Challenges in marketing Sri Lankan tea

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 targeted.

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 for subsidies.

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 and marketing

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 price pressure.
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 system.

(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 in mind.

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 downward trend.

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 market place.

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 strategy.

(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 embraced.

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 consumers.

(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 countries.

(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 anti-oxidants.

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.

Strategic options

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 competitive.

(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.

(f) Innovate

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.

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. As the competition intensifies, those ahead of the learning curve are the ones that will survive.

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 fallout.