Ceylon Tea to follow the Kodak saga?

Tuesday, 25 February 2014 00:00 -     - {{hitsCtrl.values.hits}}

  • $ 1.5 b revenue achievement in 2013 at a growth of 11% only academic
If one were to track the psyche of a consumer of today, a key attribute that influences the purchase decision is value for money. For instance, if we take the automobile industry of Sri Lanka, at one time the preferred vehicle was French origin brands like Peugeot and then people turned to Japanese vehicles like the Toyota and Nissan. With the entry of Korean vehicles into Sri Lanka, brands like Kia that have become very popular, maybe tomorrow the roads will belong to Indian brands like Mahendra. This points to the key driver that must exist in today’s organisation – value chain development with innovation as the catalyst. This will have two ends. Demand chain connectivity with the consumer and in turn supply chain development.   "A senior planter, who is a CEO of a major Regional Plantation Company, has publicly stated that “now we are in a lunatic mode as doing the same thing expecting different results is lunacy”. The question is, what next?" Kodak saga To capture the importance of these areas and the impact to an organisation, the best case in point is Kodak. A top-of-the-mind brand and synonymous with the category for decades it refused to understand the changing consumer of today. With a turnover of almost 14 billion dollars and brand value estimated at one billion dollars it was one of the most talked about organisations. However, the company refused to change the values chain based on the changing consumer who wanted convenience. Today, the brand has crashed to a loss of $0.3 billion for the last five years and sales revenue has plummeted to less than $ 0.1 billion that finally led to the company having to file for chapter 11 on 19 January, which has now become a classic case of the world who did not want to change value chain based on the changing consumer requirement. "From the demand side every 15 years Ceylon Tea has to find a new set of markets globally, whilst from the supply chain side 90% of tea stock in the corporate sector is above 60 years of age, leading to senility of the tea bushes, hence the declining productivity" Ceylon Tea – demand side saga Being somewhat ruthless, if we take a mainstream focus category of Sri Lanka like Ceylon Tea, we can see that the trends we see on value chain development is similar to Kodak in many ways. In the 1960s for Ceylon Tea the top five markets were UK, Australia, USA, Iraq and South Africa. In 1985 the top five were replaced with Egypt, Iraq, Syria, Saudi Arabia and the UK falling to No. 5 position. By the year 2010 the top five countries have changed to Russia, UAE, Iran, Syria and Turkey, which just explains the demand chain issues that the category has experienced in the last 15 years. This may have been engulfed due to the formation of new economic blocs or trade agreements but the fact remains that we keep losing consumers from the demand side of the business and that from the supply chain perspective growth may have been stunted with a low focus to innovation subject to a few organisations and brands trying to change the status quo singlehandedly. Ceylon Tea – demand side saga If one were to research the supply chain end of the tea industry of Sri Lanka, research reveals that from the total extent of Old Seedling Tea (OST) in Sri Lanka, 75% of it belongs to the corporate tea sector. As per the table almost 90% of the tea stock is above 60 years of age which means that senility of the Tea bushes is a foregone conclusion. This is the key reason for the declining productivity and production in this segment over the last couple of years. Around six years back the corporate tea sector was generating almost 148 million kilograms of tea but today this number has fallen to approximately 126 million kilograms. The Tea Research Institute estimates that the volumes from the corporate sector will decline to 98 million kilograms of tea within the next five years. If one computes the loss to the country in volume terms it will be 28 million kg of tea per annum and in value it can be as high as 10 billion rupees which captures the supply end saga that the tea industry is up against. One can argue that the RPCs must embark on a rapid replanting program but if the cost of replanting a hectare acre of land is over Rs. 3 million and as at now given that most of the organisations are under pressure for profits, this option is only an academic discussion. From the data available in 2011 the Regional Plantation Companies (RPCs) lost Rs. 49/50 for every kilogram of tea produced. Apparently the RPCs lost Rs. 8.5 billion that particular year, which sums up the saga ahead for the future development of the value chain. Ceylon Tea – 2014 If one were to get to the details, companies today are rationalising their tea stock to drive up productivity so that one can try to keep the organisation financially viable. The best case in point is that between 1968 and 2011 in the high grown areas the land under tea cultivation has halved from 81,000 hectares to 41,000, which points to the challenge ahead. Even though replanting has been an issue discussed at many budget forums and many optional discussions staged, the result has been that unless there is a national effort with a strategic investment direction on special pricing, this will not work practically given the financial pressure that a given RPC is in, says a veteran planter. He went on to mention that unless this is addressed as a priority, we might not have a tea industry in the years to come, which is what triggered me to title this piece ‘Ceylon Tea to follow the Kodak saga?’ Not essentially from a demand side but more from a supply side innovation perspective that has stunted value chain development. Ceylon Tea = Kodak saga Given the challenges we have from the demand side of the business and from the supply chain side of the business, from the above data we see that we are facing a catch-22 situation. Hence unless we develop a new business model, it will be absolutely realistic to say that Ceylon Tea is going the Kodak route. In fact a senior planter, who is a CEO of a top Regional Plantation Company, has openly stated that “now we are in a lunatic mode as doing the same thing expecting different results is lunacy”. He has even stated that the industry can crash and from the data above it’s very clear that it will give that the wage rate that has come into play in the business model is agreed on a political agenda rather than on cost model, which further adds to the saga that Ceylon Tea will take the Kodak route. Conclusion A point that needs to be mentioned is that in 1992 when the State opted to privatise the management of State plantations, 23 Regional Plantation Companies (RPCs), the venture was a loss-making at almost Rs. 1.5 billion. With the private sector thinking at play the RPCs turned around the Rs. 1.5 billion loss-making venture into profitability within a couple of years, which signalled that the privatisation process had worked given that the private sector changed to the demands of the supply chain and demand side issues. However, post that, the policy reforms that were required to the supply chain side and demand end have not materialised and now we see the industry heading to a catch-22 situation which is very sad for Sri Lanka given that we are known around the world for Ceylon Tea and that we have taken the high ground of being awarded the ‘1st Ozone Friendly’ tea beverage globally. The million dollar question is, what next? (The thoughts are strictly the author’s personal views based on the doctoral research he is pursuing and do not reflect the positions he holds in the private, public or the international public sector that he serves. Rohantha is an award winning marketer, business personality and sought-after public speaker in Sri Lanka and internationally.)

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