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Wednesday May 08, 2024
Tuesday, 9 July 2013 00:30 - - {{hitsCtrl.values.hits}}
Demand side issue
Whilst we can be happy that Ceylon Tea is finally taking a global stand given that we have never done so in the history of the industry, a point to note is that things out there in the market place is not so positive.
If we examine the top 10 destinations of Ceylon Tea in the 1960s, 1985 and in 2010, we can see how Sri Lanka has failed to build brand equity and hold on to its consumers over time. Every 15 years we are challenged with the task to find new markets and develop a new relationship with consumers, which is the most costly exercise that one is challenged with in a business.
This may be due to economic bloc formation or due to trade agreements or by different tariff adjustments coming to play but the issue at hand is that Ceylon Tea has lost its market and maybe allowed others to market branded tea with a mix of tea blends that included the powerful equity of Ceylon Tea.
Nation brand building and tea
Simon Anholt who conceptualised the principle of nation branding said that there are eight basic ways by which a brand proposition can be built globally. One of the best ways of building credibility of a country is via the export pillar. On this front the ideal product in my view is Ceylon Tea, given that it reaches over 31 countries across the world and touches millions of people by way of taste, smell, touch and visual elements. We have to use Ceylon branded tea just like how Japan used Sony or Toyota to build Japan Inc.
Some can argue that tourism can do this task better for Sri Lanka. In fact it can, with campaigns such as ‘Visit Sri Lanka’ that is being run on CNN or the up and coming tag line ‘The Wonder of Asia’ but fact of the matter is that the DNA of tea ideally fits the brand footprint of Sri Lanka. Also, in terms of geographical spread and the experience that one can get by way of touch, taste and visuals, I strongly believe that ‘tea’ will be a better proposition to build the Sri Lanka brand in the global market.
Thereafter, some of the other elements of nation branding can be used such as sports, politicians, diaspora and tourism. However, we must note that this will take time. Research reveals that it’s a slow consistent approach that is most effective rather than a strong burst and on this front the sponsorship of the Sri Lankan Cricket team is commendable.
Getting the home in order
To use tea as a nation branding tool, we should ideally select the top 10-12 markets and invest 30-40 million dollars on brand promotional work. It’s sad that from October 2010 there has been an accumulation of funds from the promotional levy that came to play and now this has swelled to over Rs. 3 billion but has not yet utilised even though a very clear strategy has been agreed on between the private and public sector. As President Obama said, “Change must come from within,” but yet this has not come to play in Sri Lanka in the key industries that can add value to the bottom line of the country.
Tea-apparel link
If we track back on the success of the apparel industry in the early ’80s, Sri Lanka was termed a mere contract manufacturer and some even used to refer to the industry as tailors, but thereafter with some strategic thinking by the industry, it gave leadership to the world by making Sri Lanka the fashion apparel of the world for ethically manufactured clothing.
This has given teeth to the industry in competing with price savvy merchandise coming in from Cambodia, China and Bangladesh and today this noble industry is targeting five billion dollars plus in export revenue by making Sri Lanka an apparel hub in Asia for R&D, technology sharing for fast fashion.
We see a similar trend in the tea industry, where with strong leadership the plantation industry was nationalised in the 1970s when it came under Government control and it went on in the 1980s to make a bold decision to make the Colombo Auction control the global demand chain by breaking away from the great London auction system which had held ground for many years.
The Colombo Stock Exchange commanding the highest values for tea globally is a testimony that this decision was correct. Then in the 1990s the supply chain was privatised, which gave the opportunity for new thinking to be introduced to the industry with strong R&D power and capital infusion that resulted in Sri Lanka demonstrating the best performing country globally for value addition tea at a commanding 43% whilst turning around the business to a 14.2 billion profit within a few years of operation.
More to be done
Whilst we can be happy with the thus progress far from a demand and supply chain side there are some key challenges that need to be managed if we are to maintain this noble industry in Sri Lanka.
1. Senility of bushes
If we analyse the finding of the President appointed committee to evaluate the performance of the Regional Plantation Companies (RPCs) it revealed that from 142 million kilograms in 2005, in 2002 the volumes had declined to 124 million kilograms of tea, which is a drop of almost 12.6%.
If we look at the overall national output too, we see that from 317 million kilograms of tea the overall volumes have declined to almost 289 million kilograms in 2009. This needs to be carefully analysed so that a clear identification is made to determine the loss of volume due to externals issues such the droughts, etc., as against improper agricultural practices.
There is one such study done by the Sri Lanka Tea Research Institute (TRI) which has analysed the drop in production from 142 million kilograms to 124 million kilos in a three-year period and linked it to the senility of the tea bushes.
The TRI states that of the extent of low producing Old Seedling Tea (OST) in Sri Lanka, almost 75% of it is in the corporate sector, which endorses the hypothesis that the senility of the bushes can be a key reason for the declining production and lower production numbers of the RPCs. The alarming factor is that if replanting is not done within the next seven years, the TRI estimates that production volumes can further decline to a level as low as 80 million kilograms. This means a drop of almost 45 million kilograms of tea from the 2002 output of the RPCs. This drop in value terms is equal to Rs. 12 billion, which is a colossal value given that this segment accounts for approximately Rs. 41 billion per annum.
One can argue that replanting must be done by the RPCs at a rate of 2-3% a year as per TRI guidelines because the State will invest on the demand side of the business as proposed by way of concepts like nation branding but the reality is that to replant one hectare acre of tea will costs over Rs. 4 million. With a gestation period of seven years and the Internal Rate of Return (IRR) being 13.7% as per TRI calculations, this makes this investment nonviable. In fact it is a cost that a RPC cannot be practically absorbed.
2. Wage increases
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 Political Economy at play. 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.620 odd. This results in an increase of over six fold which has not been tied in statute to any productivity norms which explains the pressure on the industry. Over the years the RPC’s has impressed upon the Unions the need to link wages to productivity. However, wage revisions has happened overtime that has made the business model come under severe pressure.
Conclusion
Hence we see that whilst Sri Lanka can use Sri Lanka tea as a vehicle for nation branding, from the supply side of the business there has to be some quick decision making to sort out the key issues that were discussed above whilst from a demand side we must roll out the Ceylon Tea game plan agreed with the private sector. If not we will not do justice to this industry.
(The thoughts are strictly the author’s personal views and do not reflect the positions he holds in the private, public or the international public sector that he serves. Writing is just a hobby he pursues.)
