The challenges facing Tata Tea in 1999 were not uncommon to those weighing heavily on many companies in India, China, and South America today. As markets begin to open up, companies previously sheltered from protectionist government interventions must be proactive in adjusting to the new environment. In this Case Study, Ulrike Wiehr, The Boston Consulting Group MBA Fellow, and Amitava Chattopadhyay, Professor of Marketing, explore the challenges facing Tata Tea and discuss the two most obvious strategies: to build on its current brand position or acquire a well-known brand.
The case study begins with a difficult decision facing the CEO of Tata Tea, Krishna Kumar. With a ban on tea imports in India scheduled to be lifted in 2001 and changing consumer preferences, Krishna Kumar must choose a strategy based on the following realities: the majority of the companys tea is sold in India, with international sales accounting for only 12% of total sales; its largest competitor in India, Hindustan Lever, a subsidiary of Unilever, has broad international reach; and the lifting of restrictions on tea imports will most likely bring in formidable foreign competition from companies such as Nestlé, Sara Lee Corporation, and Associated British Foods.
Clearly Tata Tea would have to grow but how? And where? Were there possibilities for further growth in the stagnant Indian market? Or could it use its brand that was so popular in India to penetrate other markets and segments? Perhaps it would need to develop a new, more international upscale brand. Or would an acquisition be a better solution? These questions become more urgent as Tetley Tea, well-known in the US and UK, unexpectedly comes up for sale.
After an overview of Tata Teas history, its current operations, products and brands, and sales and marketing, as well as a review of the worldwide tea industry, the Case asks us to consider the pros and cons of a deal with Tetley.
Arguments for include:
- Acquiring Tetley would mean capturing the higher end of the value chain
- Tetley is well-established in international markets
- Tatas gross margin is 36%, while Tetleys is a more efficient 55%
- The combination of the two companies would allow for synergies that competitors couldnt match
- Opportunity to buy a brand the likes of Tetley is rare
Arguments against include:
- Tata had already tried acquiring Tetley five years prior and failed
- Tata may have a hard time raising the required £200-300 million purchase price
- The sheer size of the transaction could prove unwieldy
- Wouldnt investing in building its own global brand be more efficient than buying a foreign brand?
- The £200-300 million asking price is much higher than the £190 million the company was valued at in 1995
Case B takes us post-decision, to March 2000, when Tata acquires Tetley for £271 million, while Case C provides a post mortem, which is significantly more positive than one finds in typical M&As. After a difficult first year, which saw the closure of a production facility, EBIT for 2001-2002 is 24% over the year prior, and EBT is 90% higher, while Tetleys market share is at an all-time high of 25% in the US and 40% in Canada.
The case series helps students to see the challenges of transitioning form a local player to global player and addresses questions such as: build or buy?, how to determine an acquisition price?, and what alternative methods can be used to assess brand value? An INSEAD classic case series, also recognised by the European Foundation of Management Development in the 2004 Case Writing Competition in the Indian Management Issues and Opportunities category.