Rescuing tea industry: Time to act global after

thinking global too!

A nation savouring small gains

Monday, 24 July 2017

An important message was delivered to Sri Lankas

policymakers and bastions in the tea industry by five experts who participated in a
live TV discussion on the subject recently (available at:
https://www.youtube.com/watch?v=iyUT_YEG5mU ;
https://www.youtube.com/watch?v=mL3mYE5rXIw&t=221s and
https://www.youtube.com/watch?v=k3p415x4C1w). The message was that the
industry was going through a crisis, it needed a long-term vision and it was time
for everyone to give up their pet ideology based on thinking local and acting
global. What was observed was that everyone was savouring small gains in the
form of temporary increases in prices which were nothing but bubbles that almost
immediately burst.

Going for political expedience instead of searching for permanent solutions

But the industry had been moving downward for decades now. The political
authority in the country, instead of searching for permanent solutions, was
thinking in terms of short-term political expedience. Their thinking was confined
only to local issues, whereas the industry was facing problems due to global
developments. The impact on the tea industry due to global issues could be
tackled only by thinking globally. Though the experts under reference did not say
so explicitly, what was needed by the industry was to shift its focus to think global
and act global.

The obsessive love for a non-existent Ceylon Tea in the world market

Sri Lankas tea authorities had always followed a thinking local ideology when it
came to addressing its issues. In May 2012, the then powerful Treasury Secretary,
Dr. P.B. Jayasundera, made the proclamation that Sri Lanka should stop the
importation of tea altogether from abroad for blending purposes, for it would
tarnish the reputation which the country had earned for centuries as the best tea
producer of the world.

He made this proclamation in the backdrop of continued agitations by a section of

tea exporters that Sri Lanka should liberalise tea imports to take advantage of
supplying blended tea to the world market and earn more foreign exchange to the
country.

The rationale of Jayasunderas thinking was questioned by this writer in an article

published in this series in May 2012 (available at:
http://www.ft.lk/article/87588/Storm-in-Sri-Lanka-s-teacup--A-more-pragmatic-
approach-is-key).
Jayasundera, through this local thinking, was apparently attempting to please a
political lobbying group which had been opposed to such a move without thinking
the future of the industry. Since then, almost all the tea authorities in the country
had been confining themselves to local issues rather than seeking to address
global issues facing the industry.
When tea is considered from this wider angle, it boils down to a problem of
long-term strategising, marketing, inventions and innovations. It is in these four
areas where Sri Lanka has failed. The country, while boasting of producing the
best tea in the world called the Ceylon Tea, has not moved even a single step
forward from where the industry was left by British planters

Tea should be looked at as a beverage and a raw material

Tea is looked at in Sri Lanka in a narrow view that it is a plantation crop connected
to factory manufacturing and exports. So far, Sri Lankans have not begun to look
at tea as a global beverage and a raw material for the perfume and
pharmaceutical industry. As a global beverage, the issue is marketing. As a raw
material for perfume and pharma industry, the issue is research, development and
commercialisation of inventions, also known as innovation. This is a wider angle
from which tea has to be looked at today.
Tea marketing in Sri Lanka is still where it was left by British planters

When tea is considered from this wider angle, it boils down to a problem of long-
term strategising, marketing, inventions and innovations. It is in these four areas
where Sri Lanka has failed. The country, while boasting of producing the best tea
in the world called the Ceylon Tea, has not moved even a single step forward
from where the industry was left by British planters.
It has continued to grow tea, manufacture orthodox black tea and sell to
consumers in some selected countries either in the form of bulk tea or tea in tea
bags. Hence, when the market prices depress due to oversupply, adverse regional
political turmoil or global economic recessions, the tea growers back at home are
forced to undergo enormous economic hardships. If the period is long, many of
them become bankrupt. This is specifically true with low country tea small-holders
who at present produce about 70% of the countrys tea output. Their woes are
then capitalised by interested political parties which create a narrow political issue
out of a major economic calamity faced by the country.
Teas economic woes

Tea in Sri Lanka is facing an economic catastrophe today. Tea output has grown by
less than 1% annually over the period from 2007-2015; in 2016, it has fallen even
to 293 million kg, below the level of 317 million kg that it had achieved in 2005. In
fact, tea output has been continuously falling since 2013. The drought in the first
half of 2017 has caused the output to remain at a very low level and it is unlikely
that it would recover in the second half of the year.

If Sri Lanka cannot produce more tea, it cannot export more since its local
consumption has been at around 30 million kg per annum based on an annual per
capita consumption of about 1.5 kg. The industry has been complacent about
small gains in the form of temporary increases in prices. When tea output fell in
2016, according the Central Bank Annual Report for 2016, the Colombo Auction
prices have increased from Rs. 401 a kilo in 2015 to Rs. 473 a kilo in 2016.

But at the same time, the cost of production too has increased from Rs 459 a kilo
to Rs 469 a kilo. Thus, the producer margins are falling; however, the exporters
have been rescued to some extent by an increase in the rupee value of export
prices due mainly to a depreciation of the currency. Having to rescue an industry
by depreciating a currency forever is not a good sign for an economy.
Rising costs in a background of low yields

Sri Lankas tea suffers from both the high cost of production and low yields. No
commodity can compete in the world market unless it reduces its average cost.
That reduction comes from increasing the yield levels. According to the Food and
Agricultural Organisation or FAO of the United Nations, Sri Lankas tea yield
standing at 1,532 kg per hectare is only marginally higher than the world average
of 1518 kg per hectare (available at: http://www.factfish.com/statistic/tea%2C
%20yield ).

Thus, Sri Lanka is ranked at 26th position in terms of the global tea yields. This has
to be compared with high yield countries such as Malaysia (with a yield of 6,778
kg or Number one position), Kenya (2,177 kg or 13th position) India (2,143 kg or
14th position) or Tanzania (1,573 kg or 24th position). Accordingly, in a
background of high costs and low yields, any fall in the international price of tea
will make Sri Lanka sick because it has no back-up resources to go through the
crisis. Since price changes occur frequently in cycles, Sri Lankas tea industry,
though it is the second highest foreign exchange earner after garments, is driven
to a high level of vulnerability.

The need for raising industry earnings

Sri Lanka cannot increase its tea yield levels overnight. However, it can increase
industry earnings by diversifying its use. The diversification can be in the beverage
sector itself as a novel drink, on the one hand, and into non-beverage industry
sector as an ingredient for producing pharmaceuticals, cosmetics and perfumes,
on the other. Both require investments in better marketing and continued
research and development.

A tea culture to make tea indispensible in the late 19th century

Tea was promoted by British planters and tea traders by using ingenious marketing
methods. When Ceylon Tea began to face competition from other tea producing
countries in late 19th century, it was presented to British and European tea
drinkers as a uniquely branded product. A separate tea culture was developed
with British and European aristocracy meeting frequently over a cup of tea and
discussing many topics of interest. Thus, tea was associated with exchange of new
ideas and British and European aristocracy could not do without it.
Tea being projected as a panacea for all illnesses

It was the aspiration of the nouveau riche to become a part of this high society tea
culture. Tea was presented to them as a brain tonic, delicious drink, panacea for
all illnesses or a drink that improved ones digestion.

In the late 19th century, there was another marketing campaign to popularise tea
among the working class as well. Since they did not have the wherewithal to buy
tea, arrangements were made for them to buy once-brewed tea from aristocrats
at bargained prices (available at:
http://www.panix.com/~kendra/tea/tea_to_england.html).

Unlike coffee, tea leaves could be reused to brew tea again and again; though it
reduced the taste in subsequent brewing, the working class people compensated
for the loss of taste by allowing the reused tea leaves to be brewed longer. Thus,
through a weaker taste cup of tea, even the working class people were introduced
to tea drinking.

The ultimate result of these ingenious marketing campaigns was to promote tea
as a universal beverage. Thus, Ceylon got the market for its tea without labouring
anything on its part and remained passive in targeting new consumers.

Campaign to make Coca-Cola the number one beverage in the world

But the competitors to tea as a beverage were active all the time in reaching out
to new consumers. One such competitor was the soft drink manufacturer, Coca-
Cola, which was penetrating the global market almost with an aggressive tone. It
had a long term vision to promote Coca Cola as the worlds number one drink. In
1986, the Chairman and CEO of the Coca-Cola Company, Roberto Goizueta, made
a historic speech before Coca-Cola sales representatives (available at:
https://www.youtube.com/watch?v=tpF_-BbaV1g).

He said: Right now at this point in time in the United States, people consume
more soft drinks than any other liquid, including ordinary tap-water. Well take full
advantage of our opportunities. Someday, not too many years into our second
century, well see the same wave catching on markets after markets on to
eventually the number one beverage on earth will not be coffee or tea or wine or
beer. It will be soft drinks our soft drink. So, the Coca-Cola Company took note
of the declining consumer tastes for traditional liquids which was naturally
happening and reoriented its strategic vision to cut a notch for itself in the new
opportunity set that was offering to it in the market.

A long-term marketing vision is needed for tea

Having such a long-term vision is a must for any commodity producer. Sri Lankan
tea manufacturers and exporters were all the time happy about living in the
nostalgic past of Ceylon Tea World an icon for which they would even fight
unto their death while the market was slipping away from them gradually quite
unknown to them.

Changing taste buds of youngsters

The new marketing strategy adopted by Coca-Cola should be an eye opener for
Ceylon tea. It is losing the market among the young people not only in the wider
world but also back at home. It still offers tea as a beverage in its traditional form:
tea shops would brew tea in hot water, add sugar and milk and serve tea as a hot
drink. Even on a very hot day, this is the way tea is served and therefore it is not a
beverage for all seasons. It may be an acceptable form of serving to old tea
addicts but not for the young people.

In Thailand and many hot cities in East Asia, when one asks for tea at a restaurant
or from the vendor of a sideway soft drink cart, he is asked the option whether it
is hot or cold. Tea is then served according to the choice of the consumer which is
mostly cold tea on a hot day. But that tea is not pure Ceylon tea; it is a blended
tea that gives a specific aroma and taste.

Selling Ceylon tea to a dying generation

Hence, when the old generation dies out, so will Ceylon tea which has failed to
cultivate a new generation of fans. That is why tea is losing ground in the world
markets with frequent fluctuations in prices. When the prices fluctuate, so will the
incomes of the tea growers back at home.

As such, it is essentially a marketing issue for Ceylon tea when it is presented to

the market as a beverage. It calls for innovative marketing tactics targeting the
young generations so that they could be served chilled and bottled tea to their
taste. At events where young people gather such as sports events, it is this bottled
tea that would have a competitive edge over its main rivals.

Tea as an ingredient in pharma, cosmetic and perfume industries

It is time now that tea should be taken out as a comforting beverage. Its health
properties have been carefully documented by W.W.T. Modder and A.M.T.
Amarakoon in their 2002 book titled Tea and Health. They have, in terms of
reported scientific research, reconfirmed the 19th century rule of thumb
marketing slogan used by British tea traders that it was a panacea for all
ailments.

But further research has to be done in order to use tea extracts in pharmaceutical
developments. Further, India has successfully used tea for the development of 150
varieties of perfumes as reported by fragrantica.com website (available at:
http://www.fragrantica.com/notes/Tea-106.html).

Promote research on and development and marketing of tea

In this game, Sri Lanka may have missed the bus to India but scientific research
into perfume and cosmetic industry does not have a limit on the new
opportunities available. What is necessary is to have a long term strategic vision
for Sri Lankas tea industry.

That vision should offer tea as an innovative beverage, on the one hand, and use
tea extracts in pharmaceutical, cosmetic and perfume industries, on the other.
Both these new horizons need further research and development in
biotechnology. That need can be filled by research outfits like Industrial
Technology Institute or ITI with its state of the art facilities in its new abode at
Malabe and research facilities at local universities and higher learning institutions
affiliated to foreign universities.

Tea is a global beverage facing global challenges. Hence, Sri Lankas tea authorities
should start thinking global and acting global, a deviation from their current
thinking local and acting global strategy.

(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka,
could be reached at waw1949@gmail.com).
Posted by Thavam