Pizza and logistics?

• 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.

Introduction

All 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.

Industry scenario

Industry 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 last year.

After 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 Tetleys 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.

Market profile

Tea 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 worlds 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 trade.

Outlook

Although, 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 years.

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.

Conclusion

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 Indias 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.