times await tea industry
Strategic Management Services
14 December 2001
India is the largest
tea producing and consuming country in the world.
It produces about half of the total global tea production.
All along, the Indian
tea industry has remained the largest producer of
tea as a ‘commodity,’ but in the process it has reduced
itself to being just a raw material supplier, which
gets a transfer price for the product it sells. Today,
the industry finds itself at the crossroads. On one
hand it is plagued by low productivity and lower price
realisations, and on the other it is grappling with
changing consumer profiles and the threat of imports.
Even as tea prices
have risen, there are many imponderables like the
unfavourable global demand-supply scenario, competition
in export markets and imports from low-cost countries.
All the problems have
led the industry to look within itself and find ways
to cope with the emerging situations. Already, there
has been a trend towards consolidation of the existing
tea plantations. Smaller players are being bought
over by larger estates or global consumer goods majors,
as in the case of Unilever Plc buying over Rossell
Industries. Apart from buying tea estates, these companies
are also moving up the value-chain through increased
branding of products across all segments in the industry
and introduction of new blends.
across India, wherever you are, you look forward to your
chai-breaks. It just goes to show how well-entrenched
this beverage is in the Indian mindset. This should not
be surprising, as India is the leading producer and consumer
of tea in the world. The per capita consumption of tea
in India is about 660 mg as against 900 mg in Pakistan,
1 kg in Sri Lanka and 2.5 kg in the UK. It is an accepted
fact today that tea will have to be presented in a more
innovative manner for it to gain popularity.
The industry is a leading
forex earner in India. The total net foreign exchange
earned per annum is around Rs 1,847 crore. The prices
of tea are mainly decided by auctions. In India, the trading
takes place through auctions in six centres. Assam is
the biggest auction centre in the world. The aroma and
flavour of the Darjeeling tea, Assam tea and the Nilgiri
tea are unparalleled in the world. The other major tea
producing countries are China, Kenya, Sri Lanka, Indonesia,
Bangladesh and Malawi. But in international trade, the
major exporters are Kenya and Sri Lanka.
majors like Tata Tea and Hindustan Lever are not only
slugging it out between themselves through increased branding
to gain market shares, but are increasingly aware of threats
emerging from other beverage segments like coffee and
aerated drinks like Coke and Pepsi. However, the
picture for the tea market as of now looks better than
record low prices in the previous year, the prices have
started picking up in the current year. The prices are
expected to remain firm in the long run. In the
exports scenario, with the collapse of the USSR, India
lost an evergreen market. But the recent trend shows that
the Russian markets are slowly reviving. On the other
hand, Sri Lanka and Kenya (the two low-cost producers)
are trying to edge out the Indian tea industry. The tea
industry is labour-intensive where labour accounts for
60 per cent of the cost of production. Kenya and Sri Lanka
have a distinct advantage, as their labour costs are low.
Demand from US market
is also expected to rise as the acceptance of tea as a
health-friendly drink catches up. Besides, there has been
a trend towards consolidation of the existing tea plantations.
Smaller players are being bought over by larger estates
or global consumer goods majors, as in the case of Unilever
Plc buying over Rossell Industries. Apart from buying
tea estates, these companies are also moving up the value-chain
through increased branding of products across all segments
in the industry and introduction of new blends.
During these trying times, the industry also saw history
being created when Tata Tea bought over UK-based Tetley’s
tea businesses for a consideration of over US $420 million.
This deal may lead to another round of consolidation among
the global tea majors. All this is aimed at not only improving
realisations but also to attract new consumers, especially
the younger generation. In effect, the industry is gradually
maturing from commodity-based businesses to market savvy
branded fast-moving consumer goods companies.
is an organised agro industry. This implies that labour
laws exist and since the dominant mode of tea trade is
through auctions, a large number of small producers get
fair prices. India and China rank as the largest and second-largest
players respectively in tea production as well as consumption.
Tea, as a beverage, is enjoyed by more than half of the
world’s population. Historically, tea consumption has
been very high in the UK and Ireland. Unlike coffee, (where
Brazil is the dominant producer) tea production and exports
are more widespread, reducing the possibility of wide
swings in the prices as have been experienced in the coffee
land is the limiting factor for increasing production,
no tea shortage is likely in the foreseeable future. The
global demand growth at around 2 per cent per annum will
be easily met by rising production from Kenya, Sri Lanka,
Malawi, Indonesia and other countries. These countries
are foreign exchange starved and tea is a vital part of
the economy. Their tea industry is entirely export-oriented.
These countries lead a price cut if there is a surplus.
The industry has not been buoyant during the last two
Even the worst may not be over even though the revival
in prices and demand started in December 2000. The year
2000 witnessed record low prices. Even though prices are
expected to firm up in the coming years, there are many
imponderables like rainfall, supply after a lean period,
global demand, competition in export markets and imports
from low-cost countries. But in spite of these uncertainties,
those who score in their quality, brand name and value-added
product-mix will have a bright future. A much-needed shakeout
in the industry is on the anvil and at the end of it the
industry should emerge stronger.
The mantra being followed
in the industry is simple: Shape up or you will be forced
to ship out. Industry majors will be hoping that this
golden beverage stands the test of time and continue to
be India’s most preferred drink even in the next millennium.
Even though tea prices have risen, there are many imponderables
like the unfavourable global demand-supply scenario, competition
in export markets and imports from low-cost countries.
Tea as a beverage continues to grow. But is the tea segment
now heading towards a secular downtrend? A
fear, which we believe, could come true, if the industry
does not take strong corrective steps in the immediate
term. Our belief stems from an already well-penetrated
market, growth of other forms of leisure drinks (colas)
and positioning of other beverages as lifestyle beverages
(like coffee). The change is gaining strong grounds in
the urban markets, which has started telling on the strong
fall in branded tea sales. A much-needed shakeout in the
industry is on the anvil and at the end of it the industry
should emerge stronger.
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