MJF rings alarm bell on future of tea industry

Industry icon Merrill J. Fernando has issued a fresh warning on Sri Lanka’s tea sector saying it may soon become a liability if corrective action is not initiated.

“In my statements of the past 10 years, I covered the neglect and deterioration of some plantations and failure to market our tea by continuing to remain suppliers of raw material, primarily,” Fernando said in the Chairman’s Review of Ceylon Tea Services 2010/11 Annual Report released recently.

“Plantations are our national assets. Their present owners are mere caretakers for the next generation. If the current trend in plantations is not arrested forthwith, there may be little left for the next generation. At this point, government and industry stakeholders should work together to reach a strategy to retrieve the tea industry from its present plight towards making it viable, as it was some years ago,” he urged.

The tea industry according to Fernando has been subject to severe punishment from land reform, nationalisation and trade union action. “It is not too late now to rehabilitate the industry, and redirect it to become productive and make a greater contribution to the economy,” the Dilmah founder said.

“I am not raising alarm bells in stating that the tea industry may soon become a liability, if corrective action is not initiated immediately,” he added.

Fernando also opined that the conflict with trade unions was largely due to lack of an ongoing dialogue between plantation owners and trade unions.  He suggested that if a cordial environment prevails between the two parties, wage negotiations may become cordial and understanding — not a confrontation.

“A better appreciation of each others’ difficulties and problems could make talks friendly. Trade unions function reasonably well under good, responsible employers. I believe that, if senior staff at regional plantation companies are given greater authority by their owners, and owners themselves, show active interest in issues with trade unions, there could be a more favourable environment,” pointed out Fernando.

Focusing on markets, Dilmah founder said that the outlook for tea prices is somewhat hazy at the present time. “Quite apart from conflicts in the important Middle East and North African markets, there appears to be a concentration of forces among the biggest corporations. Big retail chains are focused on their house brands and may team up with the biggest two brands in each category, delete others and create a discreetly controlled environment in their stores. If this strategy sees the light of day, the discount culture will disappear; a greater form of exploitation of raw material producers and consumers may surface,” Fernando said.  “This,” he added, “will be a ruthless replacement of discounts which destroyed quality and good value. That may be the path of globalisation!.”

Some of the warnings on and advices for tea industry by Ceylon Tea Services Chief in the Company’s 2010/11 Annual report was after recounting that the year 2010 was remarkable in the history of the tea industry, in its achievement of both, the highest ever crop and net sale average price (NSA) at 331 million kilos and Rs. 370.61 per kilo respectively.

He noted that these were the result of good weather and market forces. “If all plantations were well maintained and there is even basic marketing of Ceylon tea, we could expect far greater earnings from the industry than US$ 1.5 billion earned during the year,” Dilmah Chief added. CTS’s sales turnover in 2010/11 improved by 16.9% to Rs. 5.78 billion. The subsidiary MJF Beverages (Pvt) Ltd., had recorded sales of Rs. 11.0 million.  “In an environment reflecting higher costs of packaging materials and a strong Rupee, your company has done well to contain costs and produce a good result. The Rupee appreciated 2.5% against the US Dollar, which is our base currency. Its impact was offset by the strong Australian dollar, our major currency,” the Chairman said.

With regard to the outlook, CTS Chief said current indications were that the company will deliver a good result this year, too. “Our production capacity is being enhanced in anticipation of sales growth in the foreseeable future,” Fernando told shareholders in the Chairman’s Review.

He also said that Dilmah has traditionally taken the lead in bringing innovation to a global tea category that has suffered decline as a result of commoditisation and multinational dominance. Signature events such as the Dilmah Thé Culinaire, Dilmah Tea Sommelier, Chefs & the Teamaker, Real High Tea and Tea in the Five Senses are innovations in the tea category that seeks to educate and inspire hospitality professionals to offer their guests a completely new tea experience. The events foster greater interest in quality tea, and greater respect for this healthy, natural and versatile beverage.

“Last year, I stated that unique Dilmah marketing and PR concepts are being shamelessly replicated by global brands. This unhappy situation has got worse since, exposing the absence of tea knowledge and integrity among them. These events remind me of the words of William Gorman, Executive Chairman of The UK Tea Council, in an interview with Eric Ellis in the Fortune magazine: “This is an industry that has been incredibly slow to innovate, and relatively young Dilmah has shown it how”, Fernando said. Referring to shareholder value Fernando said that CTS’s paid up capital of Rs. 10 million at the IPO reached a value of Rs. 20 billion during the year when the share price reached Rs. 1,000. “An original purchase of 1,000 shares has yielded Rs. 3,200,250 in dividends and with bonus issues it has grown to 20,000 in shares showing a value of Rs. 16 million at the year end. Proper marketing of Ceylon tea delivers good results,” he added.