The Covid-era habit of snacking and cooking at home hasn’t lost its flavour. Consumers want convenient and healthy food options from trusted names on their dining tables. This trend of in-house consumption has opened up newer avenues for makers of food and beverages.
Not surprising then that companies are either rushing to acquire new brands and capabilities or launching new products; in their effort to serve up a good meal, some are doing both. That’s where Tata Consumer’s latest acquisitions — Capital Foods and Inorganic India — valued at `7,000 crore, come into play.
Best known for its tea, coffee and salt businesses, the latest buys, for which the consumer arm of Tata group is paying a steep 5-6 times the estimated FY24 sales of these businesses, will help it trade up into large packaged food categories.
These include instant noodles, soups, sauces, pastes, condiments, premium teas and infusions.
The street might believe the acquisitions are expensively valued. But the top team at Tata Consumer is convinced the bet is well-placed in what is not just a growing but an evolving food market. Moreover, a bigger portfolio would help especially since the tea, coffee and salt are commodity-led businesses that are vulnerable to downtrading by consumers and volatility in input prices.
The influx of small brands in recent quarters within fast-moving consumer goods (FMCG) segment, for instance, has been the most in tea, hurting even large and well-entrenched players such as Hindustan Unilever and Tata Consumer.
The market for packaged foods, on the other hand, is pegged at a mouth-watering `3.6 trillion and offers a big opportunity. In fact, experts at Deloitte and EY estimate the market could be much bigger at about `5-6 trillion in the next 4-5 years. That’s not unthinkable given the rapid urbanisation, growing disposable incomes and ease and convenience of preparation.
Nomura estimates the addressable market will expand significantly — by nearly `22,000 crore in the case of Capital Foods’ brands Ching’s Secret and Smith & Jones. For Organic India, the opportunity could be limited to `7,000 crore for now but could touch `12,000 crore in five years. Globally, the total addressable market for Organic India is higher at `75,000 crore, with the potential to touch `1.1 trillion in five years.
As Sunil D’Souza, managing director & chief executive officer of Tata Consumer, puts it, the opportunity is really large. “What we get is a basket of products that will allow us to entrench ourselves in breakfast, snacking and mini-meals,” D’Souza pointed out. Critically, Tata Consumer gets a chance to premiumise the portfolio.
For a company that has made acquisitions the pillar of its growth strategy over the last two decades, analysts see the latest buys as the first meaningful attempt by the firm to go beyond its base business of tea, coffee and salt. As Mihir P. Shah at Nomura says, the acquisitions will fill “white spaces” in the company’s portfolio. “What the company has secured are strong assets and brands with significant potential to scale up growth, drive synergies and improve overall margins,” Shah observed.
History of buys
Tata Consumer first indicated its appetite for inorganic growth when it bought UK’s Tetley, the world’s second-largest tea brand after Unilever’s Lipton, for `1,870 crore in February 2000. This was then the largest overseas buyout by an Indian firm, setting the stage for more to come in that decade by Tata Consumer and others. Examples include Novelis by Hindalco, Corus by Tata Steel, Zain by Bharti Airtel and Jaguar Land Rover by Tata Motors.
Tata Consumer topped up its Tetley buy in the UK with the acquisitions of Good Earth Tea and Eight O’ Clock Coffee in the US in 2005 and 2006 respectively. It also picked up a 30% stake in vitamin water maker Glaceau for `2,749 crore in the US, which was eventually sold to Coca-Cola for over `4,900 crore. The company also made inroads into the tea and coffee markets in South Africa, Russia and Poland among other countries. It entered the packaged water business picking up a 45% in Mount Everest Mineral Water Company, which manufactured the Himalayan packaged water brand, in 2007 for `210 crore. The company subsequently increased its stake and merged the firm with itself. Himalayan is now part of Tata Consumer’s NourishCo business, which began as a 50:50 JV with PepsiCo in 2010 to promote good-for-you beverages. It is now fully-owned by Tata Consumer after PepsiCo’s 50% stake was bought by the former in 2020.
Appetite for more
D’Souza says that the company will continue to look for inorganic opportunities provided they fit into the company’s textbook of growth. “We will play first in food & beverages, look at value-accretive inorganic opportunities that give us access to fast-growing categories,” he said about the company’s future strategy.
Not all acquisition talks by the firm have been smooth though. Last year saw the company call off deal talks with Ramesh-Chauhan-led Bisleri over valuation concerns.
It also denied reports of wanting to acquire snacks maker Haldiram’s and made no progress on reported talks with the Chennai-based
Aachi Masala for a majority stake in the company. D’Souza says the firm’s journey to transition into a large FMCG company has just begun. Sometimes there is gain, sometimes pain.
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