CHALLENGES IN MARKETING SRI LANKAN TEA by MTI

1. Are Sri Lankas Tea Woes Bail-able?

Sri Lankas Tea industry a year ago was recovering, buoyed by production and earnings estimates of 310 MN Kg and US $ 1.5 BN respectively until trouble hit prompting a US$150 MN government bailout. While granting that the present economic conditions may be partly to blame, the lack of clear strategic direction, we point out is among one of the many reasons why Sri Lanka tea is very price dependent. Thus Sri Lankas tea price movements behave like any other commodity, responding to pipeline demand systems. Last year, tea prices soared on a general upswing in commodity prices. Tea production on the other hand was up thanks in part to improved rainfall and fewer labour disruptions. Therefore the recent industry bucking trend is not fully attributable to production and marketing initiatives, but purely to external market forces. MTIs research and analytics point to deep rooted strategic challenges facing the tea industry that subsidies may not address. We also comment broadly on initiatives that the industry should reflect on in the context of todays hard times.

2. The Systemic Weaknesses in Production and Marketing of Tea

We highlight the key pointers to the pitfalls and myopic ideas that prevent Sri Lankas tea being competitive: a. Reduce input costs to remain competitive The FAO predicts that due to the use of new technology and other innovations, inflation adjusted prices of tea would continue to decline and production outstrip demand. Countries assimilating technology and better yielding clones faster such as ACP (African Caribbean and Pacific) countries can produce at lower costs putting Sri Lanka under pressure. The fact is that Kenya, our closest rival produces far more tea per hectare than Sri Lanka and that her labour productivity is nearly double ours. Kenyas labour costs are only 43% of production costs compared to Sri Lankas 60%; certainly a cause for concern. Producers point to these statistics and other input costs to justify their demand for subsidies. To meet global price benchmarks, therefore firms often focus on visible productivity measures such as Kg per labour-day without considering factors that may have an impact on the quantity (Kg) of Tea plucked. Studies by the ILO and others indicate that plants per hectare, the height, weight, age and experience of the plucker etc contribute to labour productivity. Unfortunately
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many companies put undue focus on input cost reduction. Though popular, this method looks inward and ignores revenue optimization, because while mangers keep their eye on the inputs radar, output never gets measured. Contrast this with the revenue optimization model which on the other hand seeks holistic and creative ways to increase revenue with the limited resources at the producers disposal. b. Auctions are a transparent way of getting the best price for the producer While the internet will bring buyers and sellers closer in a buyer-seller market space the traditional auction system will continue to play a significant role in the foreseeable future. However Sri Lankan companies will do well to realize that it is not the endpoint of the value chain and that producers need to play an active role beyond the auctions. Multinational Companies (MNCs) understand this and are minimizing the dependence on the auction system by integrating their supply chain and control of front end channels as shown below. c. Our export markets are secure Future markets may not be secure as MNCs seek to fully control and integrate their supply chains. Unilever owns a large number of estates particularly in Africa. Tata having secured supplies off their own estates is taking control of the front end marketing channels. These are strategic choices albeit one on the supply side and the other on the demand side. Local producers will become increasingly vulnerable as these giants look within for their supplies and others shift their sourcing to more productive and cost effective tea producing regions such as the ACP countries. d. Sri Lanka has strong equity in European and Middle Eastern Markets The total market for tea is approximately US $ 47 BN. Of which we have significant share in declining markets such Europe and ME. Despite Sri Lanka being the largest single exporter of tea we do not enjoy a corresponding revenue share. Another is that we are not present in big revenue markets. Though the US per capita tea consumption is low, it is the biggest revenue market, paying top dollar per cup. It is the most innovative market as well. Yet Sri Lankan tea has little or no presence there, being content to dominate traditional markets in Europe, the CIS and the Middle East. e. International Marketing is not our cup of tea Revenue optimization along the value chain is something MNCs understand well. Thus they focus on building key consumer insight and use the knowledge to control, if not minimize the impact of competition along the value chain through their go to market strategies such as branding, the channel and product mix, and marketing communications.
MTI Consulting 1999-2009

Tata is making significant gains in the US and European markets through strategic acquisitions. The acquisition of Tetley gave Tata instant access to the British and European markets. Honest Tea, a fast growing organic brand by aligning with Coca-Cola gained access to cokes huge distribution network. Sri Lankan producers however at their own peril see no role beyond the value chain. f. Geographical Origin (GI) will help differentiate Ceylon tea Can obtaining the Geographical Origin rule under the WTO fetch a premium for authentic Sri Lankan teas? Cross industry learnings indicate otherwise. The WTO and GI treat French wine industry domains as intellectual property. However recent trends indicate that country of origin is unimportant and that consumers are willing to pay premium prices for stylish new wines from the rest of the world. New consumption data confirm that modern consumers are gradually abandoning French wines. Producers must note that nation states and borders have less meaning in a globalised market. It is safe to assume that while source/origin maybe necessary, it may not be sufficient to ensure success. MNC branding strategies support this contention. Unilever controls nearly 15% of the global market with an array of brands led by Lipton. These brands have transcended national and regional boundaries, and may not necessarily use country of origin as a key driver of their brand strategy. g. Traditional teas are the way forward A slew of new lifestyle integrated brands are quietly displacing traditional teas by carving out niche market spaces in the natural beverages category. MNCs will exploit these opportunities to continue to grow the iced tea category, positioning iced teas as healthy non-sweetened, non fizzy natural drinks with lots of anti-oxidants. Repositioning traditional teas will also take place parallel to ready to drink (RTDs) teas. Unilever relaunched Lipton changing its image from a grey brand to rainbow of colours creating universal appeal. Further an exciting new tea brand Teavanah with an array of products that have an elitist appeal, is creating new market space in the upper-end US fashion malls. New innovations are being rolled out as top quality teas are made available in Pyramid tea bags, easy to use nylonmesh and other plungers that make brewing tea fun. h. Issue based Marketing is a passing fad and is expensive Today more and more consumers worry about their consumption choices. What is your carbon foot print? Is the product procured by fair means? Is it ethical? Thus issue based choices are
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becoming the norm. While this trend is new and the impact small, these are emerging trends that MNCs such as Coca-Cola, Unilever and Starbucks have already embraced. Sustainability is one of the key brand values of Starbucks. Unilever is fully committed to sustainable tea and coffee. Environmental stewardship allows the company to command a premium, post its Rainforest Alliance certification. Similarly fair-trade certification is becoming important. While ISO, HACCP and GMP are mandated by most importing countries to ensure traceability, Fair-trade and Sustainable Tea are voluntary positions taken by companies to appeal to consumers.

3. Strategic Options
As noted elsewhere, while the global market has made major strategic shifts, Sri Lanka lags behind. There are some key strategic options that Sri Lanka needs to be mindful if we are to remain competitive. a. Ceylon tea needs to be a price maker rather a price taker This position can only change if strategic marketing plays a key role. Because Sri Lanka is not competitive both at country and firm levels it will remain a price taker. Competing countries such as India and China, who may become net exporters together with other countries emerging as exporters, will continue to push prices down. As a producing country competing in a market where supply exceeds demand, Sri Lanka will end up being a price taker. At the firm level, Sri Lankan companies compete with established brand marketers such as Unilever and Tata. Since it is unlikely that Sri Lanka can build larger than life brands similar to Lipton, and Nestea, we will be compelled to compete at a non-brand level in the foreseeable future. b. Get ahead of the learning curve quickly. Some of the long term strategic initiatives the industry has neglected must be resolved speedily. Admittedly, we have the expertise, but not the will to make the hard decisions. Not enforcing the 4% of total acreage under replanting norm is one such example that affects us on two fronts. One, inadequate replanting prevents the introduction of better yielding varieties of tea. On the other front, aging plants negatively impact the yield and quality of tea. c. Introduce good HR practices We cannot escape resolving the intractable issues of plantation worker management and the reluctance to adopt time tested HR practices must be overcome. The building blocks of good HR if implemented properly would benefit the industry as a whole. The old mindset must give way to empowering the worker, giving them choices, and involving them in the decisions that
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affect them. Further they must be groomed to take up positions beyond the labour category and lead hopefully to fewer disruptions. d. Meet compliances quickly Plantations should embrace international sustainability and compliance challenges including, forestry, and eco-system management. A pragmatic approach to balancing the need to create short term cash crops, animal husbandry etc must be given serious thought. This should lead to creating alternative employment opportunities. These are areas that may not be core. However business models are available that support such activity. e. Take control of the value chain Consolidation and integration of both on-line and off-line channels etc will make competing against branded products increasingly difficult. Producers must take control and play an active role along the value chain. Many growers co-operate to form marketing entities that take on responsibility for marketing their produce. Successful models can be found across the globe and take various forms from co-operatives to PLCs. Fonterra, is a good example of a cooperative of dairy producers evolving into an international brand marketing giant. f. Innovate The lack of innovation is a major concern as producers of competing beverages such as coffee introduce a range of new products. Sri Lankas tea industry however is still bound deeply in tradition while the rest of the world is forging ahead with new ideas and technology. As the single largest exporter we must be on the forefront of innovation and new product development.

4. Concluding Remarks
Plantation management companies need to think about a paradigm shift. Gone are the days of the old raj where markets were assured, and labour aplenty. The unfolding scenario is that supply will outstrip demand. Competitors will squeeze more out of the value chain. Traditional practices will give way to the new more efficient. These are broad brushstrokes of some of the strategic choices that plantation companies must focus on. Until a holistic approach to the manufacturing and marketing of tea is adopted, Sri Lanka will falter and no amount of subsidies will help. The US auto industry has learnt this the hard way. Should the local tea industry go the same route?

MTI Consulting 1999-2009