Should SL take ‘tea hub’ route?

Ballooning trade gap

Even with the multitude of measures taken to curb imports, Sri Lanka's cumulative trade deficit widened to nearly US$ 1.7 billion in the first two months of the year with earnings from exports increasing marginally by 3.3 per cent to US$ 1.8 billion whilst import expenditure shooting by 24.7 per cent to US$ 3.496 billion resulting is the trade gap ballooning to US$ 1.7 billion.

Incidentally export earnings from Tea dropped by 11.6 per cent to a US$ 105 million mainly due to the political issues in the Middle-East adding to the pressure the industry is up against due to the rising costs.

What is important to note is that even with the depreciation of the currency, Sri Lanka is yet to see the positive impact on the export numbers and this is serious issue that needs be investigated given that there is a chance that this year’s trade deficit might cross the 12 billion dollar mark.

In this backdrop, we as a nation have no option but find ways of sprucing up the export business of Sri Lanka. The main stay export sectors like apparel, rubber and tea will have to shoulder this responsibility even if the shape of business has to be changed significantly with new policy and working styles. In this direction the plan set for tea is for it to be a 5 billion dollar business by 2020. Whilst acknowledging the many arguments questioning this target, the stark reality is that if we as a nation do not arrive at a solution, Sri Lanka is heading for very rough waters given that Sri Lanka’s economy is import dependant.

Problem

Whilst we grapple internally to bridge the trade gap, the alarming news is that the economic recovery is fragile globally with Greece exit out of the EU now almost definitive whilst the UK is on to a double dip that is creating chaos in the EU region. Yesterday’s announcement by World Bank that China’s economy is heading for a slow down adds to the challenge that Sri Lanka is up against.

In this back drop consumers moving into lower price point products will be an obvious choice.

In the case of Tea, given that Sri Lanka fetches the highest prices in any auction globally, the only way out will be for Sri Lanka to develop a Niche marketing strategy globally so that we can cover our high cost business model, whilst working on an affordable brand communication strategy.

The overriding generic communication campaign that will be unleashed by the Sri Lanka Tea board focusing on the quality Ceylon Tea proposition, via the iconic Lion logo can set the stage for the brand marketers to take the driving seat of brand building but a point to note is that this is a long term strategy that results will only begin to hit Sri Lanka may be around 2-3 years plus is my view. The million dollar question what ramifications does this hold to the short term health of brand Ceylon Tea.

Russia – No: 1 market for SL

To explain the ramification to Sri Lanka in the short term 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 it is the number one export destination for Ceylon Tea.

If one examines hard facts and data, we can see that in the Russian market the bulk tea exports out of Sri Lanka has increased in volume from 21,166 to 28,743 metric tons during a nine year time horizon of 2000-2009 as per the details in table 1. On the other hand packeted tea volumes have come down from 18,377 to 7516 metric tons during the same period. The question is why had this happened during the sample time frame.

The reason for the shift in demand in Russian has been due to the import tax that came to effect in Russia for packeted tea by around 30%-40% whilst duty on bulk exports has been reduced to zero per cent. 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.

The logic for this decision by the Russian policy makers was to give space for organisations to set up in Russia to pack teas that are imported from many countries for blending purposes and there by sprucing up FDI’s 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 results were encouraging from a Russian perspective as, Table 2 clearly indicate that the less expensive teas that are being imported into Russia from countries such as Kenya has increased from 5123 metric tons to 11,821 during the time period 2002 to 2009whilst imports from Vietnam has catapulted from 4720 metric tons to 13,183.

Hit to SL

If we want to further validate these numbers if we examine the volume of Tea exported to Russian we can see that the top 6 exporters numbers from Sri Lanka during that time period have come down from 15,623 metric tons in 2002 to 9346 metric tons in 2009, which is a decline of almost forty per cent which is colossal in value terms. If this same behaviour is extended to the rest of the key markets like Middle East and in the future Iran, the hit to Sri Lanka’s export revenue can be catastrophic in my view. Hence it imperative that Sri Lanka address this issue given that it is a business trend based on the change of consumer behaviour due to the pressure on the purse.

If we dig deeper, we see is that Sri Lankan own brands packed in Russia is making inroads to the Russian consumer. To be specific the brand Ahamed tea has made inroads and increased market share from 13% to 19% within just 3 years. As per Tea Board statistics a brand called Green Fields has increased share from 3% to a staggering 11% which clearly explains the challenge that Sri Lanka is up against in the global market place.

Given these developments, Sri Lanka has no option but carefully evaluate the best option to develop the attack strategy.

Option 1: Drive branding

One option is to drive consumer pull and retail pull by building strong brand equity on the ‘Ceylon Tea’ proposition. This in turn will

drive demand pull to brands which are manufactured with high quality single origin quality Ceylon Tea. However, the issue is that this strategy requires 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 ten million dollar promotional campaign will not garner enough share of voice to attract brand equity that is required to support this kind of brand pull is my view.

Option 2: PTL with Russia

The other option is to engage the Russian policy makers and get a Preferential Tariff Line (PTL)for value added tea imported from Sri Lanka on the premise of high quality single origin Ceylon Tea. This can be done at two levels. From a government to government diplomatic cum trade angle and the other is from the private sector high level delegation. But the challenge is that as we speak, local businesses have set up in the home country employing thousands of people. Which means that it will be tough to get the Russian policy makers to back track this decision. Sri Lanka had made some submission in this direction but had not been successful.

Option 3: Establish tea hub

The last option and I repeat, the final option, is to set up a free trade zone (FTZ) where enterprises can set up blending facilities by importing teas from other origins. However, a stipulation that policy makers should enforce is that 50 – 70% of the tea in any pack must be of pure Ceylon tea whilst the rest can be teas from other origins. May be a new logo can be developed so that the packs that originate from this geographical location is different. This will enable differentiation between ‘Pure Ceylon Tea’ and the teas that comes out of the FTZ into the global market.

With stakeholder consultation this business architecture can be further refined and the final concept of the Tea Hub taking shape. It might be painful as it’s about paradigm shift. But I will strongly urge that legislation must be done under the auspices of the auditor general so that violators can be taken to task.

Test market

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 a leakages will not take place to the local market. If this happens the total auction system can get effected and the ramifications to the country will be unimaginable.

Given this issue raised and maybe many other issues raised in the media in the recent past, I would strongly advocate that we 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 (1-3 years) an independent 360 degree evaluation must be done and the lessons before it is rolled out to the rest of the world is my view.

Probable impact

A key issue that can come up if option three 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 that can create an issue is the 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 trade mark that Sri Lanka will show case 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 detail architecture.

Other spinoffs

There are other spin offs by pursuing the third 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 may be 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

In conclusion in my view 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.

Next steps

1)    A white paper must be must be development 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 it the FTZ can be water tight. In essence a new business model must be stamped by the AG.

2)    This idea must be debated at the highest policy level at the Ministry end on a private – public partnership platform

3)    Once approved by cabinet the new business model must be sketched out with a detail game plan and 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 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 brand equity of Ceylon Tea.

6)    Post the research results are debated the lessons learned must be captured and included to 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.)