Tata Consumer Products’ Sunil D’Souza: ‘We were a bowl of noodles in terms of legal entities’

When Sunil D’Souza took over as MD and CEO of Tata Consumer Products (TCPL) in 2020, the company was over-dependent on its tea and salt and businesses. These were commoditized, low margin businesses with hardly any scope for high growth. D’Souza was given the task of turning TCPL into a new-age FMCG major on the back of innovations and deeper distribution.

Not only has the company’s revenue grown from ₹11,602 crore in FY21 to ₹17,618 crore in FY25, it’s market cap in the past five years has increased by 21.96%, the highest among its peers (other food and beverage majors). “We are a long way from where we want to be. We have to continue to grow double digits, improve margins and expand portfolio,” said D’souza, in an in-depth interview with Fortune India.

Excerpts:

It’s five years since you took over TCPL and from a back-bencher you have catapulted into becoming a leading FMCG company in the country. You were initially hesitant to take up the role of MD & CEO because you believed that the company wasn’t going anywhere. What made you change your mind?

The hypothesis was that the Tata brand name denotes trust, so you have every right to win in the consumer space. The brief was to create India’s premier FMCG for the Tata Group. There can’t be a more respected organisation in India than the Tata Group, if they are asking you to sort out their business, it’s a privilege. But it was a big bowl of noodles and there were big problems to solve. It required an open-heart surgery and not a bandage job.

When you say that the business was a big bowl of noodles, I am assuming there were lot of complexities?

We were a bowl of noodles in terms of legal entities. We had 45 legal entities. I didn’t know who has lent money to whom and who is holding what in which country. We cleaned up the deck - Tata Coffee was a listed subsidiary within a listed company. Tata Consumer had a tea extraction business and Tata Coffee had a coffee extraction business. Ultimately, you are selling to the same customer, so, we put these together and now there is a solubles business. That is now on a different trajectory. We have a common backend and sales system for tea and coffee.

We used to sell coffee in Europe and tea in the US, now we are selling tea and coffee in Europe and US. We had 45 legal entities and now we are down to 25.

How did you disentangle the noodles?

We dismantled and reset the distribution. We had to bring in an entirely new portfolio. This company started as a plantations company. Therefore, the whole concept of executing outlet by outlet, innovation, branding - that DNA didn’t exist in the company.

On the salt side, it is all about logistics. They had built a strong brand with Tata Salt but they built it basis brand and logistics. When it came to execution outlet by outlet, they were scared. The belief was if I distribute more the percentage margin goes down. My answer to that was, I can never take percentage to the bank, I can take absolutes. Even if I am making lower margins, at least I am making something, rather than blank. There were geographies in south where Tata Salt was not as strong as rest of the country. In the North there are cities of 60-65%, even 80% market share. In South, we were at 15%-17% market share because it was expensive to transfer. Today, we are at around 25% market share.

Coming to distribution, it was a consignee agent and super-stockist model. Salt was consignee agents and tea was super stockists. The only time I had heard about consignee agents was in management school. We focused on creating distributors of scale and reaching more outlets. We used to touch around only half a million outlets, today we are reaching 2 million outlets directly and our products are available in 4.5 million where our products are available. So, TCPL products are available in one out of two kiranas across the country. We are not yet at par with the top FMCGs but we will get there in the next 2-3 years, that’s a journey we will progress.

This company was never used to looking at working capital. We had 50 days of working capital which is cash. Historically, whatever acquisitions we have done, the return on capital is a challenge, but no one was bothered. We put pressure and from 50, we have come to minus one. Now people are conscious of cash and utilisation of cash. If we find a co-packer who has assets, we say why are we putting up assets. Today, for Sampann and ready-to-drink, I don’t have capital. In fact, all the businesses which we have built there is no capital employed.

When you joined TCPL, the company was largely into tea and salt. These were commodity-centric businesses. What went into transitioning to a larger food and beverage company?

We were a tea and salt company and we needed to become a food and beverage company. Today, India tea and salt would be 45% (close to 90% in 2020) of my portfolio. We needed to diversify beyond commodity, get into the value-added space. If you are looking for growth, tea and salt are not the most attractive growth commodity. We have built a three-part portfolio. There is one which keeps the lights on and pays our salaries, which is tea and salt in India and the international business - this gives mid-to-high single digit growth and steady and margins. There is one part which is geared for growth – Sampann (staples) and ready-to-drink, where the addressable market is huge. Pulses is a Rs 1.75 crore market, we are the number one. It’s relatively lower margin, but it will give me high growth. Then there is the high margin part of the portfolio, slightly lower addressable markets, but more profitable – Capital Foods, Soulfull and Organic India.

There is a portfolio to drive topline and there is a portfolio to drive margin. We have also got into various categories- there is core, there is pantry (Sampan and Capital Foods), then there is breakfast, ready meals and snacking which is Soufull and little bit of Capital Foods. Organic India is a portfolio for the future.

In terms of branding, we have not only built strong brands we have upped our spends. Last quarter we had spent 7.5% of sales in advertising and sales promotions for India. In innovation we were 0.8% of sales, that is turnover from new products, versus total turnover. For a good F&B company, it should be 5%-6% in India. Last year we have closed at 5.2%. There, we are absolutely on the top. We have built an innovation system, where there are innovation managers in every category which give feedback to the R&D team. There is an innovation council which takes decisions on which products to launch basis scale, margin and disruption and then we execute on ground.

The last five years has seen quite a few mergers and acquisitions. What was the rationale?    

In late 2020 we did a full scan of the food and beverage universe in India. We took all categories more than Rs 5,000 crore, looked at margins, growth rate and number of players. We had a map of which categories would make sense for us. We said we will not play atta because it requires distributed manufacturing, it is a game of logistics and procurement and procurement means connection to farmers which I don’t have. I will not play biscuits because there are two big players who built significant scale synergies, we will get crumpled. We will not play mainline edible oil, but we decided to play in cold press oil, as nobody is playing there.

Similarly, rice I will not enter. Categories which require high capex I am not sure I will put high capex when I am starting out. I will not play in categories which are commodities, where I can’t differentiate. We looked at categories where can we bring in R&D and distribution.

Are more M&A’s in the pipeline?

Acquisitions have to make strategic sense and financial sense. Soulfull fell in place, as it’s differentiated. Similarly, NourishCo was in no man’s land but there was an opportunity to grow. Capital Foods and Organic India we bought for two reasons – its 50% more gross margin than my existing business and have a huge distribution opportunity. They are high margin businesses and they are categories I can keep expanding.

We have done six acquisitions, but let go 200 acquisition opportunities as it didn’t make strategic sense. In 2023 we had 95 opportunities, out of which 15 we looked at seriously and finally went ahead with Capital Foods and Organic India.

What has been the strategy for the international business?

We first defined what would be the role of international. We said it has to be mid-to-high single digits topline and it should be accretive to the India business. We have rejigged the whole piece to get there. We have also designed where are we going to play, where we have the right to win and what are the businesses that we don’t need to be in. We sold a business in Australia (out of home coffee), we sold food service in the US. International is now accretive to India business. In the US, from the number 4 share of tea we are now no. 2. US is on a strong footing, Canada was always strong.

What has been the strategy for Starbucks?

Starbucks has 500 outlets and is expanding aggressively.
We are working on various pieces of the business model to make sure we are optimising capex and making sure the portfolio is more suitable to Indian tastes.