Case Study

Pure Tea and Beverages Ltd.

Simran Bali, VP – Sales and Marketing of Pure Tea and Beverages Ltd., (PTBL) leaned
back and gave a long sigh. She had been working on the integration of the operations of a
recent acquisition of the company of another company in the same industry. PTBL had
recently taken over Dew Drops Ltd. (DDL) – a listed company in the business of bottled
mineral water. It had paid a hefty price of about Rs. 165 crores to obtain a 39% stake in
the DDL with an option to acquire further 12% from DDL’s promoters in 2 years at a
pre-negotiated price of Rs. 55 crores.

Have we overpaid the to acquire DDL at such a hefty price? And all for a company that
had a small business in bottled mineral water. No doubt that PTBL was a large company
belonging to a very large Indian conglomerate and could afford to take on such risks to
enter into an exciting business with immense growth potential in the Indian market.
Tapping exports and international markets could further augment this large potential
opportunity.

But all that was in the future and provided they could get the integration right. There
were so many areas to be tackled – getting product strategy right, promotion campaigns,
exploiting distribution synergies, setting up the right distribution chain for DDL products
etc. And Simran, a veteran in this field with an MBA in marketing from a prestigious
management institute in Mumbai and over 15 years of experience in hardcore consumer
products marketing, knew that the name of the game was superior brand management
backed by strong distribution network.

And this was the task given to her by PTBL management – to ensure that the distribution
was strengthened with the right set-up, right channel partners and to exploit synergies in
distribution between PTBL and DDL systems / channels. She had to study the situation,
work out the options and then present the action plan to the management in a month’s
time. As she was busy with her existing responsibilities, she decide to entrust this task to
Sheetal Madne who worked with her as Manager – Marketing and was also a MBA from
the same institute in Mumbai.

PTBL Background

Pure Tea and Beverages Ltd. had been in existence for over 40 years. It had been started
as a company in the business of tea production and marketing – both in India and for
international markets. Over the years it had diversified into coffee through acquisitions of
coffee plantation companies in South India. PTBL not only had plantations in North East
and South India for tea but had also gone overseas in the mid 1990s to acquire tea and
cocoa plantations in Africa, China and Sri Lanka.

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The company was pursuing an aggressive growth strategy from the late 90s through
diversification in existing and allied lines of business. This was being done through a mix
of strategic acquisitions and organic growth of the business lines. In the year 2000, it had
made its first large overseas acquisition by taking over Happy Tea Ltd., which was one of
the largest tea companies in Europe with strong brands and presence in over 40 countries.
It had become a truly multinational company and had been a pioneer to set the trend for
leveraged buyouts outside India by Indian companies, a trend which became common
after 2004.

It was pursuing growth in various beverages and had taken over Golden Beverages Ltd.
in 2002, which gave it strong soft drink brands – Golden Dew and Cheer along with few
bottling plants in various parts of the country. It had successfully pursued the integration
of the acquired companies with its existing business portfolio and had gained valuable
experience in leveraging synergies of products, markets and distribution.

PTBL had purchased a 25% stake in a US company Wake-up Coffee Inc. in 2005, which
owned “Refreshingly Yours” – one of the oldest and well established coffee brands in the
American market. This was a strategic decision to give PTBL an entry into the American
market which was the largest but most difficult market for beverages in the world. The
company hoped to leverage this stake further and subsequently, make this as an avenue
for pushing its own beverage brands through the established distribution network of
Wake-up in the US.

It had also been looking for a suitable entry into the fast growing mineral water business
area since the year 2004 and had even prepared plans for a greenfield entry through
building its own brand and business as there were no suitable companies to acquire.

But DDL had come up sheer chance when the promoters decided to sell out their
fledgling business to a larger company. PTBL had bid very aggressively against many
MNCs like Nestle, Danone etc. who were also keen to get a foothold in the mineral water
business. And as a result the valuations had been pushed up to stratospheric levels. This
was causing discomfort to Simran and others in PTBL and though, they had proven track
record in successful acquisitions and integrations to exploit business growth, whether this
could be replicated in case of DDL was to be seen.

Status of PTBL

PTBL was not in a very comfortable financial position as the acquisition spree over the
recent years had led to taking on large amount of debt to finance these. Though, the
company had been able to draw synergies and ensure repayments of the loans, its
finances were under a strain and interest costs had been biting into the bottom line. The
financials of the company are indicated in Exhibit 1.

The company would be taking additional loans for the purchase of DDL and this would
strain and leverage the company’s financial position further. In addition, to the Rs. 220

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crores it needed to gain control of DDL, it had to invest further in marketing expenditure
of around Rs. 300 crores over 5 years. This was required by way of advertising and
promotion expenses to strengthen DDL’s brands. Some investment / expenditure would
also be needed to revamp the distribution network and hence, Simran had to keep this low
to avoid further strain on PTBL. But the water business was far too important and
lucrative an opportunity for PTBL to ignore and she was sure that they would succeed in
this venture too as they had done with their earlier acquisitions.

Mineral Water Business

Many studies had been carried out by leading consultancy companies like Edelweiss,
Samudra etc. and by various government and government sponsored bodies like NEERI
that water would become a key strategic asset across the world in the next 50 years. It
would be in a position of importance in the 21st century as oil had dominated in the latter
part of the 20th century. The quality and availability of fresh water would increasingly
come under pressure due variety of environmental factors including global warming,
pollution levels etc. leading to severe shortages of fresh water. Countries would guard
possessively their fresh water resources and seek to augment these in future.

The bottled mineral water business was also expected to grow rapidly due to the above
factors. It was the fastest growing area in the beverages category surpassing others like
soft drinks, tea, coffee, juices etc. by a far margin. This was also being driven by a variety
of trends including rising affluence, consumer affordability, health consciousness,
increase in tourism, increasing use of hotels and restaurants for stay and food, higher
inclination in the younger generation for eating out and rising consumer concern over
potability and quality of tap water and other sources. All these pointed to a strong growth
prospects for bottled mineral water business and every company in the world in the
beverages business was looking to get a piece of the action and make a splash in mineral
water.

The global market for mineral water was around US $100 billion and was growing at
10% per annum worldwide. Developed markets like USA and Europe constituted more
than 50% of the world market. But developing countries like China and India with
populations of over 1 billion people were the markets of the future and presented the
huge growth opportunities since the penetration levels of mineral water was still very low
in these countries. Large MNCs such as soft drink majors like Coca Cola, Pepsi etc. and
FMCG companies like P&G, Nestle, Unilever etc. were looking at entry into the Indian
market through strategic buyouts.

The Indian market was estimated to be at around 900 million litres (Rs. 1000 crores) in
2006-07 and was growing at 25-30% per year for the past 5 years. It was expected to
sustain this growth rates in future too and reach a level of 5000 million litres (Rs. 5200
crores) in 5 years i.e. by 2011-12. A local Indian company – M/s Parle Products Ltd.,
dominated the market with its Bisleri brand of mineral water with a market share of over
25%.

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Market for Mineral Water

The market was highly fragmented with many players including MNC brands like
Aquafina, Kinley, Evian etc., regional brands like Paras, Oxyrich, Kingfisher etc. and
many more brands from the unorganized sector. There were more than 200 competing
brands but most of them were in the unorganized sector and sold in small towns and semi
urban areas. The keys to success in the market were strong brand presence and
widespread efficient distribution network. Only few brands like Bisleri, Bailey, Aquafina
etc. had been able to establish a national presence through a strong distribution network

The brands had taken various positioning planks like freshness, purity, oxygen content,
mineral content, taste, health etc. to create their USPs and differentiate themselves in the
crowded market in the consumers mind. Each brand then had crafted its promotion
strategies in line with its target segments and positioning. The pricing of the mineral
water bottles was highly competitive and the most common pack size was 1litre bottle
marketed at MRP of around Rs.10 per bottle including taxes.

Various companies had tried to create different pack sizes like 250ml, 500 ml, 2 litre
bottles etc. Further, there was another category which consisted of supplies in bulk
bottles of 10 or 20 liters which were used with water coolers, water dispensers, beverage
vending machines etc.

The market was also categorized into 2 parts based on the source of the mineral water.
One was the natural mineral water obtained from natural springs in the mountains or
through underground water sources (aquifers) which provided naturally filtered and pure
mineral water rich in many mineral salts. This water went through natural filtration
process through layers of rock and clay and got enriched with minerals in the process.
This water was considered superior in quality and was sold at a premium over regular
mineral water.

DDLs brand Gangajal was the leading brand in this category in India and had more than
80% share of this segment. The other competitors in this area were mostly MNC brands
like Perrier, Evian, Vittel etc. These were natural mineral waters from springs / sources in
the Alps and other locations in Europe and were imported into India in bottles. The cost
of the imported water was very high – over Rs. 30 per litre bottle. In comparison,
Gangajal was sold at around Rs.15 per liter bottle and had a price advantage over the
competitors. As yet there were no domestic competitors in this category, though leading
companies like Parle had expressed its intentions to enter tempted by the success of DDL.

However, this category was constituted only 5% of the total market for mineral water due
to its premium positioning. Major part of the market was made up by regular mineral
water which was prepared in regular water treatment plants in various locations of India
and bottled in these treatment cum bottling plants. The process used here was
conventional filteration through clay, charcoal, reverse osmosis, membrane etc. to
remove contamination and impurities. The water was also treated with chlorine and other

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chemicals to ensure elimination of bacteria and other organisms. Due to the process used
this water had a distinct taste and did not contain natural rich mineral salts which were
healthy for the body. However, since this was produced on a mass scale and at different
locations, the cost of production and transportation / logistics were low. Thus the regular
bottled mineral water could be marketed at very low prices of Rs. 10 per litre bottle.
Unorganised sector brands were available at even cheaper prices.

The market also had two major customer segments – institutional and retail. The former
consisted of major institutional buyers like banks, organizations, companies, factories,
financial institutions, corporate offices, government departments / companies, hotels,
restaurants, bars, hospitals, airlines, railways, canteens etc. This constituted about 30% of
the total market while the balance 70% was made up by retail segment.

This consisted of shops and retail establishments that sold the mineral water to end
consumers as required. These were widely spread all over the country and the distribution
for water had to be highly intensive type to achieve the scale and coverage required for a
true national presence. Bisleri the market leader who had achieved its wide presence by
building its network over two decades was dominant in the retail segment. The growth
rate of the retail segment was 30% per annum while the institutional was growing only at
around 5-8% per year. Hence, presence in this segment was vital to become a major
player in the water business.

DDL History

Dew Drops Ltd. was set-up and promoted in the year 1996 by Sam Dadlani, a NRI who
had seen the potential for natural mineral water in India. He had settled in Europe for
many years and had seen the presence of Evian and other brands in those markets. He
rightly felt that India with its vast Himalayan region offered huge source of natural
mineral water and a large business opportunity in the years to come.

The Indian economy was finally coming of age in the mid 90s after the liberalization
carried out since 1991. The GDP growth had accelerated to around 7% per annum from
the old Hindu growth rates of 3-4% per year of the past many decades. Sam Dadlani felt
that it was the right time to return back to India and set up the mineral water business.

Accordingly, he had promoted DDL in the year 1996 with an initial equity capital of Rs.
2 crores. This initial capital had been put up from his savings and from contribution of
some private NRI investor friends. There was a lot of skepticism of the concept and
business model by most persons at that time since mineral water was still seen as a luxury
in India and had not reached the mass status that is seen today.

Consequently, Sam underestimated the difficulties that he would face in setting up the
business and had a tough time in convincing banks and financial institutions to give him
loans to grow the operations and business. The company had limped along in its initial

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years and had faced huge expenditure in marketing, advertising, promotion and setting up
the distribution chain and channels.

In order to raise funds for growth, Dadlani had approached the stock market in 1999 and
had raised around Rs. 20 crores through an IPO. He had diluted the equity capital to its
present level of Rs. 16 crores at this stage but had still retained overall control of the
company with over 60% of the equity in his fold. The balance portion had been picked up
by some of his friends, private investors, financial institutions and the general public.
Thus, DDL was a listed company on the BSE and NSE.

However, Sam had been able to procure the access and utilization rights to a very large
and high quality natural mineral water aquifer resource in the Garhwal region of the
Himalayas. This was a large and deep underground aquifer capable of yielding over 1.75
billion liters of water every year and was a perennial source as long as the Himalayas
were in existence. It was continuously being regenerated and the water not only was very
pure but had unique qualities and mineral content. This had given a strong USP to DDL
for marketing its mineral water and had rightly selected its brand name Gangajal which
connoted purity and premium quality of water. The rights for the water and copyright for
the trademark had been protected by DDL and were available for their exclusive use for
the next 40 years.

DDL had set up its bottling plant close to the aquifer source in the Himalayan region
since it did not want the risk of contamination in transporting bulk water to other parts of
India. However, this strategy had not worked out too well as it had increased the cost of
production and transportation of the water to various locations in India.

As a result of this, DDL had struggled financially through its existence and though, it had
gone into the black for the past 2 years, it still had accumulated losses of over Rs.30
crores. Besides as seen in the financials given in Exhibit 2, its sales and profits were quite
low despite almost 10 years of being in the business. The water business for DDL was
finally showing signs of strong growth and they had managed to grow their sales volumes
by over 25% per year for the past 3 years.

The major problem with DDL was the negligible presence of Gangajal in the retail
segment which was mainly due to its premium pricing. This was necessary given the
higher costs that DDL faced for bottling and transport of the natural mineral water as
compared to other regular mineral water brands. Almost 90% of DDLs business came
from the institutional segment and though it had built up this business painstakingly,
DDL had to discount its prices heavily to penetrate. This had a major impact on the
profitability.

Sam knew that he was faced with a Hobson choice – the frying pan or the fire. They were
caught between the devil and deep sea. With Parle threatening to enter the natural mineral
water business, DDL had to diversify. They had to either build more plants near the
consumption centers and invest more in safe modes of bulk water transportation or take

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the fight to the competitor’s stronghold i.e. they too had to launch a regular mineral water
brand to increase volumes and grow.

But both these choices called for large investments which DDL given its weak balance
sheet and finances was not in a position to do. Dadlani thought wistfully that had I been
ten years younger, I would taken up this challenge and gone about raising funding
through another public offer or sale to private equity. But he was not getting younger and
was tired of few more years to fight it out. Besides there was no successor in the family
to whom he could hand over the business. Both his daughters had settled outside India
and were not keen on returning here to run the business. Hence, he reached the decision
though painful that he had to sell out to a stronger party and rope a larger company with
deep pockets as a partner to whom he could eventually transfer ownership and control of
the company.

And he had chosen the time well. In the super heated Indian economy, many players were
hungry for a foothold and that too in a potentially large, lucrative and fast growth
business like mineral water. He had been deluged with offers from many Indian
companies and MNCs when he had made his intentions public. The offers ranged in the
range of Rs. 500 crores and above from some of the MNCs who were willing to pay even
upto 6 times of sales value or 4 times EV for DDL.

But Sam patriotic instincts got the better of him and he decided that he would partner
PTBL who was part of highly respected and large Indian group. He considered that the
natural mineral water resource as a wealth of India and after so many years of colonial
domination, he felt that at least now the country’s natural resources should remain in the
hands of Indian companies and not be handed over for exploitation to MNCs. And that’s
how Simran and PTBL had entered the picture.

Future Prospects

Simran sighed when she recounted all this and saw the magnitude of the task in front of
PTBL. They had to get so many things right to make this acquisition a success and make
some returns on the huge price they had paid for DDL. For PTBL, this was almost like a
greenfield project since they had to establish the regular mineral water brand from
scratch. Without presence in the fast growing retail segment, there was no way that DDL
would hit its ambitious volume and growth targets. And if it did not achieve these, then
there was no way that the profits would justify the huge acquisition cost.

They had decided on a brand name “Aquapure” to launch the regular water brand. But
there were so many things to be done. They had to do the entire launch strategy, had to
set up bottling plants at various locations, decide pricing strategies, decide product
strategies – packaging, pack sizes etc., decide the best distribution system, decide the
advertising, promotion and brand building strategies etc. The list was endless and they
had drawn up ambitious targets to be achieved – these are shown in Exhibits 3 and 4.

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And she was shocked at the stretch in the targets every time she looked at them though
she had been part of the team which drawn them up. How are we going to achieve sales
volume of 500 million litres per year by 2001-12 which will be almost 10% of the total
market? Today our sales account for hardly only around 4% of the market with majority
coming from institutions? How are we going to build the retail distribution ?

They had to increase the number of retail outlets covered by DDL to 100,000 over the
next 5 years. But is it going to be enough against Bisleri the market leader who already
had coverage of 150,000 outlets today? Where are we going to find these retailers and
what about the wholesalers etc. to support them? Where should we put our bottling plants
who need to do the bottling? The logistics and physical distribution was a major exercise
due to the high cost of moving water around. Hence, this aspect also needed to be
streamlined and optimized well.

But simultaneously they also had to protect and grow the Gangajal natural water. They
were planning to export this to Middle East and other markets? What about distribution
channels and logistics networks here? Then they were planning health based variants of
Gangajal – enhanced water including pediatric, geriatric, vitamin and other enhancements
at affordable prices. What about the brand strategies, pricing, distribution of these?

It is getting too much she decided and let someone else worry about the other strategies. I
will worry about the distribution part and hence, accordingly instructed Sheetal to study
these areas.

Existing Distribution Channels for DDL

The existing channel structure used by DDL is shown in Exhibit 5. This consisted of
around 30 distributors / wholesalers who were stocking the mineral water bottles and
supplying and covering around 1500 retail outlets primarily in the Northern and Western
parts of India. The company was also using some of these distributors to cater to the
institutional segment since these distributors had strong local contacts and helped DDL to
penetrate these accounts.

The sales staff for the institutional accounts was a separate team under a separate
Divisional Manager for this segment. They had strength of 10 persons on all India basis
located in various towns to handle various institutional customers. These persons would
liaise with the distributors if required and were responsible for various key accounts. A
separate team of 6 sales persons under a separate Divisional Manager covered the retail
segment. Both the DMs came under the GM for Sales and Marketing for DDL who was
responsible for entire marketing operations including dealer development and
management. Some of the characteristics of the distributors and retailers are shown in
Exhibit 6.

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DDL also used structure of regional WH to stock the bottles after receipt from the
production plant and before they were supplied to the distributors. However, as water had
a limited shelf-life the company had a separate Manager to handle the commercial and
logistics functions reporting to the GM. This person coordinated with transporters, WH
managers, and logistics companies to ensure that the physical distribution happened
smoothly.

The typical margins consisted around 30% to the distributors who in turn passed on
around 15-20% to the retailers which was the industry norm. However, the company had
a problem in dealings with some of the distributors since they indulged in shady trade
practices including under invoicing, tax evasion, infringement in other’s territories. Many
of these also lacked the financial muscle and strength as these had been appointed due to
their proximity to Dadlani family or their friends and acquaintances.

Sheetal wondered what kind of surgery and changes would be required on this
distribution system to make it suitable to PTBLs plans and also, clean up the problem
areas. How could she synergise with their existing distributors and leverage synergies?

PTBL Distribution Network

PTBL had also a similar structure for distribution of its various products such as tea,
coffee, soft drinks etc. in the Indian market. It had a penetration level of 50,000 retail
outlets which were being covered by over 100 distributors / wholesalers. These in turn
had more than 200 semi-wholesalers in spread over certain areas to cover all the retail
outlets effectively.

The company had also segmented its sales force to cover institutional and retail segments
effectively and a network of regional WH to support physical distribution of the products.
It also had some bottling plants in certain areas used for soft drinks which were
supporting the distribution structure.

Alternatives

Sheetal had many options which she could study and give recommendations to the
management.

1) They could keep only the strong distributors from DDL and give the entire range of
products to them
2) Same could be done with PTBL distributors to extend their product line to include
mineral water also
3) The distribution networks / channels could be combined in a optimum manner to
increase coverage
4) New distributors needed to appointed to handle the growth volumes and increase the
number of retail outlets covered

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5) Automatic vending machines as alternate to retail outlets could be pushed as separate
channel system
6) New retail store formats such as large malls, food stores etc. could be tapped for both
product lines
7) Margins and other policies needed to be coordinated and made similar before any
integration activities commenced

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Exhibit 1

Financials of PTBL

Values in Rs. crores

2003-04 2004-05 2005-06 2006-07
Sales 570 756 918 1070
Cost of Sales / Expenses 462 612 744 873
PBIDT 108 144 174 197
Depreciation 15 16 18 19
Interest 11 12 25 38
PBT 82 116 131 140
Taxes 26 30 35 43
PAT 56 86 96 97

Equity 46 52 55 59
Reserves 1245 1344 1394 1463
LT Loans 0 200 270 345
ST Loans 35 40 45 50

Exhibit 2

Financials of DDL

Values in Rs. crores

2003-04 2004-05 2005-06 2006-07
Sales 15 20 30 35
Cost of Sales / Expenses 12 14 21 24
PBIDT 3 6 9 11
Depreciation 3 4 4 5
Interest 5 4 4 4
PBT -5 -2 1 2
Taxes 0 0 0 0
PAT -5 -2 1 2

Equity 16 16 16 16
Accumulated Losses 31 33 32 30
LT Loans 25 22 22 22
ST Loans 15 15 15 15

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Exhibit 3

Targets for DDL in future years

Parameter Current Level in Projected Level in

2007-08 2011-12
Sales Volume 35 m litres 500 m litres
Sales Value Rs. 35 crores Rs. 500 crores
Profits Rs. 2 crores Rs. 50 crores
Product Mix – Natural MW to Regular 100 : 0 10 : 90
MW
Market Mix – Institutional / Retail 90 : 10 30 : 70
customers
No. of retail outlets 1500 100,000
No. of distributors 30 2000
No. of bottling units / plants 1 15
Overall share of market 4% 10%
Ad / market spend Rs. 2 crores Rs.60 crores
Exports Nil Coverage of SAARC,
Middle East, Africa
and Russia
Products Range Natural MW Natural MW, Regular
MW, Enhanced MW
Capital expenditure Negligible Rs. 40 crores in
regional bottling plants
Physical Distribution Single plant, regional Multi-location plants,
WH State level WH /
stocking, C&F

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Exhibit 4

Projected financials for DDL

Values in Rs. crores

2007-08 2008-09 2009-10 2010-11 2011-12
Sales 70 150 250 375 500
Cost of Sales / Expenses 49 105 175 260 350
PBIDT 21 35 75 115 150
Depreciation 6 10 15 25 30
Interest 10 15 30 25 30
PBT 5 10 30 65 90
Taxes 0 0 0 25 40
PAT 5 10 30 40 50

Equity 16 20 100 100 100

Accumulated Losses 30 20 0 0 0
LT Loans 22 72 15 10 10
ST Loans 15 25 25 30 35

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Exhibit 5

Channel Structure of DDL

Dew Drops Ltd.

Sales Force 1 Sales Force 2

Physical Distribution System

Warehouses, Logistic Networks

Distributors

Distributors

Sub-
distributors

Retailers

Retail Consumers Institutional Customers

Consumers

Exhibit 6

Characteristics of DDL Channel Members

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A) Distributors

• Typically small family owned businesses

• Limited capacity to invest
• Unprofessionally managed
• Located in small areas
• Not exclusive to a particular company

A) Retailers

• Small time retailers

• Not able to provide sufficient shelf display space for Gangajal
• Lack of focus to push DDLs brands
• Demanding higher margins for stocking, POPs etc.

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