Challenges in marketing Sri Lankan
Sri Lanka is capable of building larger than
life brands similar to Lipton, and Nestea in the foreseeable future. If
we are unable to compete at a brand level, will we be able to compete on
price? The cost of production and better yields from competing countries
will continue to push prices down. As a producing country competing in a
market where supply exceeds demand, Sri Lanka will always be price
taker. This position needs to change. Strategic marketing should play a
key role here
By Suraj Deen
(MTI Consulting Regional Director/Senior Consultant)
As Sri Lanka’s troubled tea industry awaits the US$150m interim bail out
measure, detractors argue that bailouts are essentially inefficient and
that uncompetitive firms should not be thrown a lifeline. This will
certainly be a self-fulfilling prophesy if the subsidies are not
MTI’s research and analytics point to a number of deep rooted strategic
challenges facing the tea industry. We also comment on several broad
initiatives that the industry should reflect on in the context of
today’s hard times.
Around this time last year, indications were that Sri Lanka’s Tea
Industry was on the road to recovery, buoyed by production estimates of
310m kg and earnings in excess of US $ 1.5 bn. This was not to be as the
world market prices tanked.
Our research suggests that a price correction was inevitable. This is
because the good fortune experienced by the industry was not fully
attributable to initiatives in the production and marketing of tea and
depended entirely on external market forces. Tea prices soared on a
general upswing in commodity prices. Tea production was up thanks in
part to improved rainfall and fewer labour disruptions.
However this scenario is changing rapidly. While harvests can be upped,
factories must mull production cuts as a global recession looms large.
As teas remain unsold at the auctions, estate labour unions are caught
up in the debate over labour productivity. It is a known fact that Kenya
produces far more tea per hectare than Sri Lanka and that their labour
productivity is nearly double as ours. Kenya’s labour costs are only
43%. Compare this to Sri Lanka’s 60% of production costs. Producers
point to these statistics and other input costs to justify their demand
According to the Food and Agricultural Organisation (FAO), the reality
is that inflation adjusted prices of tea would continue to decline as
production outstrips demand due to the use of new technology and other
innovations. Sri Lanka is at greater risk than some of the ACP (African
Caribbean and Pacific) countries as these countries are able to
assimilate technology and better yielding clones faster than Sri Lanka.
Therefore subsidies alone will not help the tea industry recover.
Systemic weaknesses in production
Sri Lanka views her tea as an agricultural commodity. Commodities
generally respond to pipeline demand pressures. As long as our tea is
treated as a commodity, it will remain vulnerable to downward demand led
In strategic terms, the concept of an agricultural commodity is
delusional. In today’s competitive market space, non-value added
agricultural commodities are literally nonexistent. A good example is
the Israeli orange. The Jaffa orange is able to command a premium. Sri
Lanka has lived far too long on the assumption that buyers would seek
out a quality tea through such mechanisms as the auctions. While
investments focus on operational strategies, little or no ‘marketing
investments’ are made, further supporting the notion that a ‘good tea’
will fetch a decent price at the auctions.
Here are some of the key pointers to the pitfalls and myopic ideas that
prevent Sri Lanka’s tea being competitive:
(a) Reduce input costs
While input cost reduction is popular, the strategy is inadequate
because the focus is not on demand led production, and is unconcerned
with external market conditions. To meet global price benchmarks, firms
often target visible productivity measures such as kg per labour-day
without considering factors that may have an impact on the quantity (kg)
of tea plucked. A number of studies by the ILO and other organisations
indicate that the number of plants per hectare, the height, weight, age
and experience of the plucker, etc. contribute to labour productivity.
They emphasise that pursuing a traditional production model will not
improve the productivity of Sri Lanka tea. Therefore input cost
reduction is not necessarily the answer.
(b) Auctions are a transparent way
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. This is because
producers do not have access to the downstream distribution and retail
channels and are dependent on importers from tea consuming countries.
The larger corporates understand this challenge well. Therefore building
channel integration and control into their business strategy is seen as
key. The strategic acquisition of Tetley gave TATA instant access to the
British and European markets. TATA has gained access to the US market as
well through an aggressive acquisition strategy. ‘Honest Tea’, a fast
growing brand now has access to the huge distribution reach of
Coca-Cola. These strategies minimise the dependence on the auction
(c) European and Middle Eastern Markets
Sri Lanka is the largest single exporter of tea closely followed by
Kenya. While we enjoy significant volume share we do not enjoy a
corresponding revenue share. This is attributed to the lack of
integration of production and marketing. The total market for tea is
approximately US $ 47 bn. While per capita consumption of tea in the
USA, the biggest revenue market is low, Americans paid top dollar per
cup. The USA boasts most of the recent tea innovations of note. Yet Sri
Lankan tea has little or no presence there. While the top producers of
tea jostle for market share in the USA, Sri Lankan teas dominate
traditional markets in Europe, the CIS and the Middle East. These
countries saw low single digit growth, contributing to a poor market
outlook. Traditional teas will always be under pressure as the younger
generations in these countries move away to more hip beverages and
multinational giants such as Coca-Cola and Unilever position themselves
to exploit these trends to the full.
(d) International Marketing
Lankan tea industry plays little or no role either in the upstream or
downstream strategic marketing process. The downstream marketing process
involves all the activity that is proximate to consumption, basically
the go to market strategy. Upstream marketing activity would therefore
include strategic choices in defining a target market and defining how
best to optimise revenue streams from end-user to the producer.
Visualize the tea value chain as starting from the point of plucking the
tea (bud and two leaves), till it reaches you in a refreshing cup of
tea. Value addition occurs at production, the broker and auction system,
and the final input in the form of buy, blend and export. At every point
along its journey decisions are made that alter the product, adding
value to it. Ideally these decisions must be made with the end customer
These choices are strategic and ultimately decide the profitability of
the product offerings. However auctions are viewed as the endpoint of
the value chain by most producers. The assumption is that producers need
not play any role beyond the auctions. As long as this approach is
adopted, producers will operate in a buyer’s market and will be dictated
to by the downward price pressures as world market prices continue their
MNCs such as Unilever understand this phenomenon well. They focus on
building key insights at the consumer end of the value chain. This helps
them make strategic choices at the point of production. Thus they try to
control, if not minimise the impact along the value chain; through their
go to market strategies such as branding, the channel and product mix,
and marketing communications.
By abdicating downstream strategic marketing activity to third parties
and not taking up a strategic position upstream, Sri Lanka’s tea
producers ignore revenue optimisation opportunities. Revenue
optimisation is seeking creative ways to increase revenue with the
limited resources at the producers’ disposal. Contrast this with the
traditional method of reducing input costs and increasing output.
Unfortunately many companies put undue focus on input cost reduction,
and the output never gets measured.
(e) Geographical Origin (GI)
SLTB is focusing its energies on obtaining the Geographical Origin rule
under the WTO and to shift the focus from exporting bulk orthodox teas
to packaged tea. GI appellation is expected to fetch a premium for
authentic Sri Lankan teas.
Is this strategy sustainable? Cross industry learning’s, indicate
otherwise. The French wine industry has carefully cultivated domains
that the WTO and GI treat as intellectual property. However recent
consumer trends show that consumers are unconcerned with the country of
origin and are willing to pay premium prices for stylish new wines from
the rest of the world. Wine consumption data clearly indicate that
French wine sales are declining. Clearly, modern consumers don’t agree
with French wine producers. They tell us nation states and borders have
less meaning in a globalised market.
Essentially, while source/origin maybe required to succeed, it is
evident it may not be sufficient to ensure success in the international
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 branding
(f) Issue based marketing
Most modern consumers worry about the impact of their consumption
decisions and issue based choices are becoming the norm. What is your
carbon foot print? Is the product procured by fair means? Is it ethical?
These are questions consumers are delving into before they make their
choices. While this trend is new and the impact small, these are trends
that MNCs such as Coca-Cola, Unilever and Starbucks have already
These companies are quick to tap into emerging trends and infuse them
into their brands. Starbucks as we know is a premium coffee and has
created a unique consumer experience for coffee drinkers. Sustainability
is one of the key brand values of Starbucks coffee. Unilever is now
committed to sustainable tea and coffee. Environmental stewardship
allows it 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 should be considered
voluntary positions taken by companies to appeal to their target
(g) Our export
Unilever has begun integrating its supply chain through ownership of a
large number of estates particularly in Africa. Tata on the other hand
has begun to acquire and consolidate its front end marketing channels.
Both these companies have identified missing links in their supply
chains and have acted to plug the lacunae in their strategy framework
albeit one on the supply side and the other on the demand side. Both
companies now fully control their supply chains. Local producers will
become increasingly vulnerable as these giants shift their sourcing to
more productive and cost effective tea producing regions such as the ACP
(h) Traditional teas
Finally lifestyle integrated marketing is another tool used by companies
intent on creating niche market spaces in the natural beverages
category. As consumers become more and more aware of the implications of
a fast paced life, they are becoming more discerning about the brands
they choose. A multitude of brands vie for your personal space claiming
to make statements about you. Accordingly brands that seamlessly
integrate with the lifestyle of the consumer are the ones that will
survive. Coca-Cola and PepsiCo recognise these trends and have
introduced non-fizzy brands of beverages very early on. The hip
beverages of choice are ready to drink iced teas and are touted as
healthy non-sweetened, non-fizzy natural drinks with lots of
An evolving new market space for tea is the upper-end fashion malls with
an array of products that have an elitist appeal. Teavanah is a case in
point. New innovations are being rolled out as top quality teas are made
available in Pyramid tea bags, easy to use nylon-mesh and other plungers
that make brewing tea fun.
Companies are not missing out on opportunities to cross sell tea and
related products. Tea is now used in spas, cosmetics and has found use
in incense sticks, candles etc.
MNC’s such a Coca-Cola and Nestle will continue to expand their presence
in the non-fizzy RTD market space. Lipton, for example, has evolved from
a ‘“grey brand’ to a brand that is a rainbow of colours with vitality
which has universal appeal. There are a number other such brands that
are spearheading this change.
The above are some of the challenges that tea producers must wrestle
with. As noted elsewhere, while the global market has made tectonic
shifts in strategy, Sri Lanka has lagged behind. There are some key
strategic options that Sri Lanka needs to be mindful if we are to remain
(a) Be a price maker rather a price taker
Sri Lanka competes at two levels. The first is at country level with
producing countries such as India and China who may become net exporters
together with a number of new countries emerging as exporters. At the
firm level, Sri Lankan companies compete with established brand
marketers such as Unilever and Tata. It is unlikely that Sri Lanka is
capable of building larger than life brands similar to Lipton, and
Nestea in the foreseeable future. If we are unable to compete at a brand
level, will we be able to compete on price? The cost of production and
better yields from competing countries will continue to push prices
down. As a producing country competing in a market where supply exceeds
demand, Sri Lanka will always be price taker. This position needs to
change. Strategic marketing should play a key role here.
(b) Learning curve quickly
Given the experiences of the past few months Sri Lanka tea will need to
address some of the long term issues that the plantation industry is
grappling with. Admittedly, we have the expertise, but we lack the will
to make the hard decisions. For example, policy makers have not pushed
producers to meet the ‘4% of the total acreage’ norm for replanting.
This impacts output 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. This
is inconsistent with the strategy of producing quality tea.
(c) Introduce good HR practices
The intractable issues of plantation worker management need to be
addressed. One of the weakest links in plantation management is the
reluctance to adopt time tested HR practices. 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 affect them. Further
they must be groomed to take up positions beyond the ‘labour category’.
(d) Meet compliances quickly
Plantations should seriously consider the need to meet international
sustainability and compliance challenges including, forestry, and the
eco-system management. A pragmatic approach to balancing the need to
create short term cash crops, animal husbandry, etc. must be embraced
and 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 of and play an active role,
protecting the value chain. Many growers cooperate 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 co-operative
of dairy producers that has evolved into an international brand
marketing giant for dairy products.
The lack of innovation is another concern as producers of competing
beverages such as coffee introduce a range of new products. Sri Lanka’s
tea production however is still bound deeply in tradition while the rest
of the world is forging ahead with new ideas and technology. As the
largest single exporter we must be on the forefront of innovation and
new product development.
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. As the competition
intensifies, those ahead of the learning curve are the ones that will
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 one but industry leaders must bear the brunt of the competitive