At the 35th anniversary celebrations of the Sri Lanka Export Development Board, my mind wandered to the key sectors that Sri Lanka has been operating in the last 35 and their health. Apparel which started its business way back in 1974 is today a five billion dollar business giving leadership to the world on the platform of ‘ethical sourcing destination of the world’. On the other hand the tea industry is poised to become a two billion dollar business globally giving an identity to brand Sri Lanka.
Quasi tea hub?
In this backdrop, the performance of the tea industry is demonstrating a commanding 16.4% growth as at the first half of 2014 which is an interesting situation with record production in the last six months.
There are allegations and counter-allegations by certain quarters of the industry that imported teas are coming into the country illegally on the lines of a tea hub, hence the spike in the tea industry numbers on volume and value. However, if one does a statistical analysis, the moving annual averages do not bring out this hypothesis.
In my view, it is too early to explain the upward movement but all we know is that there is some behaviour that needs a careful analysis in the near future. A dip stick study on the quality of tea might give an insight to this anomaly but again it will have to be on a representative sample for a meaningful analysis and decisions to be taken, given that stalwarts of the industry have voiced this concern.
What is a tea hub?
Let me throw light on what a tea hub is. This is simply setting up of a Free Trade Zone (FTZ) where enterprises can set up blending facilities by importing teas from other origins and then mixing these teas with Ceylon Tea to the requirements of the global consumer.
Certain industry quarters in Sri Lanka were of the view that in the event such a facility comes to play in the country, the policymakers should enforce that 50-70% of the tea in any pack must be pure Ceylon Tea whilst the rest can be teas from other origins.
An idea discussed at that time was that the tea packs that originate from this FTZ must be branded with coined names and it cannot come into the country and find its way into the auction system, but must be shipped out in large quantities in bulk. This will enable differentiation between ‘Pure Ceylon Tea’ and the teas that comes out of the FTZ into the global market was the essence. The typical FTZ that this can be set up in was Hambantota so that conceptually and logistically it would be easy to manage.
Why a tea hub?
If we are to understand ‘why a tea hub?’ let me take the Russian Federation as an example as it is the number one market globally for importing tea at 175 million kilograms per annum and the number one export destination for Ceylon Tea.
If one examines facts and data, to the Russian market the bulk tea exports out of Sri Lanka has increased from 21,166 in 2000 to 28,743 metric tons by 2009. On the other hand packeted tea volumes have come down from 18,377 to 7516 metric tons during the same period. The reason for the shift was that Russia duty on bulk exports has been reduced to 0% and thereby the Russian policymakers were to give space for organisations to set up in Russia to pack teas that are imported from many countries for blending purposes and thereby spruce up FDIs into the country.
This also enabled the Russian Government to address the looming unemployment crisis in the country, hence a commendable economic move internally. The Russian policy also orchestrated the market beautifully by introducing a labelling law to allow tea products to carry the tag ‘Ceylon Tea’ even if it contains only 51% of tea from Sri Lanka whilst the rest can be blends from other countries.
This can be proven with facts as less expensive teas that are being imported into Russia from countries such as Kenya had increased from 5,123 metric tons to 11,821 MT during the time period 2002 to 2009 whilst imports from Vietnam have catapulted from 4,720 metric tons to 13,183 MT.
Logic of a tea hub
If we want to further validate these numbers where packeted tea exports from Sri Lanka came down from 18,377 to 7,516 metric tons between 2000 and 2009, if we carefully examine the private sector numbers we see that the top six exporters’ numbers have come down from 15,623 MT in 2002 to 9,346 metric tons by 2009, which is a decline of almost 40%. This very clear orchestrates the need for Sri Lanka to move to a tea hub concept as explained above.
Way forward – Sri Lanka
There are two options for Sri Lanka to pursue. Option 1 is drive branding and the option is to test the tea hub concept
1) Drive branding
The first option will be to drive consumer pull and retail pull by building strong brand equity on the ‘Ceylon Tea’ proposition. This in turn can set up a umbrella category branding strategy and thereby create demand pull to brands, which are manufactured with high quality single origin quality Ceylon Tea that has the Lion logo as the differentiating point.
However, the issue is that this strategy requires a very fat advertising budget which is a luxury that we cannot afford at this moment of time. A point to note is that even the current 20 million dollar promotional campaign that Sri Lanka Tea Board is planning to launch might create a buzz but strong funding will have to be ploughed in if we are to maintain this strategy.
2) Test market the hub concept
Whilst this strategy may sound convincing on paper there are many issues that can crop up when operationally implemented. One them is, will the FTZ be a self-contained entity where leakages will not take place to the local market? If this happens, the total auction system can get affected and the ramifications to the country will be unimaginable.
One way to see the market behaviour is by test market this concept targeting one export country. This can help us ensure necessary checks and balances are in play. Once the test market duration is over (one to three years), an independent 360 degree evaluation must be done and the lessons learned before it is rolled out to the rest of the world.
Ramifications for Sri Lanka
A key issue that can come up if option two is followed is that if it is not properly monitored, it can affect the current business model of tea which commands the highest tea prices in any auction. One way out is to test market this proposition as mentioned above so that we can determine if Sri Lanka is ready to implement the concept of a tea hub and its architecture.
Another issue is brand imagery diffusion if low priced multi origin tea gets exported out of Sri Lanka. One way to avoid this is by way of developing an identified new logo which will be equivalent to a second line trademark that Sri Lanka will showcase to the world. It’s not a bad idea to pursue given that we are the champions of tea globally. But once again the private sector needs to work out the detailed architecture.
Other benefits to Sri Lanka
There are other spin-offs by pursuing the second option. There will be many support industries that will come into the economy, such as the printing and packaging sectors which will include the corrugated cartons business which ideally can be developed and maybe even enter the stock exchange that adds value to the overall economy of Sri Lanka. The other is the employment that will get generated in the ‘tea hub’.
Conclusion and next steps
In conclusion, the essence of this strategy that is unfolding is that we are moving away from a product-oriented quality argument to becoming a market-driven business that can take this industry to be a five billion plus business for Sri Lanka.
1) If there is a quasi tea hub coming into play where cheap quality teas are coming into the system, it must be stopped immediately as the ramifications for the brand can be disastrous.
2) A white paper must be developed by the stakeholders on details of the ‘tea hub’ that includes the types of tea that can be imported, the country where the test marketing will be done with details on how the FTZ can be water tight. In essence a new business model must be stamped by the AG.
3) This idea must be debated at the highest policy level at the Ministry end on a private-public partnership platform and approval must come from Cabinet on the proposed new business model. The detailed plan must be sketched out with a clear time horizons with specific robust export targets agreed.
4) When the project is in place, close monitoring must be done and corrective action taken on the run whilst at the end a 360 degree evaluation is activated not only in Sri Lanka but also on the tested export market.
5) I would suggest a brand equity study and a U&A study be also done in the test market to determine any harm that can happen to the brand equity of Ceylon Tea.
6) Post the debate of the research results, the lessons learned must be captured and included in the master plan of the Sri Lanka Tea Board
(The thoughts expressed are strictly the author’s own views and not any perspective of the offices he holds in the private, public or the international public sector.)