You would have thought that information technology companies would lead the Indian charge into the world business arena at the turn of the century. Take a second guess.
As the new millennium dawns, the first real initiative to go global has come from Tata Tea, the Tata group branded commodities major.
With its takeover of United Kingdom-based Tetley (formalised earlier this year in February), Tata Tea has eploded the myth that Indian non-IT businesses were resigned to local roles rather than global expansion.
Although the core values of the company remain those cherished by the Tata group, this acquisition, valued at GBP271 million, transforms Tata Tea from two separate perspectives: as an organisation, and as a stock market investment.
To understand how, take your mind back to the question the McKinsey Quarterly asked of companies in its 1999 (number 2) issue: Being an insider in your local market is no longer enough. Do you have the skills to specialise or the market cap to acquire?
Tata Tea has answered both questions in different ways. Its specialisation has grown over the last four years. In 1996, tea accounted for 86 per cent of its turnover. By 1999, that figure has gone up to 96 per cent. Now, it has used that increased specialisation, improved cash flow, and healthy market capitalisation as well as funding capabilities to acquire UK's second-largest packet tea business.
First, by using tremendous leverage capabilities, Tata Tea has completed corporate India's largest foreign takeover. The total amount involved would come to well over Rs1,900 crore, as large and probably larger than the average investment in a new automobile project. Tata Engineering, for example, has invested a comparable amount in its first passenger car project.
The sheer size of Tetley is also impressive testimony to Tata Tea's acquisition funding capabilities. Figures for Tetley are not readily available because the UK-based company is privately held. But, according to reliable sources, Tetley clocked a worldwide turnover of GBP320 million (Rs2,240 crore) and profits of about GBP26 million (Rs182 crore) in 1998 (Tata Tea and Tetley's business has, as an aggregate, instantly become a Rs3,141-crore business).
The acquisition also gives Tata Tea the second position globally in the tea market. Tetley sells tea bags in 44 countries, has a presence in India (it has a Kochi-based, export-oriented joint venture with Tata Tea), Canada, the US, Australia and Europe, and is the world's second-largest tea brand (Lipton is the largest). It's also one of the UK's top tea bag brands. In a survey of 50 top British brands in the 52 weeks ending April 1998, AC Nielsen, the market research agency, ranked Tetley 17th, well ahead of tea bag rival Unilever's PG Tips (26th).
By all measures, Tetley is a big player. It buys over 2 million pounds of tea every week at major auctions, including Calcutta, Chittagong, Colombo and Mombasa (Tetley buys some 8 million kg of tea from India)
The acquisition is all the more important because of the looming prospect of free imports following the imposition of World Trade Organization norms. In less than four or five years, tea from Sri Lanka and anywhere in the world will come in. As a result, local market players can buy and import good quality lower-priced tea. Kenyan crush, tear and curl (CTC, or non-premium) tea, for instance, costs at least Rs10 a kg less than comparable Indian CTC teas; the price gap is Rs20 a kg for premium tea. So Tata Tea can draw on Tetley's expertise and infrastructure in sourcing teas worldwide for the Indian market.
Tetley's strength in packet tea is amazingly synergistic with the direction Tata Tea has consistently followed, along with other Indian tea companies, of shifting from selling loose tea — the exception being high-quality teas that are still hawked in auctions for heftier prices — to branding and packaging teas. The packet tea business is highly profitable. Companies make a minimum profit of Rs4-6 per kg.