For the think tank at Bombay House, the Tata group headquarters, it must be a feeling of deja vu.
Six years ago, in February 2000, Tata Tea bought out the world's second largest tea company, Tetley Tea of the UK, for $431 million, a company more than twice its size.
Last weekend, its Bangalore-based subsidiary Tata Coffee snapped up the New Jersey-based Eight O' Clock Coffee (EOC), the largest wholebean branded coffee firm in the US, for $220 million.
With revenues of $109 million in 2005, EOC is 2.5 times bigger than Tata Coffee (FY06 sales: Rs 200 crore (Rs 2 billion). Tetley was an unlisted firm, and so is EOC. The Tetley acquisition was a leveraged buyout and so too will this be.
What differs this time round, though, is the level of confidence Tata has in making it work. Says Arvind Mahajan, partner, IBM Consulting, "The Tetley acquisition has worked out quite well, though there is a lot that needs to be done before it becomes a truly global player."
With Eight O'Clock, so named to gain perceptual ownership of "coffee time", morning or night, Tata Coffee now has a well-recognised brand in the US. Mahajan says that this will help Tata Coffee, largely a commodity player, go higher up the value chain.
"We lacked a brand," admits M H Ashraff, managing director, Tata Coffee, adding that Eight O'Clock can gain a powerful consumer franchise
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in markets to which it has been exporting coffee that sells under store labels.
"This gives us a chance to enter the Russian market, growing at 12-15 per cent, with a top-of-the-line brand," he says. East Europe too.
The brand buyout, overall, spells instantly higher margins: at least 3-4 per cent higher, in Tata Coffee's reckoning.
No less important is the distribution clout that EOC brings with it. As Vedika Bhandarkar, managing director and head, investment banking, at J P Morgan, points out, Tata Coffee will have access to the world's largest coffee market, the US, estimated at $21 billion.
EOC's penetration of the US retail coffee market is about 67 per cent: it sells at supermarkets and beyond. Tetley, which gained something of a distribution network with Tata Tea's purchase of Good Earth Teas, now gets the requisite muscle.
Tetley, says Ashraff, could use the EOC distribution in the US, while EOC could use Good Earth's on the West Coast. With Jemca, it has access to the Czech market too, adds Mahajan. And all this may just be the beginning of a long ascent up the value curve.
Indian coffee fans may have to wait, though. Eight O'Clock will not hit Indian shopshelves in a hurry, because the market is too small and the competition intense. Here, the whiff to follow is that of Tata Coffee's cafe chain: the Mr Bean junctions.
