Do people prefer coffee over tea?

When I was preparing for the few thoughts that I wanted to share at the launch of the FAO-IGG Global Forum on Tea, I realised how divergent the ground reality was based on the template that we have set for tea globally.

Whilst intellectually it may be stimulating, at the end of the day the private sector looks at return on investment and Sri Lanka is at crunch time as we are in a catch-22 situation. Most Regional Plantation Companies in Sri Lanka are in the red with some segments reporting that the cost of production is higher than the net sales average.

This news, coming in the backdrop of the Eurozone splitting, the double dip recession in play in UK and the sanctions in Iran, sure pulls down business confidence.

Key decisions

Whilst some can gaze at the future, I thought of looking back the key decisions that this industry has made that gave leadership not only to the industry in Sri Lanka but also globally.

Post nationalisation the first key decision that was made was when priority was given for teas to move through the Colombo auctions rather than the traditional London route. Though this decision led to many sleepless nights for those in the trade, the benefits have come into being, with Sri Lanka being ranked the best performing auction system generating the highest value on a kilogram of tea. In fact the rest of the key producing nations followed this best practice and now London auctions have fallen apart.

The second key decision that came to into being was the privatisation of management that led to the infusion of technology and capital into an agricultural-based industry that improved productivity and also introduced research and development knowhow.

The commanding position of 42% value addition that Sri Lanka registers in tea exports can be viewed as a result of private sector-driven brand building initiatives. However, a point to note is that the second decision came to into being due to the escalating losses in the two Government entities, JEDB and SLSPC, which at one time crossed Rs. 1.5 billion.

The third key decision I feel was the private-public joint partnership initiative, where Sri Lanka was awarded the first ozone friendly growing nation due to the phasing out of methyl bromide in the plantations.

Maybe now the challenge is for Sri Lanka to keep innovating by taking the lead on MRL compliance and by driving the Rainforest Alliance positioning. This will make the Ceylon Tea brand young and contemporary, which is very positive from a brand marketing perspective.

The issue

The next decision that Sri Lanka will be up against to give leadership to the world is by solving the supply chain profitability issue. One can harp on about the daily labour wage that has been increased by 986% (Rs. 515 per day in 2011) when compared to the Rs. 52 per day in 1991, which is incidentally way above the inflation rate, but the more important aspect is find a way to manage this element rather than focusing on the negative aspect.

If one examines this issue more closely, the cumulative inflation from 2004 is at 73% but the labour wage increase is at 284%, which clearly indicates the gap that existed at a household level and how it needs to be traded off with business sense.

When I met the Managing Director of the Kenyan Tea Board, an insight I got was that was that even in Kenya, this aspect was a burning issue. Incidentally a point to note is that Sri Lanka’s daily labour wage is 137% of the auction price, which is highest in the world, while the daily wage rate for Kenya is 79% of its auction price and for India it is 93%, which indicates the issue at hand for Sri Lanka.

An option

There are many options that can be implemented in the short-term, but given that the war is over and Sri Lanka is ranked as a top four growth economy globally, I feel we must do justice to this industry by providing a strong policy decision.

There are two options: The first being to encourage commercial forestry, that includes the carbon trading business. This business attracts almost US$ 5 billion into the Indonesian economy, which is how attractive this segment of business is for Sri Lanka.

The next option is to pursue the out-grower model, which is similar to the smallholder segment of business that contributes almost 70% of the tea harvest into the country. But a point to note is that serious policy changes will be required to implement this at ground level, which includes the unions that are in existent in the system.

Whichever combination of options exists, the reality is that a new business model will emerge in the years to come and I guess we must be ready for this change. In fact we have no option.

Danger

Whilst many are focusing their energies on the split of the Eurozone and if there will be a war between Iran and US that can hurt the total global economy, I feel the tea industry has a bigger war on its hands with the latest research revealing that people are opting for coffee rather than tea as a beverage.

Latest research done by the FAO-IGG Secretariat reveals that in India, black tea and green tea are both price inelastic but a uniform decrease in price would change the share item in favour of coffee. Similarly in the UK, black tea remains inelastic but just like in India if a uniform price decline takes place, the share will move towards coffee.

The most alarming sign was the research that revealed that if household expenditure on non-alcoholic beverages increases, consumers will spend proportionately less on black tea and more on coffee, which is an interesting revelation. This same insight emerges in the consumer research done in the USA, which means that it can be extrapolated to many other countries in which Sri Lanka operates.

Next steps

Whilst being positive about high level policy meetings and conferences, what we see is that at ground level there are serious issues that are being seen locally and at global level. I would recommend the following initiatives that must be pursued:

1.Arrive at an urgent remedy to the current profitability issue in the corporate sector driven by the high labour cost.

2.As a matter of urgency, ensure the Ceylon Tea campaign hits the market place.

3.Link the export products to the Ceylon Tea campaign so that on the shelf of a supermarket, the linkage is made.

4.Appoint a high-level team to develop an alternate business model for tea in Sri Lanka.

(The writer is actively involved in the economic development agenda of the country and chairs the Tea Cluster at the Ministry of Industry and Commerce. The thoughts expressed are his own ideas and not the views of the organisations he serves in Sri Lanka or overseas.)