Storms brewing in teacups

Colombo International Tea Convention discusses trade and marketing of the beverage

By Cheranka Mendis

Nestled in the dynamic Asian region with a hot beverage to its name, Sri Lanka could benefit well from becoming a ‘tea hub’ in the future, Commonwealth Secretariat Economic Affairs Division Former Director Indrajit Coomaraswamy said.

Addressing the Colombo International Tea Convention on Friday, Coomaraswamy stated that even though there is a debate in the country on whether ‘tea hub’ is a path that the country should take, when taking into consideration the demand for tea and the economy, there seems to be a strong place to give Sri Lanka an opportunity to take advantage and for opening all possible avenues.

“Having an offshore operation to create a tea hub in the country will offer a number of advantages,” he said.  “The country is deeply indebted to the tea sector of the country. The tax contribution by the tea sector has been able to help the country during troubled times.”

Speaking on Sri Lanka’s medium term prospects, opportunities and challenges, Coomaraswamy noted that the country now had the best set of circumstances for the last 50 years. “Currently there are no major drags on the economy and it is the best circumstance for the country for five decades.”

Located in Asia and only 20 miles from large and expanding India, the country is on the brink of massive opportunities. The country has the opportunity to tap in to the supply chain in Asia, he said. “At present Sri Lanka does not have a part in this at all; we need to catch up. One needs to plug into the region of Asia.” He noted that the country should focus more attention on India and China.

“China has done remarkable well in terms of managing its economy post recession era despite the financial economies going through crises. It has been growing close to 10% and is said to slow down to about 8.2% during the course of the year. But this is still robust growth.”

India, even with its concerns on inflation, posts two main advantages – a sustainable growth which is far less dependent on the external market and a young population. “If India gets its education and training act together, it will have a massive demographic dividend as it moves forward.”

However, there are many factors that would affect Sri Lanka’s strategic choices. There is a high level of liquidity in the global market, Coomaraswamy said. Given that the growth in emerging economies is going to be higher than in advanced economies, there is a real opportunity for countries like Sri Lanka to grow. For the foreseeable future, monetary policy in the advanced world is going to be very accommodating and with the high level of consumption from emerging economies, prospects are favourable.

“Over the course of the decade about a billion people are going to attain global middle class consumption pattern. That is an enormous demand creation. This will, in my view, result in medium to long-term high commodity prices. It will also however give developing countries a boost in terms of trade.”

When one considers tea from a demand aspect, some of the key markets for Sri Lanka are Middle East, Russia, etc., which are listed as high growth countries. With the increase in income in such countries, the demand for greater value added tea will rise, Coomeraswamy noted.

 Strategic trends for the tea industry

MTI Consulting CEO Hilmy Cader based on MTI Consulting’s global research divided the industry into four categories in terms of global consumption patterns – regularised markets, rough, ripe and raw to explain the strategic trends which would impact tea as a category.

Regularise markets are the well-organised, very structured, trade-driven countries such as North America, Central Europe and Australia. Rough would mean the developing economies such as India, Pakistan, Bangladesh, China, etc., where the growth is really taking place in the world.

He said ripe markets were where the teas of Kenya and Sri Lanka are very strong, which are the Middle East and the former Soviet nations – “this is where your competition is” – while raw markets include parts of Africa where coffee is the major consumed beverage.

When it comes to consumption, the future of the industry will not be decided at the auction or production but by the consumer, Cader asserted. “In rough markets, there is significant growth. For example a country like Bangladesh will within the next few years move from being a nett exporter to importer of tea.”

However to get into this market, one needs a low cost, mass produce, mass distributed. He warned that the producers in local market will find ways in which they could dilute the product for low cost tea, which will be a major challenge for the industry. “There are mixed products to get low prices today, but this will get worse. So to compete with that you need low cost, mass produced tea. The dynamics will be very challenging,” he warned.

The market is also moving towards convenience. With convenience comes tea bags and with that packaging becomes more important and tea becomes relatively less important. “Perhaps people in the packaging value chain will make more money than those in the tea value chain.”

Cader noted that another problem in the tea industry is the belief that putting tea into tea bags is serious value addition. “It is not. This is a mindset the industry needs to look way beyond. Look at other beverages and understand how they have added value in terms of products,” he emphasised.

Creating more havoc in the market is the phenomena of thinking value for money. He commented that over the last few months the thinking has got capped. The global financial crisis put a lot more pressure in terms of price capping and there will be pressure on pricing which will affect the entire chain. Prices will be quelled.

“Increasingly, the choice of what brand to buy is determined by two factors – power of your brand and power of your retailer. Have you got a strong brand or have you got the power of a retailing chain to bring the consumer in? This will determine what the consumer picks up.”

In this context, the country needs to think how it is going to take its name to overseas markets and say ‘don’t buy that particular brand because it has no Ceylon Tea’. This will be a challenge. “Do we push this whole country origin to the consumer, paying a lot of money on that or do we realise that the power is in the brand or retailer and work in synergy between the parties?” he questioned.

A positivistic note to the tea industry is the anti-Cola trend. However, this segment of the market is increasingly being captured by iced tea. And when it comes to iced tea, the brands that are strong in iced tea are not only coming from tea but also from other beverages. “So you have added competition from brands that really understand the consumer habits. It could be the flavour houses that are making the money here. Whether it is real tea or not is decided by the consumer.”

The next part of the value chain is the retail segment and here whether we like it or not, penetration and power of supermarkets is increasing and with that the power that we have had with partners in emerging markets reduces as that power in the retail level is retained. “More consumers are becoming sophisticated and the growing middle class will be consuming from here. Decision making here is very different to the decisions made with traders,” Cader said.

He asserted that from his research, it is evident that a serious out-of-home consumption is now taking place. More people spend time outdoors, working, etc., and food and beverage companies have started developing products to fit this level of consumption.

From the production side, one must remember that tea is one of 25,000 products on a retail shelf. Because of the challenges of prices, tariffs, etc., one must pack closer to consumption. “However the challenge countries have as far as we define value addition, it is something that must take place in your own soil. This will be a challenge,” he noted. “We are still looking at tea from an outsider point of view.”

Understanding and having supply chain agility is important today. No supply chain manager would want to tie all his risks into one country. As a result the trend will move into multi origin teas because of pricing. “This is the commercial reality and one needs to look at it from a commercial point of view.”

Touching on other category challenges, Cader noted that “coffee is cool, so is Red Bull”. Tea, other than iced tea, is globally having a challenge in terms of appealing to the younger generation. “In the Middle East we see a clear shift away from the younger generation of Arabs, with them moving away from tea which their fathers and grandfathers consume in such large quantities,” he noted.

This issue however cannot be addressed at an individual brand level but should be focused on as a category. He emphasised on health consciousness when it comes to tea and that there were lots of niche markets available because of it.

“Competing in markets is like competing in the jungle, only more glorified. Every morning in the jungle, a rabbit wakes up thinking I need to run faster than the smallest lion to survive and the lion wakes up thinking I need to run faster than the smallest rabbit to survive. In the market, whether you are the rabbit or the lion, you must run.”

 The Tata story

 Going from a local brand to a leader in global beverages, Tata Global Beverages Deputy CEO Percy Singanporia used the forum to thank the suppliers for being part of the global Tata beverage story. “I cannot walk alone and if I do, I cannot grow. This is what you must keep in mind.”

In its journey from producing tea for Finlays while concentrating on its growth and evolution, Tata managed to create a name for itself in India with carefully targeted brands. Over the years partnerships were forged in order to expand. Within a decade, Tata moved from a 3% market share to 25% share in Indian market having 74 tea gardens, producing 62,000 tons per annum. It soon became India’s largest producer of integrated tea and by 2000 was poised for greater growth with the buying over of Tetley.

“We were in India in 1962 where the distribution channel expanded the length and breadth of the country. India then had two separate very large entities dominating the tea market which were independent and had best practices to every retailer in the country. The best challenge was for all the brands and their best talents to work together to make a difference, differently. Everyone geared up and wiped out the entire share capital,” Singanporia noted. “I say it with great deal of humility because we all make mistakes.”

However, he noted that the core values individually transcend the barriers for the economy, the environment, the competitor and consumer. “We need to transform and adopt a global mindset in thinking. The person I am today and the company I work for is not the same as it was then. We have over 75,000 employees on a permanent basis. The aim was to lead them and move them to align the growth. Everything was done from ground zero with the mind for the future.”

The secret to success was doing what they did successfully. “We changed our business models at a frequency that was shocking. Today we work with methodologies we are developing which will support us in the future. That is how Tata local found its way of competing in the market.”

It developed an outsource and distribution organisation that provided the necessary space and focused on innovative mindset and engagement of consumer minds. “The solution to make a brand is to engage consumers at a point next to consumption. That is where we interact.”

“In a growth mode, one should not let structure come in the way of performance and growth,” Singanporia said. “Do what is right. Engage minds and businesses and you are well on your way.” He noted the value of partnerships, setting as an example Starbuck’s wish to partner with the group to establish the brand in India. The opportunity to develop together is great, he said.

“Have a business model that supports all areas. Land and people are your assets and you have something unique here in Sri Lanka. So go for it and enjoy the journey.”

Trends in the beverage market in Russia

 With the leaders of Russia, Kazakhstan and Belarus forming a customs union to target a more ambitious common market, the tea industry must look at all three when considering the trends in the beverage market in Russia, RusTeaCoffee Association Deputy Chairman Alexander Borisov said.

Borisov outlined that between the three, the tea and coffee market increased by 15-20% last year making it the biggest market in the world. Even though in Russia both tea and coffee in terms of cup is difficult to covert, it is estimated that the country consumes twice as much tea than coffee.

“The Russian coffee market has seen a tremendous development in the last few years. It is estimated that 55,000 tons of instant coffee and 82,000 tons green beans are imported to Russia. The industry is developing fast in high quality instant coffee and consumption of roast and ground coffee. Importation of instant roast is 120,000 tons in Russia, 15,000 tons in Kazakhstan and 5,000 tons in Belarus.”

Russians import more and more good valued teas, he said. On spending he asserted that 10 years ago US$ 228 million was allocated to import teas the number has grown to US$ 563 million in 2011. Share of packaged teas has doubled. The trend is definitely towards better high valued teas, Borisov said.

“The tea industry has grown much in last year. Due to brand building, advertising and marketing, the result is today we are satisfying 85% of the international consumption. However there is a competition from Sri Lankan packaging,” he noted. Borisov commented that consumption of tea bags which is today 55%-53% of the market will also grow in the future, adding that single origin teas will also grow.

With the rising labour cost in Russia and high social taxes, factories are now adopting high speed equipments and global standards. Without standards there will be no buying in the future.

Sri Lanka for the last nine years is the main exporter of tea to Russia and the high level of buying shows how Sri Lanka has quality teas. “Sri Lanka is certainly number one and Sri Lankan tea in Russia is a brand in itself. In Russia the consumption of Sri Lankan tea is more than 55% of the market as it is blended with other origin teas,” Borisov said.

He noted that this is legally allowed in Russia – that if a certain percentage of tea is from Ceylon Tea, etc., the teas could be categorised under the name. “It is a problem,” he admitted. “However, Sri Lanka origin teas are looked as a brand in Russia. It is a category in itself. Many Sri Lankan companies own some of the top tea brands of tea in Russia.”

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Pix by Upul Abayasekara