in 1989-99 to 100% currently (2004-05) Tea companies are required to pay Corporate Tax on a specified percentage of profits, while the balance profits are subject to the state agricultural tax. o Tamil Nadu has abolished agricultural income tax recently. o However, in Assam, companies pay corporate tax on 40% of profits and state agricultural income tax of 30% on the balance 60% profits In case of export of tea, the exporter is eligible for a refund of VAT paid in the state of export.
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Global Footprints
Major Acquitions
Formed an export joint venture with Britain's Tetley Tea in 1992 Acquired Tetley for 271 million in 2000 Good Earth, a US maker of green and herbal teas in 2005 US firm Eight OClock Coffee for $220 million in 2006 Bought a third of Joekels, South African tea producer for 0.9 million, in 2006 Czech-based tea company Jemca for 12.4 million, in 2006
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Transportation (2%)
Warehousing (1%)
Transportation (5%)
Sold to retailer
2002
M 2003
M 2004
M 2 2005 2006
M 2007
M 2008
12.36
1 9.59
9 9.53
M 2
13.83
1 9.35 8 6.09
9 1 1 1 1 1 1 1 10.28 11.34 14.12 17.52 16.59 17.47 11.84 21.27 6 5.86 5 7.82 7 1 1 1 1 10.39 13.33 12.98 12.21 6.23 6 15.19
ROA (%)
8.82
EPS (Rs)
17.82
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Analyzing the profitability of Tata Tea Ltd for past 10 years, we observe that the profit margins are suffering for last few years, along with the other profitability ratios.
If we plot the operating profit margins and net profit margins, we can infer these values are downward sloping since FY 2007.
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Weakness:
No product differentiation: One of the major problems Tata Tea faces is the lack of much product differentiation hence loyalty of consumers is a major area of concern Distribution Network: The distribution network of Tata Tea comprises on 1.25 lakh distributers this is not much when you compare to HUL who have the strongest dealer network in the country
Opportunities:
New Product Development: The Company can move into energy drinks. This segment has not yet been tapped by any of the tea companies yet and this could give Tata tea the first movers advantage if they decide to enter this segment Rural Market: There is a large untapped rural market which needs to be exploited. Although Tata Tea has made its presence felt in the rural markets this sectors is characterized by a large unorganized sector and local players are still rules the market Export Potential: Tata tea is present in 40 countries around the world and can exploit the untapped markets all over the world Mergers and Acquisitions: There are more than 1000 tea companies in India. Tata tea can increase its market share and penetration by acquiring these small companies and also forming mergers with other big MNCs like it did for Tetley Tea, Good Earth etc. 18
Threats: Low Barriers: There are not many entry barriers by policy makers and this makes the Indian tea market extremely fragmented and unorganized. There are many regional players who hold small chunks of markets Globalization: Possibility of a big player entering into the Indian market is high due to globalization
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Leveraging the brand value and strong infrastructure like R&D and distribution network
Launch of a T!on brand - A niche product in the new good for you ready-to-drink cold beverage
sector in India.
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Acquired minority stake in US-based beverage and bottled water firm Activate Joint Venture with PepsiCo in the area of non-carbonated ready-to-drink beverages, focused on health and enhanced wellness
Lipton comprises of Yellow Label which is designed for upper middle, upper lower and upper middle class, which is a market leader in the industry, it comes in all the packages including hard packs, jars, and teabags. Lipton yellow label although the direct competitor of Brooke Bond Supreme comes in the family of Unilever so it is prone to its competing attacks. Lipton follows a massive promotion scheme to hold its share. Richbru is designed for middle and lower upper classes, and Pearl dust is designed for rural areas, mostly districts of Sindh where consumption of dust is extensive
Brands of HU
Economy brands
Brooke Bond Sahetmand
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Analyzing the HUL profitability, we can see that operating profit margins are growing.
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Weakness:
Huge Marketing Expenses: Large amount of money is being spent into marketing and promotional activities and thus puts HUL into a disadvantage on price compared to local and regional players Brand Dilution: Having too many brand extensions can dilute and confuse consumer perception and give fresh and new competitors to seize market share
Opportunities:
Alliance: Alliance with Pepsi to access massive distribution network. Presence of big, well known partners drives demand further Rural Market: There is a large untapped rural market which needs to be exploited as currently only regional player have market share in these markets
Threats:
Competition from local players: Large number of branded and unbranded tea in the market with ample price difference. HUL need to increase its advertising and promotional budget to get a better shelf space and more retailer patronization for the company's brand. Govt. Policies to discourage tea consumption: This rise in import duty on tea by government is intended to discourage its consumption, which possess to be a threat as it has resulted in higher prices for the consumers.
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Low Barriers: There are not too many entry barriers put by the policy makers and this makes the Indian tea market extremely fragmented and unorganized. Big players such as Coca-Cola and Nestle could be potential competitors.
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Strong focus on Urban & Rural Markets Dominance in Supply Chain Management with an effective Distribution Network Project Shakti workers used for promoting Brook Bond Sehatmand in rural areas Sustained Raw Material supply: Close collaboration with key tea plantations and Rainforest Alliance (RA), an international certification body in the area of sustainable agriculture. In addition they have also taken steps to source raw materials from agriculture and forestry in a sustainable manner
Currently, Hindustan Unilever Ltd is doing good and is profitable. By leveraging all the above strategies HUL has been increasing its market share. Following strategies are recommended to further improve its standing.
Recommendations:
Strategic alliances: Tie-up with airlines, railways, caterers etc. to promote their beverages Acquire local players: To counter competition from cheap regional players Target Rural Markets: Deeper penetration in rural markets to access newer markets Beverage Outlets: Open outlets in Tier II cities serving tea along with other functional drinks, on a scale similar to service outlets in big metros
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TATA TEA
Positive but declining High threat from substitutes. Opportunities in functional drink market Less Profitable Strong Distribution network Resource and Capabilities
HUL
Profitable Already exist in functional drink market
Profitable Strong Value Chain Supply chain including the distribution network and marketing strategies Price Cash Cow
TTL TT
Stars
???
HUL
Cows
Dogs
Tata Tea is moving from Stars to Cash cows with reducing growth while HUL is enj
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References:
http://www.reportlinker.com/d012116209/Tea-Market-in-India.html http://indiaearnings.moneycontrol.com www.teaboard.com http://www.tataglobalbeverages.com http://www.teaboard.com/ http://www.hul.co.in/ Case Study Series, FMCG Sector Vol. II Indian Tea Industry: Outlook Positive For The Short To Medium Term
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