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Tata gluco plus ingredients

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9B17A062


NOURISHCO BEVERAGES LTD.: MAKING NEW INROADS Neena Sondhi wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright © 2017, Richard Ivey School of Business Foundation Version: 2017-11-27


In May 2016, Harsh K. Rai, chief executive officer and managing director of NourishCo Beverages Ltd. (NourishCo), was reading with pride the special mention of NourishCo’s performance by the chief executive officer of PepsiCo India Holdings (PepsiCo), Indra Nooyi, included in her 2016–17 second-quarter summary report. As Rai looked away from the colourful array of sample packs towards his talented team of dedicated professionals, he knew the young company had already made a mark in the beverage sector. NourishCo began its journey on October 28, 2010.1 The long-term corporate vision of NourishCo was to focus on the health and enhanced wellness needs of India. The company currently had a diverse and well- conceptualized portfolio of three brands. It was founded as a fifty–fifty joint venture between one of the world’s best-known companies, PepsiCo, and one of India’s most respected and trusted brands, Tata Global Beverages (Tata). Since its inception, the two parent firms had been regularly financially supporting NourishCo. After a considerable amount of investment in product, packaging, manufacturing, and innovations, NourishCo had successfully met the objectives of its business model. The company now wanted to continue its expansion nationwide. The NourishCo board had approved national expansion plans with Tata Gluco Plus as the company’s leading brand. This was a great step forward, but the pragmatic 46-year-old Rai knew that with great expectations came great responsibilities. NourishCo had a distinct, low-cost, and effective business model. However, the low entry barriers in that segment could lead to fierce competition from both big and small companies. Tata Gluco Plus had taken four years to establish a market presence. However, to retain its first mover advantage and achieve financial viability, NourishCo needed to be a national company within the next couple of years, or else it could lose its unique status as the on-the-go energy company. However, there was the question of how best to carve a national footprint. Should the company begin with regions closest to its existing market or expand to regions with different climatic and customer compositions? The company’s fragile product packaging needed support from its manufacturing operations in the region. Was the decision to keep this kind of packaging viable for a national strategy? What about the variant mix; should regular flavours like lemon and mango be kept or new regional choices added? Rai expected that the company would be moving at a very fast pace over its next phase. The company would need to strike a perfect balance between managing cash flows and expansion plans.


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Page 2 9B17A062 THE NON-ALCOHOLIC BEVERAGE MARKET IN INDIA: AN OVERVIEW Although the definition of a non-alcoholic beverage varied across countries and continents, it was widely known as a drink that contained less than 0.5 per cent alcohol. The category originally referred to juice, cider, and lemonade and expanded over time to include a large variety of products in a profitable and diverse market sector. In 2016, the category was separated into carbonated soft drinks, functional or non-carbonated drinks, and hot beverages. Carbonated drinks, the largest group, accounted for 40 per cent of the category,2 growing at an annual rate of 10 to12 per cent in India.3 Functional beverages were grouped together based on useful benefits they provided to consumers. Therefore, the category included functional water and other drinks that contained some form of healthy ingredients, such as vitamins, minerals, prebiotic or probiotic bacteria, and raw fruits and vegetables. These drinks came in the form of fruit- and vegetable-based juices, or pre/probiotic and energy drinks. The category also included ready-to-drink tea options, which were also considered to have functional stimulating benefits. Dairy-alternative beverages, which were non-dairy drinks and an important source of nutrition for lactose-intolerant consumers, were also part of this group. The energy and fruit-based juice drinks together accounted for more than 50 per cent of the functional beverage market. These two sectors were expected to see exciting growth in the future, at a compound annual growth rate of 25 per cent for energy drinks and 30 per cent for fruit-based juice in value terms.4 After India created the food and beverages sector in the late 1990s and 100 per cent foreign investment was allowed (see Exhibit 1), there was a proliferation of international brands with extensive reach across all beverage segments over the entire country. Generally, three different manufacturing models were used by these beverage firms: contract-based outsourced manufacturing, franchisee operations, and stand-alone company-owned operations. Working capital management and brand building were challenging for stand- alone operations, especially for creating a national brand. Quality diversification was a clear advantage for firms that had company-owned operations. On the other end, a company with franchisee operations had a lower liability because of fixed assets, which made exiting the market much easier, compared to other models. The Coca-Cola Company, PepsiCo Inc., and Parle Bisleri Ltd. dominated the soft-drink and bottled-water market.5 With very little differentiation between products, they carried out continuous product innovations and extensive brand-building exercises to create entry barriers for new ventures. They also had the advantage of well-planned wide reach through their distribution and manufacturing networks. In the previous six years, an unexpected but critical market trend had emerged. Smaller beverage companies from Tier 2 cities6 had grown by 30 per cent. This was almost twice the growth rate of the market leaders in Tier 1 cities.7 In 2014, the market research firm Crisil had predicted that aggressive smaller companies would likely occupy 40 per cent of the food and beverage sector by 2019. Two regional companies were making significant gains in the market. Kali Aerated Water Works, based in Tamil Nadu, achieved success with its flagship brand Bovonto; and Hector Beverages, based in Haryana, had two successful brands: Paperboat and Tzinga. Both companies adopted, packaged, and branded traditional unbranded flavours and used innovative packaging and branding to succeed where cola giants led the market. These two brands were preparing to gain a national presence in forthcoming years. The soft drink sector was almost constantly affected by fluctuations in the prices of raw materials including sugar, artificial sweeteners, fruit-juice concentrates, and other commodities. The base ingredient for soft drink products was water, which was a major risk factor for the sector because water stress was a global and national area of concern.


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Page 3 9B17A062 New trends, shifts, and reversals were also expected in the market share of carbonated and non-carbonated beverages based on forecasts of key market and consumer trends. SHAPING FUTURE MARKETS: KEY MARKET AND CONSUMER TRENDS According to market research, two-thirds of future market growth in the soft drink beverage sector would be coming from Asian nations, mainly India and China. Carbonated, non-carbonated, and packaged water were going to be the major areas of growth8 despite environmental and health concerns. The chief managing director of Manpasand Beverages, a fruit drink company based in Guajarat, India, compared the sector’s growth in India to other countries as follows:


As per a report, India’s per-capita consumption, annually, of soft drinks is three litres, while it is almost 90 litres in the USA and 16 litres in Pakistan. In a country of more than 1.2 billion people, if consumption increases from three litres to six litres, I am sure that no company can fulfill that demand. Such is the potential size of our market.9


A McKinsey report predicted exciting times for India and forecasted that by 2025, it would be the fifth-largest beverage-consuming nation in the world. The factors that the report credited for this growth included a 7.4 per cent increase in household incomes between 2015 and 2025, although the distribution of income would be erratic across income classes. A significant prediction was that employment opportunities would trickle down to the base of the income pyramid, labelled the deprived group, whose average annual income was less than ₹90,000.10 This group was expected to shrink from 54 per cent of the population to 22 per cent by 2025.11 According to the report, smaller nuclear households, increased urbanization, and a rise in the number of double-income families would further contribute to increased beverage consumption. With higher consumption growth for beverages in urban areas, a considerable increase in consumption in smaller cities and low-penetration rural areas was also forecasted for the coming years. These areas, which once suffered due to a lack of adequate infrastructure, would gain with improvements in existing roads and infrastructure development, which had become a prime focus for central and state governments in India. This would be further accentuated by improvements in cold storage and supply chain facilities. Consumers around the world, including in India, were consciously moving towards bottled water and water- based beverages for health and wellness reasons, making pure water and fortified water beverages natural choices. Another trend of some significance was the emergence of smart consumers12—well-informed customers that sought complete transparency in the ingredients and production processes of products, demanding more natural and less processed foods and beverages. An increase in out-of-home consumption of food and beverages was also expected, partly due to the fact that consumers were spending more than 50 per cent of their waking hours outside the home, engaged in either work or leisure activities. Public beverage consumption was carried out in retail and restaurant settings, while private consumption occurred at home. Roughly 80 per cent of beverage sales came from public, or out-of-home, consumption,13 making on-the- go, ready-to-use, single-package units the preferred choice for all consumer groups. These consumer trends were shown to be effective in shaping the routine decision-making habits of consumers, who were seeking new flavours and packaging options. These behaviour patterns had been recognized and addressed in the product strategies of both small and major companies that looked for innovative packaging, labelling, product form, and composition for their offerings. Companies in India and

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