It did not take Kapoor and his top team too long to understand that the business in its current form offered very little headroom for growth. "We could not grow by expanding the plantations as it is very difficult to acquire land. Also, there were limitations to improving the productivity of our existing land," says Kapoor. HM's productivity at 5,750 kg/acre for tea was already higher than the industry average of 4,500 kg/acre though some newer gardens do produce 8,750 kg/acre. In the case of rubber, HM's productivity at 666 kg/acre is marginally lower than the India average of 740 kg/acre. "We realised that HM should move away from cultivating and selling the produce as commodities in auctions if it has to achieve higher growth," he adds.
THE PROBLEM THE REASON THE SOLUTION THE CHALLENGE |
It also improved the capacity utilisation of its factories by buying produce, both rubber and tea, from other growers. These efforts have begun to show results and taken revenues from Rs 209 crore in 2007-08 to Rs 293 crore in 2008-09 and the company hopes to close 2009-10 at Rs 350 crore. "These measures were aimed at not only bringing in a burst of immediate growth but also improve further the overall productivity and quality of the output-an important pre-requisite for the company's second strategy," says N. Dharmaraj, Vice President, Tea Division.
Their second strategy, clearly more challenging but with the potential to take the organisation to a high trajectory growth path, was to convert HM into a fast moving consumer goods (FMCG) company. "HM has always had its tea brands. In fact, we launched our first brands (Surya and Mountain Mist) along with Tata Tea way back in 1970s," points out Kapoor. But HM's branded tea business never really took off on a large scale for a variety of reasons. Those tracking the tea industry say that the company tried to act like an FMCG company by remaining a plantation company at heart.
It had repeatedly failed to attract good talent with FMCG background to run its branded tea business as the company's wage structure more suited the plantation sector. So the responsibility invariably landed on the executives from the plantation sector who were not trained to listen to consumers. That explains HM's decision to package and sell only those teas it cultivates resulting in the company being absent in popular segments such as Darjeeling tea and Assam tea. HM's brands thus remained regional with presence only in a few pockets.
Unlike in the past, the branded tea strategy that the top management drew up now was well thought through, sincere and long term in approach. To start with, the company began by convincing its employees that it was possible for HM to become an FMCG company. "Our knowledge of tea is unquestionable. We are among the best," says Kapoor. "This fact needs to be coupled with a mindset change where the customer is seen as the king. The earlier inward-looking approach (controlling cost and selling at auction) had to go," he adds.The company started a consumer marketing division and began recruiting FMCG professionals offering them a competitive pay structure. A detailed market research followed and the brands were revisited. It was decided that HM will have its brand across the price spectrum and tea will be purchased from other plantations for processing and packaging in the case of Assam or Darjeeling Tea. Today, HM's tea brands are available in packs priced from Rs 150 (economy segment) to over Rs 300 (superpremium segment).
Once the people and the brands were ready, the company began to set up its distribution network. Unlike most other FMCG launches, which are big bang affairs, HM began to roll out its distribution network and products in a calibrated fashion. It first started with Kerala and Karnataka, its traditional strongholds and followed it up with Tamil Nadu (in Chennai and Coimbatore). It recently forayed into parts of Maharashtra. The rollout was followed by localised brand promotion. "This is a conscious strategy. We will first get the back-end ready and then go for mass branding, which is too costly. There are no shortcuts in this," explains Kapoor. HM will enter Orissa and Andhra Pradesh (Hyderabad) in 2010-11 and hopes to cover most parts of the country in four years' time.
Also, the company is very clear that it does not want to take on Tata Tea or Hindustan Unilever-at least for now. "We can't compare ourselves with them. They are global brands. We are not even a national brand yet. There is a third brand in every market and our hope is to grab that slot in three to four years," says Kapoor. HUL and Tata Tea, between them, account for 52 per cent of the 500 million kg branded-tea market in the country.
In 2008-09 HM's branded-tea business earned revenue of Rs 8 crore. It is expected to be Rs 20 crore in 2009-10. In four years, income from branded-tea business is expected to touch Rs 100 crore. The results have already begun to reflect on the bottom line- realisations, the company says, have already improved by 20 per cent. The stock market too has taken note of this. HM's share price at the Bombay Stock Exchange (BSE) has doubled from Rs 60 levels in April 2008 to the current level of Rs 121. During this period the BSE Sensex rose by 4 per cent.
Even as its branded-tea business grows at a measured pace, HM is readying its next move. "Once we gain enough scale, we will look at buying an international tea brand. That will then lay the foundation for our next big leap," reveals Kapoor. Plans are also afoot to acquire tea gardens abroad, especially in Africa. HM is also planning to leverage its distribution chain by launching brand extensions. For instance, it will soon add value to the fruits it grows such as pineapple and banana by offering them as packaged table-top fruits. It is also planning to enter packaged-juices segment.
In rubber too, the company is looking at products. "As a forward integration strategy we are looking at developing new products such as thermo-plastic natural rubber. We are also considering acquisition of companies that are in the business of manufacturing rubber products such as threads or gloves," says C. Vinayaraghavan, Vice President, Rubber Division.
The company has also financially readied itself for this growth. "Our debt-equity ratio at 0.54 and free reserves at Rs 153 crore offer us enough flexibility to fund our growth plans including acquisitions," says K.N. Mathew, Vice President, Finance.
HM, with all these measures, hopes to double its current revenues to become a Rs 600-crore company in three years. That is three times the growth it managed before it started looking at value-added products.
COMMENTARY-1 Go for brand extensions  The regional roll-out strategy, as opposed to a national launch, is quite appropriate-for it provides replicable learning and cash required for the next regional roll-out and at the same time provides for specific adaptation to local requirements. However, a foray into fruits and juices should be done with great care, for investment and management of cold-supply chain is inevitable for scale in this business, and is immensely different from warm supply chains (for tea and other FMCG products). Here, it may also leverage RPG Group's existing expertise in managing retail chains (Spencer's Daily). A firm's competitive advantage is in not only launching successful new brands but also in leveraging the distribution network with more brands extensions- the reason why, for example, CavinKare has forayed into many products sold at a grocer's (e.g. pickles, shampoos, etc). - Jayaram K. Iyer, Associate Professor, Loyola Institute of Business Administration COMMENTARY-2 Don't be impatient for results  Selling and distribution are necessary but not sufficient conditions; positioning, packaging and communication are key elements. This is a new and unfamiliar game for HM, a plantation company. A common mistake is to be impatient for results. Another is for non-marketing people to interfere in marketing decisions. Risks can be minimised if a proven marketing professional is chosen to lead the effort and if he is given time, space and consistent support for at least 3-5 years to build a team. The company is right to focus on a few proximate markets to start with; it helps correction of mistakes when they are small; and helps to build confidence in the rest of the company (unfamiliar with marketing FMCG) before larger marketing investments are made. With regard to the company's vision of entering rubber products, juices, etc., to increase the realisation, HM needs to be aware that each of these products need a different understanding of the market, consumer and competition; and hence different strategies. The company will need new skills and money to learn them. So, as long as the phasing is slow and steady with an approach to learn, it should do fine. - V. BALARAMAN, Former Director, Hindustan Unilever Ltd. |
