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Can the tea industry make Sri Lanka worth $ 100 b?


Comments / {{hitsCtrl.values.hits}} Views / Tuesday, 30 December 2014 00:52


  • Tea poised to cross $ 1.6 b dollar mark in 2014
  • SL the only country to be awarded Ozone-friendly tea positioning
  • Supply chain issues in tea industry must be addressed
  • Rs. 6.5 b plus marketing spend must be unleashed 
We all are aware of Sri Lanka’s brand value as per the nation brand value, which has touched $ 61 billion in 2014 with a +35% growth as against last year. Even though the guru of nation branding Simon Anholt says that a country earns an image that it rightfully invests in based on the way they behave with their actions, as a marketer I feel that we as a country can influence this cause by way of the marketing we do for our country.                                 In this perspective, the Rs. 6.5 billion marketing and promotional fund that is swelled up can be unleashed to drive the country brand to be 100 billion dollars in the near future. We as a nation must commend the performance of this noble industry that includes the Sri Lanka Tea Board officials. With all the challenges that we see, the industry has taken a bold decision to sponsor the Sri Lanka Cricket Team. It has also ventured out with a coherent marketing plan and promotional strategy for the country. As at October 2014, overall exports were at 1.3 billion dollars. The drop of -6% is due to the issues faced in the Russian market that account for the highest share of Ceylon Tea. The good news is that the overall revenue is poised to cross the 1.6 billion dollars this year from a demand point of view, which is commendable.   The challenge in 2015 is to activate the Rs. 6.6 billion plus that is waiting in the promotional funds for the last two years. The good news is that the overall promotional strategy has been scientifically developed and agreed on by the industry. The only issue is that the allocation plan keeps changing, which is more a policy issue than an industry issue.   Value of Brand Sri Lanka – 2014 As per Brand Finance, Sri Lanka’s brand value has picked up significantly at around 35% year on year and as at now stands at $ 61 billion and it can be estimated in 2015 to be around $ 79 billion with some strong global marketing and credible reports emanating from the country. This is where the tea promotional spending comes to play. We should ideally select the top 10 to 12 markets and invest $ 30-40 million on brand promotional work. The good news is that the current strategy at play is on this direction but awaiting the green light for activation and the split between the private sector matching values and the spend by the Tea Board on the generic campaign. The quicker we resolve this, the better it will be for the industry given the issues faced in Russia.   Supply chain focus Whilst we focus our energy on the demand side of the business in the lines discussed, we must also use this ‘Priority’ status by the policy makers to get our house in order, meaning correct the supply chain issues of the tea industry.   1. Senility of bushes? Tea production in 2012 – RPCs’ tea volumes has declined to121 million kilograms which is a drop of 8% from the volumes of 1996. If one analyses the production against 2007, it is a drop of 4% whilst against 2010 the volumes the numbers reflect a drop of 4%. Hence we see that the production volumes have not improved even in 2012 given that the numbers hovering around 126 million kilograms of tea. This also confirms the projection made by the Sri Lanka Tea Research Institute (TRI) some time back that if the stipulated corrections do not happen, the volumes would decline to 110 million kilograms of tea by the Regional Plantation Companies. In actual fact the numbers have declined to 120 million kilograms of tea as against a volume of 132 million kilograms of tea that was produced in 1996 at the time of privatisation.   2. Wage issue The second burning issue that needs to be discussed is that in the corporate sector the inconsistency by which wage increases takes place due to the political economy at play is mindboggling. For instance in February 1992 the total package of the plantation worker was around Rs. 60. In the first collective agreement in February 1998, it was revised to Rs. 101. Today the wage stands at Rs. 600 odd. This results in an increase of over 1,000% which has not been tied in statute to any productivity norms which explains the pressure on the industry. Over the years the RPCs have impressed upon the unions the need to link wages to productivity. However, wage revisions have been imposed on RPCs due to the political pressure that makes the business model nonviable, which I believe needs to be addressed post 8 January 2015.   3. Tough financial conditions One can always mention that the investment on replanting must be done but if we analyse the financial situation of the industry, the challenge is crazy. For instance in 2010 the difference between Cost of Production (COP) and Net Sales Average (NSA) is only 1.5% whilst in 2012 it was at 1.9%. It also highlights the profitability challenge that the RPCs are up against. If one analyses the RPCs on the area of profitability the gross profit has declined from a healthy 18.4% in 2007 and net profit of 9.9 to 8.3% gross profit percentage and to 7.2% net profit by 2012/13 which is tough to correct given that 60% of the cost is on the wages that are being paid, which is essentially outside the control of the private sector. Key next steps Whilst it is a fact that Sri Lanka can use Sri Lanka tea as a vehicle for nation branding, from the supply side of tea, some strong decisions have to be made.   1. The lease period from the current 53 years (19 years have already lapsed) has to be extended to a lease period to 66 years so that to some extent the financial viability of replanting becomes attractive for replanting to be done given that two cycles of bush life can be achieved.   2. In the short to medium term it’s important to build in an operating structure where a quarterly review is done between the private and the Government sector so that replanting rate issues can be discussed and agreed mutually by the State and the private sector based on the reality than on statistics. If outside funding is required by the RPCs it will have to mutually-agreed between the private sector and the relevant line ministry so that productivity levels can be increased for the benefit of the industry.   3. From a more long-term perspective it is important to develop a new business model to operate the RPCs that are required, not only from an economics point but from a social side too. The good news is that some companies are already on to this new strategy but require strong policy reforms that can support this hard-line approach. This model includes a highly-diversified RPC that has business lines in commercial forestry, gemming, mini hydro, ecotourism, palm oil, mineral water bottling, dairy farming and vegetable/fruit cultivation for the export market and other entrepreneurial ventures based on the needs of the market place. We also have to face reality and move towards a very lean operating structure which is highly diversified that needs policy support too given the political ramifications.   (The author was appointed by the President to the 10-man committee to evaluate the effectiveness of the privatised Regional Plantation Companies in Sri Lanka. The thoughts expressed are his own and not the views of the organisations he serves in Sri Lanka or globally.)

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