From salt to staples to Starbucks, Sunil D'Souza, Managing Director and Chief Executive of FMCG major Tata Consumer Products, is steering all this and a lot more. For this episode of The Morning Brief podcast, I caught up with Sunil to capture what India's burgeoning consumption landscape looks like, when he expects India's cities to beat the protracted slowdown, unrelenting commodity costs, volatile global markets, and resurgent regional competitors—all this at a time when consumers may prioritize savings and debt reduction over spending amid rising prices. Sunil, who's been steering Tata Consumer since April 2000, has been instrumental in leading large acquisitions such as Ching's Secret, Fabindia-backed Organic India, and millets-based cereal maker Soulfull. Previously with Whirlpool and PepsiCo, he's just been reappointed as chief of Tata Consumer for another five years. Finance Minister Nirmala Sitharaman's 1 lakh crore rupees stimulus to the middle class in the form of tax breaks has put the spotlight firmly on consumption, but will consumers take the bait? More importantly, will India's cities transform into growth hubs? Listen to Sunil D'Souza as he draws on his vast experience to throw light on all of the above.
It's Friday, February 7th. I'm your host Ratna Bhushan from The Economic Times, and you're listening to The Morning Brief.
Good morning, Sunil. It's so nice to have you on The Morning Brief podcast.
Thanks, thanks Ratna, for having me on the podcast. And it is always a pleasure to talk to you.
So to start with, quick thoughts overall—your earnings are largely in line with expectations. Would you agree?
Yes, more or less. What we expected is right. From the beginning of the quarter, we've guided very clearly, said there is going to be pressure on tea margins. And if you look at our results, 1.77% top line, EBITDA percentage was negative 2.1%, but overall absolute numbers came in flat. Group net profit, of course, there is an impact of the difference in interest income versus the cash that we were carrying last year and the borrowing which is going down steadily with the rights issue. So overall, not surprising. Across categories, the great news is that we've got India tea firing with a 7% volume growth. I think we will be ahead of industry here, despite the fact that we took price increases, we still grew volume. And the growth businesses, which we had said 30% of the portfolio, came in at 27%. So overall, yes, the only issue on the horizon is the tea prices. As I have said, tea cost went up by about 25%, and roughly 10% of that has flown through in terms of price increases. So we mitigated about 40% of the increases. That leaves 60% still there. The brunt of the pressure on margins was this quarter. Going forward, as the price increases get actualized in the market, and we see newer price increases, and with the new season coming mid-Q1 onwards, hopefully if the crop is proper, prices will reset and therefore margins will go back to normal. I think that's a good place to be in overall—whether it's our growth businesses, our international business coming back to shape, tea volume firing, including salt coming back, I think it's been a pretty good quarter.
So that's a good snapshot that you've given. You know, we'll soon get into the new fiscal, like you also mentioned. So at a macro level, what would the demand outlook be for the next fiscal?
See, Ratna, I think we were one of the first to flag off saying that there is pressure on demand. I think we did that in early Q2, and that has now played out across the segments. Now, just as a perspective, while I do hear rest of our peers talking about pressure on urban, from a TCPL side, if you take general trade overall, urban is low single digits, rural is double digits. And if I add back e-commerce and modern trade, which is again an urban phenomenon, then even urban is a double digit. So broadly, I would say the big impact which we had flagged off of inflation, and specifically of food inflation, I think that is waning. If you look at the numbers even from the releases, 11%, 9.8% in that order, and that has been easing off, number one. Number two, I would think the government is now extremely conscious of the fact that GDP growth needs to be driven. So you will start seeing infrastructure spends continuing. You will start, probably I'm hopeful that consumption measures will get kicked off. So I remain hopeful of demand picking up from here on going forward.
A lot of companies have also called that rural is growing faster, and you've also given some data on this. So in the next few quarters, or the Q1, Q2 of next financial year, do you see rural continuing to outpace urban even though urban will grow?
I would say till at least another quarter or two, rural will continue to outpace urban. That said, I remain hopeful that urban will come back. Urban is the big consumption opportunity, big growth opportunity going into next fiscal, and I'm quite confident that it will come back.
And even in urban demand, is it the lower end of the urban demand which is facing stress? Because there is premiumization which has also kicked in, like we all know. So which segment of the urban category is under maximum stress?
So I know I've been reading comments from some of our peer companies about stress on the lower end, etc. But from our perspective, Ratna, when we look at our portfolio overall, I think we're seeing decent growth now across the portfolio. If I rewind back about three months back, there was stress on the middle to higher end, then the lower end, especially in tea, was starting to fire up very strongly. Now, as we've gone through, and even for the month of January, we see all sides of the portfolio firing equally well. So longer term, there is an opportunity in India both for per capita consumption growth from unbranded to branded, as well as premiumization. I think broadly you will start to see all the pieces starting to fit in as we go ahead.
This brings me to my next question on Starbucks. So there was a lot of chatter last quarter on recalibration of stores and a rethink on Tata Starbucks. I'd like you to throw some light on this.
So, Ratna, in the middle of last quarter, I think there was a social media article which went viral which said that Starbucks is reconsidering its business in India, and we issued a stock exchange notification to debunk the whole piece. Now, just between Tata Consumer and Starbucks, we are very, very committed to the India opportunity. We've said we will go for a thousand stores by FY28. In the longer term, we remain focused on that. In the shorter term, we opened 16 stores last quarter, primarily in eastern India and four cities. Now we are in 74 cities, 473 stores, largest coffee operator. We are focused on driving traffic back into the stores, which was a bit of a pressure point. And like I said, I think we are seeing improving same-store sales growth. We're still not out of the woods yet, but the trajectory has been better from where it was last quarter. And we will have short-term blips, so we've got to brace for those ups and downs. And we are, across all businesses, we will continue to do the right things, whether it is in terms of focusing on efficiency in cost of goods, focusing on capex efficiency, focusing on driving new stores, marketing, driving traffic into the stores, new products. We will continue to be focused on growing the Starbucks business.
So there's a mushrooming of cafes—you know, hyperlocal cafes, or cafes that are maybe only in two or three cities. So there's a lot of competition in this space. I'd like your views on this—how does Starbucks deal with all these mushrooming of smaller cafes all over?
So, Ratna, let me put it this way. Overall, coffee as a category is underpenetrated in India, whether it is out of home or in home. And globally, coffee consumption is trending. India, therefore, both out of home and in home, will continue to grow. We are focused, with our Tata Coffee Grand portfolio, on the in-home consumption. On the out of home, Starbucks is our vehicle to capture that opportunity. I mean, it's not that we are the only people who are seeing that opportunity. There are enough players out there. India is severely underpenetrated in number of stores. If you benchmark—just forget the total cafes—even the Starbucks number of stores in the Philippines, or China, or Indonesia—we are severely underpenetrated. And therefore, there is an opportunity. And they keep opening. But overall, coffee shops are underpenetrated in India, and therefore you will see competition pop up. There will be unorganized competition pop up, there will be what we call the Indies—the independents—pop up, there will be the small two-three outlet chains which will pop up. So that's not something which we can control. What we can definitely focus on is making sure Starbucks is there as a great brand, the consumer experience in Starbucks is great from a product perspective, and we're making sure we're creating a destination to pull in consumers into the stores.
