Valuation of Brands

Tata Tea Limited

Brand Valuation Approaches
Price Premium Valuation
Royalty Based Valuation
Brand Margin Valuation
Brand Margin Valuation – Earnings Method
Brand Margin Valuation – Brand Sensitivity
Method
Brand Discounted Cash Flow Valuation
Inter Brand’s Valuation Method
Inter Brand’s Valuation Method
Inter Brand’s Valuation Method – Financial
Analysis
Inter Brand’s Valuation Method – Market
Analysis
Inter Brand’s Valuation Method – Market
Analysis
Inter Brand’s Valuation Method – Brand
Strength Analysis
 Inter Brand’s Valuation Method
Year -2 Year -1 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Net Sales 440,0 480,0 500,0 520,0 550,0 580,0 620,0 650,0
Operating earnings 66,0 72,0 75,0 78,0 82,5 87,0 93,0 97,5

Tangible capital employed 220,0 240,0 250,0 260,0 275,0 290,0 310,0 325,0
Charge for capital (5%) 11,0 12,0 12,5 13,0 13,8 14,5 15,5 16,3

Intangible earnings 55,0 60,0 62,5 65,0 68,8 72,5 77,5 81,3
Brand earnings (75%) 41,3 45,0 46,9 48,8 51,6 54,4 58,1 61,0

Tax rate 33% 33% 33% 33% 33% 33% 33% 33%
Tax paid 13,8 15,0 15,6 16,3 17,2 18,1 19,4 20,3
Post-tax brand earnings 27,6 30,0 31,3 32,5 34,4 36,3 38,7 40,7
Discount rate 15%
Discount factor 1,0 1,15 1,32 1,52 1,75 2,01
Discounted cash-flow 31,4 28,3 26,1 23,9 22,1 20,2

Value to year 5 152,4

Annuity 135,3
Growth 0%
Brand value 287,7
 MANAGING BRAND VALUE
• Take a comprehensive approach to brand value
– Brand value=net present value of brand’s future cash flows
• Determine future sales volume and prices
• Additional value creation through the option to create brand
extensions
– Perceptual variables at the level of the consumer underlie brand
value
• Need to measure and quantify levels of awareness, attitude,…
– Identify and quantify sources of value creation
• Tangibles such as product features or sales outlets
• Intangibles such as service quality and staff morale
– Understand and map how the resources interact with each other
– Establish a systematic and dynamic perspective on the
relationship between brand value and its sources

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 CONCLUDING COMMENTS
• Copying best practice doesn't always work
– Brands have different market positions and belong to organizations
that have different skills
• Perceptual variables are critical and should be quantified
– They begin moving in new directions long before classic financial
measures, and are much better strategic indicators
• A brand has value, but not just one value
– The earnings of a brand are influenced by the way it is managed
as well as by the strength of competing brands
– A brand may have different values to different firms
• Short-term measures can destroy long-term value

Copyright © INSEAD 16
 Introduction
• On a hot, sultry day, Mr. R.K. Krishna • Could it use its brand that was so
Kumar, CEO of Tata Tea, sat deep in popular in India to penetrate other
thought, struggling with the question markets and segments, or would it
of how to take his company, the second need a more international, upscale
largest tea company in India, into the brand?
new millennium • And, if so, would it be realistic to build
• Industry experts believed that India’s up this brand on its own or would an
tea industry, so far sheltered from acquisition be the better solution?
global competition by protectionist • Such an opportunity had recently
government intervention, would soon surfaced: Tetley Tea, the No.2 brand of
be deregulated tea globally, was up for sale
• International players were expected to • Tata Tea had to decide if it would make
break into the market, and Tata Tea’s a bid. Mr. Krishna Kumar knew that he
management feared that its archrival had to make a decision soon
and market leader, Hindustan Lever,
the Indian subsidiary of Unilever,
would benefit from this development
• To avoid being marginalized, Tata Tea
would have to find ways to grow – but
how?
• And where? Were there possibilities
for further growth in the Indian
 Tata Tea
• Tata Tea was a part of the Tata Group • Tata Tea was one of the largest tea
of companies – one of the largest and companies in the world and the second
most highly regarded family-owned largest seller of packet tea in India
conglomerates in India • In India it owned 54 tea estates with
• The group’s tentacles spread across a 25,700 hectares under cultivation
wide range of industries including • Most estates had on-site processing
chemicals, electricity and steel, facilities and six had packaging facilities
through telecommunications, hotels,
and financial services, to watches, cars, • In addition, there were six packaging
tea, coffee and spices facilities outside the estates where tea
bought at auction was blended and
• The group consisted of 80 companies, packaged (see Exhibit 1 for Tata Tea’s
some of which were privately held by profit and loss and balance sheet)
Tata Sons, the group holding company
(e.g., Tata Consultancy Services, India’s
largest software services company),
while others like Tata Tea, Tata Motors,
Tata Steel, and Tata Chemicals were
listed
• The Tata name was used as a corporate
brand across the majority of the
group’s companies
Exceptions included Voltas, Indian
 Products and Brands
• Tata Tea used 80-90% of its tea production for its own • Tata Tea spent about US$1 million per year on R&D
branded tea products
• Its research in agronomy had led to quality and
• The balance was sold through public auctions or efficiency gains at its plantations.
directly exported
• Tata Tea sold different blends catering to regional
• In addition, the company manufactured instant tea in tastes in India
its plant in southern India, the biggest instant tea
facility outside the US • These had been developed on the basis of studies of
consumer preferences in different regions (see Exhibit
• It supplied instant tea to companies across the world 2 for key brands)
and had been the principal supplier of instant tea for
the “Snapple” brand since 1995 • For example, in southern India, where dust tea was
popular, and a premium product, the Chakra Gold and
• Tata Tea’s success was built on its “from tea bush to Gemini brands were sold
tea cup” philosophy
• Brahmaputra, a strong Assam tea was launched in
• By owning plantations and effectively integrating northern and western India
across the supply chain, the company guaranteed the
freshness and quality of its teas to the consumer • In 1999 Tata Tea entered the economy segment with
the Agni brand; the first brand to be launched
• To reinforce the freshness promise, in the mid 80s nationwide with aggressive promotional campaigns
Tata Tea had introduced the polypack, a packaging
with superior barrier properties • While each brand was distinctly packaged, the packet
design bore the Tata group logo and name
• “This was probably the first time in India that
• It also prominently featured the phrase ‘Asli Chai –
consumers were offered garden-fresh teas produced, Asli Taazgi,’ or, ‘Genuine tea - Genuine freshness’
packed, and sealed on plantations, and it contributed
to the growth in popularity of packet tea sales in
India,” said CEO Krishna Kumar
• Between 1985 and 1998 Tata Tea’s market share grew
from 3% to 21% of the Indian market, while the
market size for branded tea grew from 125 million kg
to 280 million kg
 Sales and Marketing
• Tata Tea’s packet tea products were • In 1999, exports amounted to 12% of
sold throughout India through a sales and went to 15 customers in the
network of over 600,000 outlets US, Europe, the Far and Middle East,
consisting of supermarkets, grocery Russia, and Japan
stores, and roadside stalls • Instant tea was entirely produced for
• Most of the points of sale of this vast export, with 88% going to the US.
network were in larger villages, towns, • Looking to increase its exports, Tata
and cities; Tata Tea did not have a Tea formed a joint venture with Tetley
significant direct distribution network to produce tea bags, which were
in smaller towns and villages exported under the Tetley brand to
• Given that the rural population of India Poland, Russia, and the Confederation
was estimated at 629 million, Tata Tea of Independent States
believed that considerable opportunity • Tata Tea’s share of total Indian tea
existed for increasing rural sales exports was 3.5%
• To this end, the company was test-
marketing a “video on wheels”
program: a truck with a video screen
that moved through such areas
showing commercials and selling
packet tea
• While packet tea and the bulk of Tata
Tea’s other tea products were sold
 The Tea Industry
• 76% of all tea produced was black and • Growth in production, 1.7% annually,
the remaining 24% was green came from increases in productivity
• India was the largest producer, • Given the slow growth in production,
accounting for 28% of world the price of tea had grown at an
production, followed by China (24%), annual rate of 8% to 10% over the
Sri Lanka (10%), and Kenya (9%) past 10 years
• Between 1995 and 1997, the average • At Indian auctions, the price of tea per
annual production was approximately kilogram had risen from Rs.11.26 in
2.6 billion kg, and 1998 set a record of 1975 to Rs.104.62 in 1998
2.86 billion kg produced worldwide • However, after the peak of 1998 which
• Tea was grown in 30 countries, with saw record harvests and prices, the
2.4 million hectares of land under price fell to Rs.97.20 per kg in 1999
cultivation
• The global supply of tea was limited as
there was little additional land
available that was suitable for
cultivation
 The Tea Industry in India
• India produced 870 million kg of tea in 1998 • India did not allow imports of tea, although
the import ban was expected to be removed
• With approximately 420,000 hectares under
in 2001
cultivation, it produced a wider variety of
teas than any other region in the world, • The government levied higher taxes on tea
including Darjeeling tea, known as the than on manufactured goods; agricultural
‘champagne of tea’ and central income taxes took away about
50% of the income
• India’s tea exports had remained steady in
terms of tonnage from the 70s through the • Further cost pressure came from wage
90s at approximately 200,000 tonnes per regulation in India
annum, with 37% consisting of packet tea
• Competitiveness was further eroded by the
• However, the value of exports grew ten fold fact that India’s tea bushes were the oldest in
between the mid 70s and mid 90s the world, making them less productive
• India exported most of its tea to the CIS (70% • Yields in India were 2000 kg/hectare
of exports of packet tea), and 21% to the compared to 2400 kg/hectare in the newer
Middle East gardens in Kenya
• Some 2,800 tonnes were exported as tea • Replanting would mean foregoing five years
bags, mainly to the CIS (52%), Poland (25%), of yield until the new plants matured, which
and the Middle East (9%) (see Exhibit 3, Table exceeded the financial resources of most
1 for export destinations) planters
• Notwithstanding its size, the competitiveness • To counteract this, the Indian government
of the Indian tea industry had been eroded planned to lift restrictions on foreign
and the country fell from first to fourth in ownership of tea companies in 2000
export volume (Exhibit 3, Table 2)
• The Indian government was to be held partly
 Tea Consumption
• Between 1995 and 1997, the countries with the • But while the tea tradition continued, there was
highest annual per capita consumption of tea increasing competition from soft drinks among
were Ireland (3.2 kg), the UK (2.5 kg), Turkey (1.8 the more affluent customer segments, especially
kg) and Iran (1.8 kg) within the younger population
• India was the largest consumer of tea in terms of • Tea also faced increasing competition from coffee
total consumption, but per capita consumption as the trendier, upmarket alternative, often
was relatively low at 0.66 kg per year (see Exhibit available in stylish coffee bars
3, Table 3) • This raised concerns about tea acquiring an ‘old-
• In developing countries, where per capita fogey’ image
consumption of tea was relatively low, total • In India, growth in branded teas was estimated by
consumption as well as consumption of higher- Tata Tea to be around 10% per annum in the
value teas was expected to increase in the coming years
decades to come • However, independent estimates suggested that
• Consistent with this, the value of tea sales grew tea prices were starting to rise beyond the reach
by 14% between 1993 and 1997 with the highest of certain classes of people, which could slow
growth occurring in Asia (49%) as well as the future growth
emerging regions of Middle East and Eastern • In the developed countries, the market for tea
Europe (36%) and Latin America (33%) was mature and the key sources of growth
• In developing Asia, tea was ubiquitous included branding, competitive pricing, and
• It was appreciated as an everyday, economical product innovation
drink, prepared at home or bought at road stalls,
and consumers were very price-sensitive
 Tea Consumption
• The average growth expected in Western Europe and • In markets where tea was valued as a special, high-end
Northern America was about 1% product, consumers increasingly saw loose-leaf tea as the
• Significant markets among the Western countries experts’ choice
included the UK and Ireland where tea enjoyed immense • The only exception was the UK where loose-leaf tea was
popularity as an all-day, everyday hot drink associated with older consumers
• However, while helping to maintain sales volumes, this • Among the fastest growing tea products was green tea in
image had acted against the introduction of more tea bag form (sales grew at 27% in 1999), ready-to-serve
expensive alternatives tea (44%), and Mate (191% growth in dollar sales)
• Elsewhere, notably the US and continental Europe, • In 1999, Unilever launched a new range of flavored green
consumers increasingly valued a more sophisticated teas called Chae, and Premier Beverages started to sell a
image of tea new green tea blend under its Typhoo brand
• In countries like France and Germany, tea was regarded • The popularity of tea had also led to new outlets such as
as a special or occasional drink with a higher social status, tea bars gaining importance
and thus flavour and origin were more important than in • In the UK, Tetley opened “Gaffer’s” and Unilever opened
the UK a teashop called “Ch’a”. In the US, the number of existing
• Developed country consumers were becoming bars was expected to double to 200 by 2002
increasingly health-conscious and tea was expected to • This was projected to help sales of premium teas grow by
benefit from this trend as it was seen as the healthy more than 50% annually over the coming years
alternative to coffee
• Tea had also moved, as an ingredient, into other
• In the US and Europe, scientific studies had stimulated categories such as energy bars, chocolates, chewing gum,
interest in the health benefits of black tea which and cosmetics
contained vitamins, minerals, and antioxidants that were
believed to be effective in maintaining oral health and in
reducing the risk of cancer and heart disease
• Tea’s increasing popularity with consumers had spurred a
high rate of new product introductions (75%)
• More varieties and blends with an appeal to
connoisseurs, including origin-specific or perfumed teas,
had been introduced
 Competition
• Tata Tea’s largest competitor in the domestic • Altogether, seven brands of Hindustan Lever
market was Hindustan Lever, a subsidiary of were among India’s top 10 brands, which
Unilever occupied strong positions in the economy,
popular, and premium price tiers for both
• Hindustan Lever was the largest seller of
dust and leaf tea (see Exhibit 4)
branded teas in India with a market share of
40% (compared to Tata’s 21%) and a turnover • The company was India’s largest tea exporter,
of Rs 19 billion in the beverage category in accounting for about 30% of the country’s
1999 exports
• It produced only a small percentage of the • Unilever had made significant investments in
tea it sold, and bought the rest at auctions its Bangalore-based International Centre for
Beverages to pursue consumer-relevant R&D,
• In 1999, however, it acquired Rossel
as well as in other innovation projects for
Industries, an Indian company with several
tea gardens blend reengineering and supply chain
integration
• There were seven other Indian companies
that together had a market share of 15% of • It had also set up a Brooke Bond Tea and
the Indian packet tea market Health Information Centre with the objective
of collecting and publishing scientific
• The remainder of the market was made up of information on the health properties of tea,
regional brands especially its beneficial effects as an
• Hindustan Lever’s key brands were Brooke antioxidant
Bond and Lipton, both of which were re-
launched in 1998 with improved taste and
infusion attributes
 Worldwide Competitors
• Nestlé, Sara Lee, and Unilever, along with • In Canada, key competitors included Tetley
Tetley, were the main competitors in the and Unilever’s Red Rose brand
international arena
• In France, Australia, Poland, and Russia,
• The brands competing against each other competition was primarily between Unilever,
varied in the different markets (see Exhibit 5) Tetley, and regional/national players
• In the UK, the Tetley brand competed against • Worldwide, Unilever was the market leader
Unilever’s PG Tips which were neck-and-neck with a 39% share compared to Tetley’s 7%
in terms of volume (20%), but Unilever
dominated in terms of value (25.4% vs. • As branding became increasingly important,
spending on marketing had risen
Tetley’s 22.4%)
• To manage costs, Unilever, with its Lipton
• Other competitors had considerably smaller brand, had announced that it would leverage
market share the global brand name to unify marketing
• While outside the UK the sale of private messages, reduce advertising costs, and
labels, in terms of value, was 70% that of launch brand extensions
Tetley, in the UK private labels accounted for
24.1% of the market by value, some 7%
higher than that accounted for by Tetley
• In the US, Unilever’s Lipton brand had a 50%
share; other competitors included R.C.
Bigelow, Twinings, and Tetley
 Tetley’s Teas
• At the beginning of the nineteenth • In 1989, Tetley launched the
century, brothers Joseph and round tea bag and a further
Edward Tetley began to sell salt innovation, the drawstring tea
and tea from the back of a bag, in 1994
packhorse on the Yorkshire moors • In 1998, Tetley began selling the
• In 1856, they opened a store in Tetley brand range in laminated,
London and the company resealable packaging, which would
extended its services to blending eventually replace traditional
and packing cardboard cartons
• In 1888, the company established • Research expenditure in 1999 was
a distribution agreement with an £1,395,000
American agent for Tetley’s Teas
• Soon Tetley’s Teas was established
as a major trade name in America,
and the American operation
became one of the largest packet
tea distributing organizations in
the world.
• Tetley launched the first tea bag in
 Operations Today
• Tetley was the world’s second largest tea • Tetley had centralized tea buying in its UK
company head office where global blend requirements
were assessed
• It produced 20 billion tea bags per year and
generated sales of £263.6 million in 1998 • Tea was bought direct from manufacturers or
via auctions in Africa, India, Sri Lanka, and
• It blended, packed, marketed, and
Argentina, where agents who received a 2%
distributed tea, principally in the UK and the
US, and operated with three distinct commission, purchased on behalf of Tetley,
geographical divisions: Great Britain and and arranged logistics
Ireland (54% of revenues), US (26%) and • Tetley purchased more than 1 million kg of
International (20%) tea each week
• The international division included • Blending was an important part of Tetley’s
operations in Canada, Australia, France, operations
Poland, and Russia and exported to more
than 30 countries (see Exhibit 6 for profit and • As no single estate produced enough tea of a
consistent standard over a 12-month period
loss and balance sheet) to meet
• Tetley operated five manufacturing facilities
• Tetley’s requirements, it was necessary for
in the UK, US, and Australia as well as a joint the company to buy from a wide range of tea
venture with Tata Tea in India that produced estates to ensure a consistent quality product
tea bags
• Final blends could be made from up to 40
• The expected growth in Tetley’s key markets different teas
was 1%
• Tetley paid a 30% corporate tax rate in the UK
 Products and Brands
• Tetley produced more than 60 • The company also made plain and
black tea blends, which catered to flavoured green teas,
different tastes in local markets decaffeinated teas, and herbal
• The company had developed a tea infusions (e.g., camomile)
grading system to ensure product • Tetley also supplied iced tea
consistency concentrates and ready-to-drink
• Tetley produced high quality iced teas
blends for hot consumption in the • It sold 92.5% of its tea in the form
UK (see Exhibit 7) of tea bags
• In the US, where consumer tastes • The company used the Tetley
were different, it also produced brand worldwide, and sales under
black tea for brewing iced tea this flagship brand accounted for
• In addition to standard black teas 85% of sales in 1999
Tetley produced specialty teas • In mature markets, Tetley was
such as Earl Grey, as well as fruit- positioned at the upper end of the
flavoured (e.g., orange) black teas mass market but, in developing
markets, it was positioned at the
premium end of the market
 Sales and Marketing
• In the UK, Tetley’s tea bags were available in all • 38% of sales volume came from supplying private
major retail outlets, including Tesco, Sainsbury, labels: customers included the largest retailers
Asda, Safeway, Somerfield, and Morrison’s such as Wal Mart and Publix as well as the largest
supermarket chains (see Exhibit 8 for prices of wholesalers such as Wafekern Food and United
Tetley’s tea and private label teas) Grocers (see Exhibit 8 for prices)
• In 1999 retail sales accounted for 64% of Tetley’s • The Tetley’s brand had been developed in the UK
branded sales in the UK through advertising campaigns involving the
• Some of these chains also sourced their private “Tetley Tea Folk”, seven characters representing all
label offerings from Tetley that was good about tea. The Tea Folk had also
been used in Tetley’s advertising in the US, Canada,
• Sales to the foodservice sector and institutional
Poland, and Australia
sales represented 5%
• In this sector, Tetley’s largest clients were the Rank • Tetley also employed a variety of consumer and
Group, Marriott, and McDonalds retail promotions
• In the US, Tetley sold 45% of its volume under the
Tetley brand, through supermarkets, grocery
stores, drug stores, and mass merchandisers
• Another 17% of sales under the Tetley brand were
made to the foodservice and institutional sector,
where customers included Burger King, Del Taco,
and Sodexho/Marriott
 Potential for a Deal
• In July 1995, the Tetley Group was created • The company was demanding a premium
when the UK food and beverage company price of around £300 million (tangible assets
Allied Domecq sold what was then the Lyons of £55 million)
worldwide beverage business
• Global Finance estimated that the company
• Tata Tea bid for the company, but its bid was would be sold for between £187 and £210
topped by a management buy-in offer of million
£190 million
• Rabobank estimated the price would be
• Since the buy-in, Tetley’s operating profits between £270 and £275 million
had risen from £10.7 million in 1996 to £41.1
million before exceptional restructuring items • The asking price was thought to have put off
Sara Lee who had gained a reputation in the
in the year ending March 1998 market for buying companies at low prices
• However, during the year ending March
• It was assumed that antitrust regulations
1999, the company generated operating would prevent Unilever from making a bid for
profits of only £25 million before exceptional Tetley
restructuring charges
• Also, fluctuations in commodity prices were
• The company called these results thought to be holding back Nestlé, which was
disappointing and attributed them to a already exposed through its coffee interests
particularly difficult trading environment
• From 1999 speculation had been mounting
that Tetley would be sold again, though the
question of to whom remained
 Tata Tea Considers the Deal
• As Tata Tea deliberated on the possibility of • More than that, the company had integrated across
acquiring Tetley’s Teas, the company saw arguments the value chain and guaranteed the freshness and
for and against the transaction purity of its teas to an extent that few of its
• On the negative side, Tata Tea had tried to acquire multinational competitors could achieve
Tetley five years earlier and failed due to its inability • Given consumers’ increasing health awareness and
to arrange financing their desire for international products, could Tata
• Based on this experience, some insiders questioned Tea not leverage its origins and build its own
whether the company was in a better position to international brand?
raise the required sum of £200-300 million in 2000 • On the other hand, the opportunity to buy the
• However, preliminary inquiries suggested that Tata Tetley brand – a brand well established in
Tea might be able to obtain funds for the deal at an international markets – was rare
interest rate of around 7% • Acquiring Tetley would mean capturing the higher
• This was well below its current weighted average end of the value chain
cost of capital of 11% • Tata Tea’s gross margin was 36% lower than Tetley’s
• Contributing to the doubts was the sheer size of the
transaction: Tetley generated worldwide revenues
of £323 million while Tata Tea’s income was £125
million
• Some managers at Tata Tea were concerned about
the price demanded by Tetley: the anticipated £300
million was much higher than the £190 million at
which Tetley had been valued in 1995
• Finally, critics raised the question of why Tata Tea
would want to buy a brand rather than investing the
funds in building a global presence and a brand of
its own?
• Tata Tea operated from India, a country long known
 Tata Tea Considers the Deal
• Some managers also questioned • Advocates of the deal argued that
whether Tata Tea would have the a combined entity of Tata Tea and
skills and market insight to build Tetley would be able to benefit
up its own brand in the from synergies that competitors
international markets where would find difficult to match
Tetley was already present and • Mr. Krishna Kumar considered
whether the cost of doing so these arguments
would be prohibitive
• He knew he would have to reach a
• Tata Tea’s country of origin and decision quickly
the association of India with lower
quality could be a disadvantage
• Many felt that raising the funds
necessary to build a new brand
would be more difficult than
financing a deal
• Even if building up a brand were
possible, there was still much less
certainty about its success and it
would take much longer for the
 Summary of the Case
• In late 1999, India’s second-largest tea company, Tata Tea, was presented with the opportunity of acquiring Tetley’s
Tea, the world’s second largest tea brand. Tata Tea is a part of the Tata group of companies; one of the largest and
most highly regarded family-owned conglomerates in India. The group’s tentacles spread across a wide range of
industries including chemicals, electricity and steel, through telecommunications, hotels, and financial services, to
watches, cars, tea, coffee and spices. The group consists of 80 companies, some of which are privately held by Tata
Sons, the group holding company (e.g., Tata Consultancy Services, India’s largest software services company), while
others like Tata Tea, Tata Motors, Tata Steel, and Tata Chemicals are listed. The Tata name is used as a corporate
brand across the vast majority of the group’s companies. Exceptions include Voltas, Indian Hotels Company (Taj
group), Rallis India, VSNL and Titan Industries.
• Tata Tea has a strong presence in India, its home market, based on a value proposition of guaranteed freshness and
quality stemming from its control of the supply chain from “tea bush to teacup.” Tata Tea has expertise in plantation
management and tea cultivation. It sells mainly to the mass market in India. Internationally, the company sells bulk
tea that is blended and sold by branded tea marketers.
• Tetley’s Tea, the world’s second-largest tea brand, enjoys strong market positions in the UK, US, Canada, and Australia
and seeks to expand into other Western European markets and emerging regions. The company does not own tea
plantations but has built its expertise in sourcing and blending tea from different origins. Having been one of the first
companies to sell tea bags, Tetley has made key innovations in the development of packaging for its different black
and specialty teas. Based on extensive marketing, the Tetley brand is very popular in its key markets.
• Several industry developments play a role in Tata Tea’s consideration of whether to go international or not, and, if so,
whether to acquire an internationally established brand or to try and build on their own brands:
• Deregulation of the Indian tea industry and the consequent expectation of intensified international competition.
• Image problem of tea in India and many other countries where it has a backward, mass- produced, old-fashioned
image, and faces competition from coffee and soft drinks.
• Worldwide development of a segment of affluent tea lovers with an increasing interest in specialty teas (high quality,
specific origin teas, green teas, herbal teas, etc.).
 Key Points
• This case is designed to stimulate discussion of issues related to the
internationalization of a firm, the build-or-buy brand decision, and
brand valuation. Key points to be raised include:
• • Should Tata Tea internationalize? Can it survive as a local Indian
brand?
• The growing importance of branding in the tea industry in India
and internationally.
• The challenges of turning a local player into a global player and of
entering new markets.
• Should Tata Tea build or -buy a new brand?
• The future strategic and competitive advantage created by merging
with Tetley?
• How much should Tata Tea offer for Tetley?
• Alternative methods to assess a brand value.
 Teaching Plan
• The instructor can begin the case by asking • However, it is a rare opportunity and unlikely to
participants to indicate if they are going to make occur again, and if Tata Tea is to internationalize,
an offer for Tetley or not and, notwithstanding they certainly do not have the human and
the decision, how much they would like to offer financial resources to build an international or
for the brand global brand
• I have found it useful to give students a • In the second phase of the case discussion, one
spreadsheet with the formulas plugged in and of the participants can be asked to provide the
have them fill out the numbers in the missing bases for their analyses
boxes • Several factors such as the assumptions about
• The discussion can next focus on the reasons for the future growth of the market, the discount
or against acquiring Tetley factor used, the rate used to calculate the capital
• These can be organized in terms of the charge, etc. can be discussed
competitive scenario in India and internationally, • This should make it clear that coming up with a
the changing regulatory environment in India, the brand value is as much art as science
benefits sought by consumers in India and • The instructor can wrap up with a discussion of
internationally, and the strengths and the softer issues involved in M&A, particularly
weaknesses of Tata Tea cross-border ones
• This discussion reveals that on the hard facts, it • It should be emphasized that the soft factors play
would seem to make sense for Tata Tea to make a a far more important role than is typically
bid for Tetley assumed while undertaking due diligence
• However, the soft factors, e.g., cultural fit make it
unlikely to work
 Teaching Plan
• It is also important to point out that while Tata Tea • One can end with a discussion of how the corporate
bought Tetley for its marketing capabilities, it is the and national culture differences can be managed so
Tata Tea people who are involved in the marketing of that both the acquisition and the brands involved
Tetley in India and soon in China and elsewhere (see thrive.
Postscript)
• The case discussion and the wrap up comfortably fill a
• It is clear from looking at the ads used to launch 90 minute session
Tetley in India (See TN Exhibit 9), that Tata Tea does
not understand the essence of Tetley • It is important that student using this case to do the
valuation be given a lecture before the case session
• It is useful to contrast these Tetley ads with ads used on brand valuation techniques as described later in
in the UK by Tetley this note
• It is also useful to know that the original brief given to • When using the case with executive audiences, it is
the agency in India, Rediffusion by Tetley UK, did useful to provide them with a full hour prior for group
require the spirit of the Tetley brand to be captured, work to complete the calculations and the strategic
but this was lost somewhere in the process of analyses
developing and signing off on the campaign by Tata
Tea
• This highlights the differences between the two
companies
• While Tetley is a marketing company, Tata Tea’s roots
in the plantation business clearly make it difficult for
them to transition to the new way of thinking in
managing a lifestyle brand like Tetley
 Suggested Case Questions
• What is the • Does it make sense for
competitive situation Tata Tea to buy an
in India? international brand?
• What are the strengths • Should Tata Tea make a
and weaknesses of bid for Tetley? Why?
Tata Tea? • How much should Tata
• What are the key Tea offer for the Tetley
benefits sought by brand? What are the
consumers? advantages and
disadvantages of
different valuation
methods?
What is the Competitive situation in India?
• Dominated by Unilever which • Branded tea market is growing but
controls over 40% of the market not as fast as in the past
• As a MNC, Unilever has deep • Price of tea going up steadily in
pockets India and may soon go out of
• Unilever has strong global brands, reach of the common people
Brooke Bond and Lipton, which • Production costs in India are high
occupy the premium segment due to laws governing labour in
• Unilever is making increasing plantations as well as high tariffs
investments in marketing (50%)
• Focusing on global brands is • With deregulation there is an
making their spending more expectation of increased
efficient competition on several fronts
• Opening up of investment in
plantations to foreign companies
• Unilever is the largest exporter of —Unilever has already bought a
Indian tea garden in India
• Several smaller but significant • Import of tea into India—higher
domestic players productivity of gardens in Kenya
and Sri Lanka could be a problem
 What are the Strengths and Weaknesses of
Tata Tea?
• Strengths • Unilever controls 39% of global tea sales, Tetley is
• Grown steadily for the past 15 years and has been 7% while Tata Tea is 2%.
able to erode Unilever’s market share—down from • Only 12% of the tea produced is exported
75% in 1986 to 32% in 1999 • Exports are primarily bulk tea
• Has a large number of gardens in India • No access to international distribution
• Strong in R&D related to plantation management • No knowledge of building brands in international
and the production of tea markets
• Strong national and regional brands in India • Relatively weak even compared to other Indian tea
• Regional brands adapted to local tastes companies in international markets
• Brands are particularly strong in the middle and • Low margins—35% compared to 55% at Tetley and
lower price tiers other international firms
• Strong corporate brand that acts as an umbrella and • No brand image internationally
provides a common positioning based on ‘garden • Lacks the size to incur the expense needed to build
freshness’ an international brand
• Good understanding of Indian consumers • Building an international brand takes a long time
Weaknesses • International markets intensely competitive with
• Weaknesses several well-established global brands including
• Gardens are old with lower yields than new gardens Lipton, Brooke Bond, Tetley
in Kenya and Sri Lanka • India has strong positive associations with tea but
• While it is No.2 in India, it is very small compared to negative associations with quality; may prove to be
Unilever on a global basis— a handicap in the branded tea business, especially at
the premium end
 What are the Key Benefits Sought by
Consumers?
• Indian Market • Simple pleasure to
• Freshness enjoy
• Availability • Preference for high
quality teas from
• Regional variations in
taste different destinations
• Trusted brand • Exotic cuisine
• Low price • The consumption
experience
• Developed markets
• Brand image
• Health
 Does it make sense for Tata Tea to buy an
International Brand?
• Buying a brand would reduce the • While cost may be high, can borrow
competitive intensity; one less against the to-be-acquired asset,
competitor making funds for purchasing more
• Allows for immediate access to likely than for brand building
international markets • Access to managerial resources for
• Far less uncertainty building an international brand
• Portfolio of brands would provide
comprehensive coverage of markets
and reduce risk
 Should Tata Tea Make a Bid for Tetley?
Why?
• Pros • Price erosion can be stopped by selling tea to Tetley; it
• Well-recognized brand name; complements the buys over 50 million tons of tea annually
portfolio of brands owned by Tata Tea as Tetley is a • Savings on auction commissions due to the presence of
premium brand while Tata Tea is strong in the middle Tata Tea at the Indian auctions
and lower price tiers • Tata can market its teas without the baggage of the
• Strong in US, Canada, UK and Australia; complements Indian country of origin
Tata Tea’s strengths in India • Leaders in tea bag technology and in packaging for tea;
• Synergies both in terms of levels of value chain as well complements Tata Tea’s downstream competencies
as cost savings • Opportunities for participating in market for a range of
• Competencies in buying and blending tea tea flavoured products
• Solid international marketing competencies • There is no third option; an opportunity like this is
• Strong competencies in brand building unlikely to arise again
• Tetley brand can be used to strengthen position at the • Key competitive bidders absent, thus price may not be
premium end of the Indian market and compete in that outrageous
segment against Unilever
• Worldwide presence; distribution access in key
markets
• Access to tea based beverages market
• Provides access to innovations like Gaffer’s tea bars
Should Tata Tea Make a Bid for Tetley?
Why?
• Cons • Much larger than Tata Tea
• Distant second to Unilever—Tetley has • Culture clash in terms of accepting a
7% share worldwide compared to 30= firm from a developing country having
% for Unilever a say in management decisions
• Recent performance has been mixed; • Ability to retain top talent
profits down by ~30% from previous
year
• Tetley’s price expectation is high
 How much would Tata Tea offer for the Tetley brand?
What are the advantages and disadvantages of different
valuation methods?
• To calculate the value of the • Private label sales in UK are
Tetley’s brand, you can make the valued at 107% of Tetley’s UK
following assumptions: sales
• The average price of Tetley’s tea • Outside the UK, private labels are
per kilogram is £6.20/kg at retail 70% of the value of Tetley’s
from case Exhibit 8 international sales
• The average price of unbranded • Production and distribution costs
tea is £3.76 /kg at retail from case are cost of sales plus 50% of the
Exhibit 8 selling and distribution costs
• Sales will grow at 3% for 10 years • Production and distribution costs
and then grow at 1% in perpetuity are 15% higher for a branded
• 11% is the appropriate discount product
rate • Cost of marketing and advertising
• The corporate tax rate in the UK is the brand are 50% of the selling
30%; this is stated in the case and distribution costs
• Incremental costs for R&D are 50%
of actual R&D costs of £697,500
 Brand Valuation Approaches - Price
Premium Valuation
Brand value is established based
Brand premium = price premium If a non-branded benchmark
on the premium consumers are
in category A x volume in does not exist, the average of
willing to pay for a brand
category A (added over all the three lowest price
relative to a non-branded
categories) competitors is taken
product

Problem: value depends greatly

on benchmark used, possibly
higher costs of producing
branded product are not taken
into account, value is snapshot
of current earnings without
taking the future into account

The average price of Tetley’s tea per kilogram is £6.20/kg at retail from case Exhibit 8
The average price of unbranded tea is £3.76 /kg at retail from case Exhibit 8
 Brand Valuation Approaches – Brand Margin
Valuation
• This approach values the marginal revenue that is • Price (PM) that is higher than that (P) of an
attributable to a brand’s existence unknown brand
• Brand value = incremental brand revenue – • Brand investment includes the incremental
incremental brand investment product costs (product quality, R&D) as well as
• Brand revenue (RM) can come from two sources brand related investments in marketing, sales,
• Demand (QM) that is higher than that (Q) of an distribution etc.
identical product with an unknown brand • Problem: Information required is very detailed
and often not available (e.g., difficult to separate
brand costs or investments from other costs or
investments)
• Again, future projections are necessary to
determine the real value

Private label sales in UK are valued at 107% of Tetley’s UK sales

Outside the UK, private labels are 70% of the value of Tetley’s international sales
Production and distribution costs are cost of sales plus 50% of the selling and distribution
costs
Production and distribution costs are 15% higher for a branded product
Cost of marketing and advertising the brand are 50% of the selling and distribution costs
Incremental costs for R&D are 50% of actual R&D costs of £697,500
 Brand Valuation Approaches – Brand DCF
• This approach establishes brand value by • Forecasting the tangible capital employed and
discounting total net cash flows attributable to a applying a charge for capital (real rate, excluding
brand over the lifetime of a brand inflation)
• Free cash flow of a brand = brand related • Calculating intangible earnings as operating
earnings + depreciation of brand assets + interest earnings – charge for capital
payments + changes in reserves due to the brand • Calculating brand earnings as a percentage of
– investment in brand assets intangible earnings
• Problem: Assumptions have to be made on the • Calculating the after-tax brand earnings and
lifetime of a brand, future cash flows and discounting them to their present value
discount rate that significantly influence the
• Problem: While this methodology corrects some
valuation of the problems mentioned above, there is still a
• Interbrand developed a methodology based on high degree of subjectivity involved in the
the DCF method where: calculations
• Earnings from intangibles are isolated through a
detailed financial analysis
• The importance of branding in the market
examined is established through a market
analysis
• A brand strength analysis shows to what extent
brand earnings can be realized over a longer
period of time
• In a simplified model, the brand value can be
calculated by:
• Forecasting future operating earnings
 Postscript
• Tata Tea acquired Tetley for • Tetley was launched in
£270 million on 10 March India in January 2002 by
2000 Tata Tea
• BCG was hired to manage • Susequently launched in
the integration of Tetley Pakistan, Bangladesh, and
within Tata Tea Russia
• A management committee • Plans to enter China with
of six executives (3 from the Tetley brand in 2004
each), with Mr. Krishna • Tata Tea has also launched
Kumar as Chair was set up its own premium brand,
to oversee strategy of both Tata Gold in India, in
firms January 2004
• Tetley was given the rights
to market the brand in its
existing markets
 Further Readings
– Anson, Weston, Raymond Perrier, and David Defty
(1996), Look after your assets: How brands can
boost your balance sheet, Corporate finance, no.
144, (November), 35-39.
– Jean Noel Kapferer (1992), Strategic brand
management: New approaches to creating and
evaluating brand equity, Kogan Page/Éditions
d’Organisation.
– Raymond Perrier (1997), Brand valuation, 3rd
edition, Premier Books.