Innovation not value addition answer for current tea crisis

7 September 2015 03:06 am - 0 - {{hitsCtrl.values.hits}}

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Dying out value addition model not working
Tea industry is in a value trap
Emulating old success stories won’t work
New trend is food life style
Must move away from traditional markets

By Chandeepa Wettasinghe

Ceylon Tea should focus on product innovation instead of the dying-out value addition model to get out of the current tea crisis, Singapore-based The Calamander Group Inc. Chairman Roman Scott, who owns the Coffee Bean and Tea Leaf franchise in Sri Lanka said.

“You’re in a value trap, but you’re in a good position to get out of it,” Scott said at the Tea Exporters Association Sri Lanka AGM held last Friday.

According to him, most tea exporters are focused on value addition, blinded by the success some of the local tea brands have had in the past through their tea bag sales in international super markets.

The government too has called on the industry to do more value addition to boost export earnings. “That’s yesterday’s model. It was good 20 years ago,” Scott said, adding that today at Tesco, products of these brands are not on the top shelf, or on the premium shelf.

He said that if companies do want to pursue such a model, the best method is to sell to the large retailers like Tesco or Sainsbury brands to improve the companies prior to launching their own brands, similar to how Korean and Taiwanese computer manufacturers sold to top US brands prior to launching their own.

“The new trend is food lifestyle, like Starbucks, artisanal speciality tea and RTD (ready-to-drink) iced-tea. The old tea is not going to work because of the brand disloyalty among the millennials and the rich.

They’re looking for funky, authentic stuff with pictures and origin stories of your tea pluckers and things which
say 5 percent of the proceeds go towards these pluckers,” he added.

At the same time he stressed that Ceylon Tea must move away from its traditional markets in the Middle East and Russia which depend on oil.

“You’re not looking at the macroeconomics of your tea markets because right now, you’re not in the business of tea, you’re in the business of oil. The new oil cycle has fallen and it’s not coming back up because of new technology in shale fields,” Scott said.

He said Ceylon Tea should instead cater to the western markets which have the euros and dollars to pay for a premium, where carbonated soft drinks have been in a free fall due to health awareness, and RTD has plugged into the gap, becoming the fastest growing market in food
and beverages. The global tea market stands at US$90 billion with US$40 billion in hot tea and US$50 billion in iced-tea.

“The US is the second largest tea consumer and Britain is the 4th. That’s the greatest opportunity for beverages. You shouldn’t be in the oil market. You should be in the fat guy market,” he averred.

While exporters have been saying that entering a new market is extremely costly, Scott gave examples of innovative western companies which had started small by blending and packaging tea in garages, and were recently bought out for hundreds of millions of dollars.

“Those should have been your companies. You have the finest tea, but you need the flavour profiles and well designed packaging. So if you don’t have them, don’t be afraid to get consultants in,” he added. Ceylon Tea is in the worst crisis it has ever faced, with the fall in commodity prices, world currency devaluation, oil glut and unsustainable production costs due to an ever-rising wage structure.

For the first 7 months of 2015, tea export values fell to US$683 million from US$797 million year-on-year, and the Colombo Tea Auction in August fell below the November

2012 figures. Tea Exporters Association Sri Lanka former Chairman Niraj De Mel said that the global mass market is demanding US$2-2.50 teas, whereas Sri Lanka has usually attracted US$4 per kilo which allowed the planters to operate without losses.

Pic by Indraratne Balasooriya

Expansion through RTDs

The Sri Lankan franchise of Coffee Bean and Tea Leaf is looking to expand its presence in the country through the ready-to-drink segment.

“I’m developing RTDs. I’m looking for the flavour profiles. I’m looking for a Coffee Bean and Tea Leaf iced-tea blend,” Scott said. He added that the company is also looking for skilled blenders to create the product. Opportunities would arise for beverage bottlers and designers as well.

A whole host of companies, including HVA Foods PLC, Ceylon Cold Stores PLC and Nestle Lanka PLC currently offer iced-tea for both local and export markets.

Scott could be attempting to capitalize on the stronger demand and increasing sophistication of the Sri Lankan consumer.

Coffee Bean and Tea Leaf is a California-based food lifestyle company, and the 2nd largest in the world after Starbucks. It has over 1,000 outlets in the US and 24 in other countries. The main tea supplier to its North American operations is Walter’s Bay—a subsidiary of Bogawantalawa Tea Estates PLC.

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Innovation not value addition answer for current tea crisis

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