But the journey from being a team major to joining India's top FMCG company, Tata Consumer, has consistently been the hawk-eye on market share. Even as they have achieved significant market share over the years, the company does not shy away from venturing into new products. From tea to coffee to salt, and now acing their packaged food game with relatively new brands like Sam and Soulful, the growth has not just been exponential but unstoppable. In our brand new edition of CEO at Work, ET Now's editor-in-chief Nikunj Dalal spoke with the MD and CEO of Tata Consumer, none other than Sunil D'Souza. Take a look.
Hello and welcome to a brand new show of CEO at Work. On this edition of CEO at Work, we'll talk about a company which in a sense has really transformed itself, an individual who really is behind the transformation. We're talking about a company which was a tea company, became a beverage company, is now on course to become one of the largest food companies in India. And guess what? They are just touching your life on a daily basis. From a stock market standpoint, this is a stock which has delighted and surprised everybody. But like Sunil always says, the best is yet to come, the hard work is at play, the team and everything else is in motion. And every time when we have Sunil D'Souza on ET Now, it is chai, coffee, and charcha. So nice to have you on, thank you for joining us.
Always my pleasure, Nikunj.
We're talking about a company which has changed both the customer appeal, the shareholder appeal, and also the dynamism in terms of the brands they represent. So before we go forward, let's remind our viewers where you were versus where you are.
So Nikunj, like you rightly said, this started as a tea company and then slowly over a period of time it became a beverage company. We had ready-to-drink, etc., the joint venture with PepsiCo. And then I think the real transformation started in the year 2020 with the integration of the salt business and the Sam business which came from Tata Chemicals. Right? That gave us a foundation of tea and salt, if I may call it. From there, I think the big job was: A) expand distribution, B) build portfolio, C) financial metrics. I think we had lost sight of the fact that ultimately we've got to deliver financial metrics.
So in terms of portfolio, I would say broadly my portfolio today is geared for growth and for margin, and I'll tell you why. I've got, I would say, three businesses: the tea, salt, and international, which are 1,000 crore sort of businesses per quarter. These are stable margin, mid to slightly higher single-digit growth rate, and these provide the bedrock for us. But they are not the fastest-growing businesses; they give us stability. Then we have these fast-growing businesses with very high TAM: the Sam and the ready-to-drink. Per capita pulses, 40 lakh, 50,000 crore category, branded is not even 1%. Spices, 60,000 crore category, branded is 20%. So huge TAM, decent margins. Ready-to-drink penetration in India is very low. So these two businesses provide me the high growth of the top line. And then we've got these businesses which are fantastic margins—I would say 50% accretive to my base margins: Soulful, Capital Foods, and Organic India. And these are the brands for the future as well. So we've got these three pieces giving me both stability, high top-line growth, and good margin growth. So overall, I think financially now we are set, portfolio-wise we've diversified, financially we've set. We've built out distribution now; the incremental cost of going out is not going to be significant. So the margins on the top line are going to start flowing through the bottom line.
Okay, so you've pretty much given us a big picture view in terms of what the sketch of the company is. Let's start filling in the colors now. I'll start with the recent quarterly performance, and I'm talking about Q3 even though we're about to close Q4. There was a bit of stress both in terms of margins and also in terms of the tea business. How much of that was largely cyclical in nature?
So Nikunj, I mean, we delivered a 13.3% EBITDA margin versus last same quarter last year of 15.1%. If I strip off the tea cost as well as the price increases that we took on tea, I would add anywhere from 100 to 150 basis points back. So versus a 15.1%, I would be 16.1% to 16.5%. And I have maintained that a good food and beverage company in India should be between a 17 to a 20. So we're within touching distance, bar the tea ups and downs. Now tea again—I've only taken about, in the last quarter we've taken about 40% of the cost, we've passed on 40% of the cost as prices; 60% is still there. Now tea, here's the thing: plucking has started in North India. This year's crop right now looks equal to if not better than last year, which means prices should broadly start coming down. Right? As that starts coming down, middle Q1, early Q2, I think you'll suddenly see the margin shift happening in TCPL.
So tea ultimately is a commodity: two good years, three bad years, one or two flat years. So last year you suffered because of high tea prices; this year you could benefit because of low tea prices. But what is the plan in place to ensure that irrespective of where tea prices are moving, 60% of your portfolio—which is still tea and beverages—is insulated? Because last quarter was good, next quarter will be better, then the same problem could come back. What will you do to protect the volatility in your numbers?
See, the good part about tea is, while you're absolutely right about the cyclicality, the good part is we've got a strong position in tea. We are a very strong number two, and therefore as a business it's a good business. But you're absolutely right, we've got to take out the cyclicality. The way to take it out is make sure the rest of the portfolio grows. Salt has been a steady profit generator—now volume and profit generator. International has come back to the party. International we always maintain should be incremental to India; that has started happening, about 200 basis points better than India. And then most importantly, all the new businesses that I talked about—Sam, ready-to-drink, Soulful, Capital Foods, Organic India—we've guided for 30% contribution growing at 30%. So mathematically, 9% of my growth will come only from this, and everything else is incremental. So from that perspective, it is maintaining tea, growing share slightly, but more importantly growing the rest of the portfolio aggressively.
Okay, so if I do some basic maths here, we are looking at less than 50% contribution technically then coming from the non-tea portfolio by FY26 itself?
Oh yes, absolutely, because 10% new business adds up every year. Again in tea, I would separate it into two pieces: there is India tea and international tea. India tea would be roughly around, this year, about 30% of my portfolio. International is not so volatile; India is more so because international is dependent on Kenya, Rwanda, Malawi—that's where we source our teas from. That's not as cyclical as Indian tea. Right? So it's only 30% of my portfolio which is slightly cyclical.
You know, Starbucks is more about coffee, less about tea, right? My day starts with coffee in the morning. What about you?
My first cup is coffee, rest of the day is tea. So there's a dark roast here, a medium roast here, blonde roast—that's what you call them. And then there is green beans.
So just educate our viewers—this is how the beans come out, right?
Yeah, so once you pluck the coffee, you take out the parchment and then you dry the coffee. This is how it is.
Okay. Then you take out the parchment?
Yeah, then this is green beans, and then you start roasting it.
The more you roast it, the more darker it gets, and therefore more caffeinated.
So what does India like? The halka coffee or the strong coffee?
India more or less is the halka coffee right now. But here's the thing, Nikunj: India coffee is changing dramatically and changing fast. Globally, coffee is a growing business, tea is a flat business, and those trends are now coming to India. So whether it is out-of-home coffee or in-home coffee, it is growing very, very fast. Incidentally, when I talked about my portfolio, coffee which is part of my portfolio—I've got about 2 to 3% market share now and it's growing at 30%.
But coffee prices are at a 50-year high, and what I understand is that tea companies or beverage companies are struggling to pass it on. While tea could be at a four-five year high, coffee prices are at a 50-year high. So if tea hit you last quarter, will coffee hit you this quarter?
No. So coffee—the good part is I sit on both sides of the story, right? Because I have plantations where I get the upside, but then I also have a coffee business in the US where I buy coffee. Right? So I get an upside here, downside here—it normally balances off. So you're absolutely right. Coffee—because of the droughts in Vietnam and lack of rainfall in Brazil, Arabica and Robusta both have gone up in sync. And I heard a major coffee company CEO saying now we're at the point of demand destruction, right? With the prices having run up.
If you dial back maybe two years back, it was $1.50-$1.60 Arabica per pound. Today it's touching $4, right?
It's gone through the roof.
Especially in Vietnam, it's actually Robusta also gone through the roof, is what I was reading.
So what happened was Arabica went up and people started replacing it with Robusta. So Robusta went up. Now Vietnam there is a drought and Brazil there is a drought now, so both Arabica and Robusta both are up. So now the point, like you said, people are struggling to pass on the prices because you are starting to see the impact on volume. The consumer is now starting to push back.
Okay, where we're standing right now—just to introduce this—this Starbucks café, this is the first Starbucks Reserve Café in India.
So this is absolutely the first Starbucks store in India.
This is where we started from, what, 10-12 years back?
Yeah, from there we've grown to about 475 stores. We just entered Jamshedpur, right? 75 cities. And as a celebration of the 10th year, we converted this to a roastery, to a Reserve store. So what you see here, it is the first Reserve store in India.
So we've done tea, we've done coffee. Now let's look at FY26 and FY27—what should shareholders expect? Are you at a cusp of a strong operating leverage kicking in? Why? Because if you've acquired a lot of businesses, you've used your cash, you are rebuilding some of the franchises. Will FY26 and FY27 be the patch of real J-curve for Tata Consumer? Because you will keep on expanding your margins, you'll keep on growing. So more than top line, it is the bottom line which will suddenly start looking better.
So Nikunj, we've spent the last four-five years building out the muscles for a classic FMCG company. We built out a very strong R&D team; my innovation-to-sales ratio is best in class. We built out distribution—now my numeric reach is about 4.5 million outlets, direct reach is 1.8 million. And I've got, I would say, best-in-class digital now starting to kick in into the front line. And then we started to build brands—we were a commodity company, now we're getting to be a branded company. So we built the muscles and the infrastructure; we're more or less there in terms of reaching where we want to reach. Now it's the wholesale multipliers which will kick in. Therefore the costs on the middle of the P&L are not going to go in sync with the top line.
So when I put my portfolio together, my growth business is 30% at 30%. What is the margin for the growth business? My overall gross margins, if I calculate right—and my gross margins include variable freight—it's about 35 to 37. The growth businesses, which is Capital Foods, Soulful, are 50% more accretive than the traditional business—that would include salt, spices, tea, coffee. And my other businesses, which is Sam and ready-to-drink, are about 10 to 15% lower. So all put together, it's slightly accretive compared to where I am right now. That margin—if I'm not adding costs on the middle of the P&L—all starts to flow down. So to your point, we've publicly said we will grow at double digits and my EBITDA will grow faster than the top line.
So I'm just going to construct this for our viewers—for FY26, the way forward: if I put this graphic out, it is that the new businesses will grow at a higher rate, which is higher-margin business. Additional business will grow but the contribution will start coming down, and you will continue to invest in the two-three new categories which you just mentioned. So on a blended basis, for Tata Consumer beyond FY25, we are looking at a bit of margin expansion. That I think is story number one.
Story number two, which everybody is trying to really put their heads around, is that we are now getting more and more accustomed and addicted to quick commerce. As a percentage of your total sales, now nearly 8% is coming from quick commerce—that's the highest for any food company in India, or highest for any FMCG company in India. Was this a conscious strategy?
So Nikunj, my strategy: I will be where the consumer is. Right? If the consumer is digital-first and online-first and going on to quick commerce and e-commerce—e-commerce overall is 15% of my sales, I would think that is one of the higher in the FMCG space—and quick commerce is, like you said, 7.5%. The reason is I don't want to be trying to tweak my margins by managing channels. I would go where the consumer is and then back-work everything. So we built the muscles for executing on quick commerce, we built the portfolio for executing on quick commerce, and now we are focused on making sure we delight the consumer whichever channel they're in.
Okay, so is quick commerce more volume, less margin? Because if this becomes 10% of your total sales—which it could, looking at the growth—could that really then force you to go back to your EBITDA margin guidance? Because if you are selling more in quick commerce, it's a low-margin business, and then it could aggregate your total impact on the margins.
So let me leave you with this: quick commerce is not necessarily a low-margin business. It depends on what you're selling and how you structure your portfolio. And here's the thing, right? I know that quick commerce will continue to grow, and therefore I have to figure out the rest of my costs to make sure my EBITDA margin continues to grow. I can guarantee you, EBITDA margin is going to grow. We will play around with all the different moving parts to make sure we deliver those numbers.
