Business

Introduction

In a bold move to solidify its position in the burgeoning Health & Wellness sector, Tata Consumer Products recently inked definitive agreements to acquire two prominent Indian entities, Capital Foods and Organic India. This strategic maneuver is poised to transform Tata Consumer into a formidable player in the packaged foods category of the FMCG business, marking a significant shift from its traditional focus on salt, tea, and coffee.

How Will Investors Benefit from These Acquisitions?

Tata Consumer Products envisions a substantial addressable market size for the acquired brands, providing a lucrative opportunity for investors. As the company transforms into a major player in the packaged foods category and continues its expansion into high-margin categories, investors may witness significant returns on their investments in the foreseeable future.

The Acquisition Details

Tata Consumer Products has set the stage for a paradigm shift in its business portfolio by acquiring Capital Foods and Organic India. The conglomerate invested a substantial INR 51 billion (approx. $614 million) in Capital Foods and an additional INR 19 billion (approx. $229 million) in Organic India, expanding its reach into diverse markets and product segments.

The Capital Foods Deal

In this strategic move, Tata Consumer secured 75% of the equity shareholding of Capital Foods upfront, with plans to acquire the remaining 25% within the next three years. Capital Foods, a Mumbai-based company with nearly three decades of legacy, boasts popular brands such as Ching’s Secret and Smith & Jones. The acquisition aligns seamlessly with Tata Consumer’s expansion strategy, especially in high-margin categories.

Organic India Acquisition

Simultaneously, Tata Consumer inked definitive agreements to acquire up to 100% of the issued equity share capital of Organic India, a robust brand in the BFY (Better For You) organic space. Founded in 1997, Organic India supplies its products to over 40 markets, including notable US retailers like Whole Foods Market and Sprouts Farmers Markets. This acquisition positions Tata Consumer to tap into the growing Health & Wellness segment.

Strategic Intent and Market Opportunities

Capital Foods Integration

Sunil D’Souza, MD & CEO of Tata Consumer Products, emphasized that the Capital Foods acquisition is a strategic fit, expanding the conglomerate’s market presence. With Capital Foods’ widespread availability in 3.4 lakh outlets, Tata Consumer aims to leverage its extensive distribution network, providing a substantial runway for growth. Analysts estimate the business could reach INR 1,700 crore in FY26 with an EBITDA margin exceeding 25%.

Organic India’s Health & Wellness Platform

Organic India’s strong relationships with farmers and robust organic supply chain will let Tata Consumer accelerate its growth momentum in the Health & Wellness sector. The acquisition creates a platform that aligns seamlessly with Tata Consumer’s objectives, presenting exciting market opportunities in the rapidly growing health and wellness segment.

Financial Snapshot and Industry Positioning

Over the past five years, Tata Consumer Products has witnessed an impressive annual stock price growth of 46%, outperforming FMCG majors ITC and HUL. Analysts believe despite trading at a price-to-earnings (PE) multiple of 83x, considered by many as expensive, Tata Consumer is at a pivotal point in its journey, eyeing a transformation from a traditional FMCG player to a dominant force in the packaged foods category.

The Growth Trajectory

Tata Consumer Products envisions a substantial addressable market size for Capital Foods’ brands, estimating it at around INR 21,400 crore. This positions Capital Foods as a leader in the condiments category of packaged foods. With this acquisition, TCPL will become the sixth Tata Group company to cross a market capitalization of INR 1 lakh crore.

Category Expansion and Future Prospects

With brands like Ching’s Secret and Smith & Jones, Capital Foods opens avenues for Tata Consumer to directly compete with industry giants like Nestlé and ITC. This foray into the fast-growing non-Indian cuisines segment aligns with Tata Consumer’s focus on acquiring fast-growing brands, mirroring ITC’s previous strategy.

Tata Consumer Products’ recent acquisitions of Capital Foods and Organic India mark a pivotal moment in the company’s evolution. With a strategic focus on health and wellness, Tata Consumer is expanding its product portfolio and transforming into a significant player in the fast-paced world of packaged foods. As the company diversifies its offerings and taps into emerging markets, investors may find themselves on the cusp of a lucrative opportunity with Tata Consumer Products.

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FAQs

India, known for its love affair with tea, is witnessing a remarkable surge in coffee consumption, and global coffee giant Starbucks is capitalizing on this trend. In an ambitious move, Starbucks Corp. has unveiled plans to double its stores in India over the next four years.

This expansion plan aims to open a new Tata Starbucks shop every three days, strategically focused on tier-2 and tier-3 cities, where the burgeoning middle class is fuelling a rapid evolution in coffee culture.

Current Coffee Market in India

Traditionally, tea, especially sugary, milky chai, has dominated India’s hot beverage landscape. However, the past decade has witnessed a significant shift, with coffee becoming increasingly popular, especially among aspirational consumers frequenting cafes. Starbucks, other high-end cafes, and local chains like Blue Tokai have contributed to this shift, offering beverages sourced from locally harvested crops.

Starbucks and its Growth Ambitions

Starbucks’ intensified focus on India is part of its broader strategy to strengthen its presence in economically promising markets worldwide. Since entering India in 2012 through a joint venture with Tata Consumer Products Ltd., Starbucks has steadily grown its footprint, boasting 390 stores across 54 cities. The ambitious goal is to reach 1,000 stores by 2028, positioning India as one of Starbucks’ major overseas markets.

Starbuck’s Current Presence in India

The joint venture with Tata Consumer Products has been instrumental in Starbucks’ Indian journey, and the partnership aims to deepen its roots, focusing on tier-2 and tier-3 cities, marking a strategic departure from its initial focus on major metropolises. With 390 stores and a net addition of 22 outlets in the last quarter alone, Starbucks’ presence in India is significant, albeit dwarfed by its expansive presence in mainland China.

Starbucks and its Competition

Starbucks faces stiff competition from local chains like Cafe Coffee Day and foreign entrants such as Barista. Emerging players like Third Wave and Blue Tokai, backed by private equity, have added about 150 stores in the last three years, intensifying the competition for market share.

Revenue Growth and Challenges

Tata Starbucks reported a 14% year-on-year revenue growth in the Sept. 30, 2023 quarter. Despite this positive performance, it marked the slowest growth since the March quarter of 2020. The challenges were attributed to the lingering impact of the COVID-19 pandemic, underlining the resilience required in the ever-evolving market.

Revamping On the Cards

Recognizing the dominance of instant coffee consumption at home, Starbucks has revamped its strategy in India. Initiatives include introducing smaller-sized drinks starting at $2.24 and milkshakes, a tactical move to appeal to the diverse preferences of the tea-loving population.

Starbucks acknowledges the importance of local partners in its success, so it plans to skill these partners for various roles, opening new stores to provide an elevated customer experience and promoting Indian-origin coffee globally.

Strategic Importance of India

As India becomes the world’s third-largest economy by 2030, Starbucks believes the country will be a focal point for its growth. With a thriving middle class and evolving consumer preferences, Starbucks is doubling its presence in India.

The 50:50 joint venture between Starbucks Coffee Company and Tata Consumer Products Limited has been the cornerstone of Starbucks’ operations in India since 2012. The collaboration has not only let Starbucks navigate the intricate Indian market but has also provided a platform for mutual growth.

To achieve the ambitious target of 1,000 stores by 2028, Starbucks plans to double its workforce to ~ 8,600 partners and expand drive-thrust, airports, and its 24-hour store footprint to serve customers where they are.

Upskilling and Empowering Women

Tata Starbucks’ expansion strategy in India includes its commitment to women’s empowerment and upskilling initiatives. Recognizing the need for diversity and inclusivity, the company will help to empower underserved young women in the F&B retail industries through vocational skills training.

In collaboration with The Starbucks Foundation, Tata Starbucks will offer workforce development training, skills building, and mentoring for 2,000 young women by 2024. The grant awarded to Trust for Retailers & Retail Associates of India (TRRAIN) will provide on-the-job learning options for program participants in critical cities, contributing to the socio-economic development of women in India.

Tata Starbucks has extended its on-the-job learning program for participants in stores across Bengaluru, Chennai, Delhi, Hyderabad, and Mumbai. This initiative contributes to skill development and strengthens Starbucks’ commitment to fostering inclusive growth at a grassroots level.

Tata Starbucks’ plans to double its stores in India reflect its confidence in the country’s economic trajectory and evolving consumer preferences. The company’s strategic approach and initiatives to empower local partners and contribute to skill development could position Starbucks for sustained success in one of its fastest-growing markets.

FAQs

At the beginning of 2023, Indian conglomerate ITC spun off its hotel business at a 10:1 ratio. If you wonder what a spin off company means, this article is a must-read.

What is a Company Spin Off?

Simply put, a company spin off means selling a business segment of a parent company to build a new company (standalone) out of it. Let us take the example of ITC. ITC has multiple business segments, from hotels to FMCG products and more. However, ITC Hotels became a new entity after ITC spun out its hotel segment.

The parent company’s shareholders are usually given a particular ratio of shares in the new company. In the case of ITC, shareholders of the ITC (parent company) were allotted one share of ITC hotels for every ten shares held in the parent company.

How Does Company Spin off Work?

The parent company sells the entire stake of the spin off company to the shareholders, and the newly formed company gets a new management and name. However, the spin off company’s assets, human resources, and intellectual properties may remain unchanged. In addition, the parent company often offers financial and technological support to the newly formed company.

Reasons for Spin offs

If you want to invest in a spin off company, you must first understand and analyze the reasons behind the spin off. The most usual reasons for spinning a company are –

1. To focus on a business segment with higher potential in the long run. When a company has multiple business segments, the focus is divided. Thus, if a business segment has more potential, the parent company may spin it off as a new company with new management to optimize its potential.
2. Another reason for the spin-off is the growth prospects between novice and mature businesses. For instance, if company A (parent company) has four business segments, out of which one has been its primary business since the beginning, the segment has now reached its peak and thus offers little growth. The company has entered the other three segments in the past few years, and these segments are offering higher growth prospects. Therefore, it may spin off the first business segment from its remaining three businesses.
3. Spin-off also happens when the strategic needs of businesses start deviating from each other. An FMCG and a construction business may not have the exact strategic requirements, right? Therefore, the parent company can spin one of the businesses off.
4. Finally, suppose a parent company wants to sell off one of its business segments but cannot find investors. In that case, it may spin off that segment into a new entity, increasing the potential and getting investors.

While there could be different reasons for a spin-off, the basis is the same: it makes the businesses more profitable.

Effects of Spin-off

A company spin-off has effects on both investors and the parent company.

For Investors: Investors or shareholders tend to get better returns after the spin-off as both the parent and the spin-off company get to focus on their independent businesses, which often helps generate better returns. However, the share prices of the new company can become volatile or sluggish, as there is no independent financial performance data from the company’s past.

For Parent Company: The parent company’s stock price usually drops initially as the assets, intellectual properties, and other resources that go to the spin-off company get reduced from the parent company’s books. However, if the spin-off goes right in the long run, the parent company will also benefit, which can be transferred to its shareholders.

Risks of Company Spin Off

Shareholders of the parent company get shares of the spin-off company automatically. However, the stock of this new company may not suit any investors’ portfolio. Thus, the investors need to evaluate whether the prospects and nature of the new company match their investment criteria. If not, then they should drop those shares from their portfolio. This makes the share price of the spin-off company volatile in the initial days of the spin-off.

Recent examples of Company Spin offs in India

There have been some significant spin-offs in 2023. Let’s see the parent and the spin-off company.

Apart from recent spin offs, if we go back in time, then Bajaj Auto spinning off Bajaj Finance and Bajaj Finserv has churned a lot of wealth. Similarly, Reliance spun off its subsidiaries earlier as well.

Independence is crucial for growth and prosperity, and that is what companies strive for when they think of spin offs. While not all spin-offs become successful, the idea is to generate better profits by focusing more on potential businesses.

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