Future for Ceylon Tea has never been brighter than today: Dilmah’s Dilhan

Dilmah Ceylon Tea Company CEO Dilhan C. Fernando

The Daily FT-SC Securities joint multi-media initiative “Market Pulse” today features Dilmah Ceylon Tea Company Plc’s Director Dilhan Fernando. He was subsequently made the Chairman and CEO of the Company following the demise of industry icon and father Merrill J Fernando.  

In this interview done by SC Securities Asst. Manager Investment Banking & Marketing Dilusha Gamage, Dilhan deals with the challenges faced by the industry and the future of the Sri Lankan tea industry. Following are excerpts. The interview is also available on video at FT TV https://www.ft.lk/ft_tv/Legacy-of-Taking-Ceylon-Tea-to-the-World-Story-of-World-s-Finest-Produce-of-Tea/10520-750794

Q: Dilmah holds a proud legacy as a Sri Lankan brand that has gone international, earning a successful international brand. Do tell us a bit about how this legacy started and how it has become so successful.

A: It all began with a single person, a young man with a very big dream. It was the 1950s and my father, at the age of 20, had observed the passion and the commitment with which tea was harvested. Each cup of tea contained 30 hand-picked leaves. That means somebody spent time and effort hand picking the finest leaves for your cup of tea. There is nothing more artisanal or more luxurious than that. My father saw this and he wanted to get into the tea industry. He then visited Mincing Lane in London, which ironically was the centre of the global tea trade, though they don›t produce much tea, yet, was the centre of a global tea trade, part of the unfortunate colonial economic legacy the British Empire had. And there, contrary to his expectation of a celebration of what is great about tea he found something quite different, because the trade was focused on profit and therefore value reduction. As a tea grower, my father saw at the time as we see today the incredible artisanal commitment, the effort that goes into making tea, the effort of the tea growers combined with the influence of nature. When you translate that into a commodity to be traded, it turns out to be something completely against the social and economic interests of the country. My father saw this in the 1950s when he conceived an idea. It was a very different time. There was no printing in the country. There were power issues and many complications while the trade was dominated by the British. So he had to work his way through and eventually in 1985 he was able to make his first breakthrough getting his Dilmah tea grown, harvested, ethically produced, packed and branded in Sri Lanka, with the profits coming to the country. In September 1985 he got it on shelf in Australia. That’s a potted history of how it all happened.

Q: In how many countries is Dilmah being sold now?

A: Then onwards we soared and we are now in over 100 countries. However, our objective is not to say that we are the biggest. We want to maintain our quality, as there is nothing great about saying you are the biggest in volume, what matters for Ceylon tea is value.

Q: Sri Lanka does not really do much of value-added product exports. When it comes to the tea industry, the majority is bulk exports. Dilmah is an exception. What is the reason for Sri Lanka not being geared for value-added exports?

A: It›s a tragedy. Sri Lanka has the finest tea, the finest cinnamon; we have exceptional cardamom and the finest pepper. We have an abundance of quality products that extend from our people. If you talk to international chefs they would tell you Sri Lankan pastry chefs anywhere in the world are the finest. We fail to take advantage, with the finest chocolate work, ice carvings and the precision of their work. This is the difference that my father saw. Because every skill, whether it is the quality in a cup of tea, every uniqueness, every point of difference, needs to be emphasised and focused on in building value. In Sri Lanka value addition in tea may be in the region of 30 %. But real value addition is when you take a product and you add value through the use of technology, use of art, craft, communication and presenting new experiences to engage the consumer. Value addition isn›t just saying look I›ve sold something at a high price. It›s about delivering an experience where a consumer says this is worth the price we are asked to pay. Although we have all these attributes, it›s probably in the mindset and the marketing failures that we are yet selling our cinnamon as a competitor to the inferior and carcinogenic cassia. We are selling our finest Ceylon tea with all its artisanal attributes as a cheaper alternative to multi-origin blended tea which has no identity, personality, guarantee of craft nor guarantee of soil conservation. So whether it is cinnamon or our incredible cashew, we need to understand that we have an amazing asset and that asset merits charging a fair price. My father›s philosophy of understanding the concept of value and charging a fair price for the value we offer, not cheating the customer but offering an experience for which he or she is willing to pay the price extends to tourism.

My brother oversees and manages our Resplendent Ceylon. Our room rate is significantly higher than any other in Sri Lanka, because we offer a unique experience and that›s a Sri Lankan experience. Our Ceylon Tea in most countries has its own place, for example, in Poland you would see us sitting on the top shelf in terms of price, because we offer a quality product.

Tasting 10,000 teas each week and selecting the finest is about honesty. Honesty builds trust. Trust builds value. I think the important thing here is as Sri Lankans we need to first understand the value of what we have. We need to frame our proposition on how we propose to engage with the consumer. Today the consumer is very responsive to a message that talks of wellness, provenance, biodiversity, quality and taste. Tea has everything, so does cinnamon, cashew and Sri Lanka tourism. When you read some of the reviews online they are exceptional but we need to charge a fair price. Because when you discount something as a commodity, you end up devaluing it. The Seychelles is $ 600 to $ 700 a night while in Sri Lanka it’s $200 a night, trying to demonstrate that probably the cost corresponds to the quality. Sri Lanka is worth a thousand plus dollars per night because of the experiences we could offer. Wellness experiences, Ayurveda, fine tea, fine gastronomy are a few that Sri Lanka offers. I believe it is as much the mindset, as well as a relic of colonialism that seems to have colonised our minds. We need to have the confidence to say we have a great product, we are going to market it as a premium, and charge the right price. It is only the right price that›s going to allow us to pay our workers a fair salary and to build innovation into our industry.

Q: Dilmah is an export-oriented business and the current high currency fluctuation can be a serious challenge. How is this impacting the industry and Dilmah?

A: We emerged from an unprecedented crisis. In 2020 following the Easter bombing we confronted unimaginable challenges. We had to build parallel transport networks, build fuel dumps. We had to maintain health and safety in a way that we never had to in the past. But we never stopped for a minute. Currency fluctuation is part of the recovery of our nation. Ultimately it›s also in the mindset. We have to be positive. Every problem has a solution. We are a Sri Lankan company, with a Sri Lankan product and believe we can do it. So we will overcome the challenge. To meet any challenge valuing our product is important. When the currency fluctuates or when we have inflationary pressures we can go to the market and tell our partners these are the justifications for a price increase. When you don›t have a brand you become a victim of all of those trends. When you sell bulk tea for example, it is you against the low cost producers around the world. So it comes back to the same thing. Value what we have. Today we have a currency crisis but it›s part of our restoration. Tomorrow we may have a climate crisis. We may have another health crisis or perhaps other issues. It is building value, understanding what you have and crafting it through value addition is what is going to help us to build resilience. 

Q: Turkey and Russia are two main buyers of Ceylon tea. In the recent past we have seen that both these countries are experiencing economic challenges. How are these dynamics affecting the demand for Ceylon tea and how do you manage that?

A: Turkey, Iraq, Iran, Libya, and Russia are the traditional markets for Sri Lankan tea and I think our future and our resilience is to broad-base Ceylon tea. We have been reliant on the same markets virtually since the 1960s. There is no reason why we should not venture beyond. When we talk to industry insiders you hear the phrase “oh we lost that market”. Yes we lost it to Kenya but we lost it on price. Ceylon tea is not a price driven product. It’s a quality and sustainability driven product. So perhaps today it›s Turkey and Russia suffering from an economic crisis and tomorrow it could be Europe. But we need to broaden our markets. We cannot stay reliant on the same five or six markets. When Iraq, our number one market, has some sort of import issue, embargo or sanctions, Sri Lanka suffers. Hence, it›s an unsustainable and narrow-minded approach to keep going

Q:  Kenya and India emerged as strong suppliers of tea. However, both countries are facing labour issues at present. Does that mean it creates more opportunities for Ceylon tea and is there any way that we can capture that opportunity?

A: I think it creates more opportunities but probably not in the way you think. When there is a supply disruption it is inevitably temporary. But where it creates an opportunity is, if we go to consumers and say look during the pandemic most countries either mechanised or retrenched twenty, thirty thousand workers causing them misery or they abandoned minimum wage mechanisms and reduced the wage. But in Sri Lanka we actually increased our wages and increased social commitment. If you walk on the streets of Berlin or London, you need not walk more than 100 feet to see somebody in misery, without health care, or in deep trouble. All those who come here take photographs of somebody and publish in the newspapers and say we are mistreating our workers; they need to look at themselves to understand who is at fault. The world is telling us we want a cheaper product. When we go and offer a product at a fair price we get kicked out. We are asked to compete with one country or another. Our product is valuable because we want to take care of our workers, we provide free education, and free medical care. Kenya and India face short-term labour issues but we should not seek to exploit that because that would be at most a short-term benefit. We need to understand the bigger picture. Where does Sri Lanka fit in this competitive environment? We should not seek to compete with them because it would end up in price competition. We should compete on quality.  What is important is not to sell 300 million kilos, but to sell 150 million kilos of Ceylon tea profitably. When I say profitably it must be profitable for the environment. We have to invest in soil regeneration, in agroforestry, make sure it is profitable for the community, and integrate the livelihoods of people into our business model.  We should tell the world that we produce the finest tea on earth, that we look after our workers, our environment and that we want a fair price. If you do this you will find a reasonable gap between the cost of production, net sale average and Export FOB. We can use that gap to benefit social environmental issues. This year Dilmah will generate almost over Rs. 900 million over our 13 centres around Sri Lanka, supporting children with Down Syndrome, schools and hospitals on the plantations, environmental education, climate change centres etc. We are not compelled to do this, but we feel obliged because we are a Sri Lankan company benefiting from a Sri Lankan product and we have to share. This is my father›s philosophy. This is a business built on family values. We can do it because we have a brand. We tell our customers, we will give you the finest tea but you have to pay a fair price for it.

Q: The fertiliser ban imposed in 2021 created serious issues for the plantation sector. Now the regulations have changed. What is the current situation?

A: That ban was ranked as a stupidity. It was purely political. It›s unfortunate because it caused a catastrophe that is still rippling through our country years later. Now we have recovered to an extent. The availability of fertiliser and the fertiliser that has been applied since is resulting in more normal crops coming through. If you look at it and try to find a little bit of light at the end of that self-imposed tunnel, I suppose people are thinking a little bit about sustainable means of regenerative agriculture. This is important. We should not be reliant on fertiliser because the stupidity of the fertiliser ban was the ban in itself. As members of the tea industry who were part of that initial task force until we were kicked out, we recommended that there should be a progressive plan by setting a target of five or ten % gradually. That would have been a wise and insightful action. Several countries are working on this model. But the time frame is 30-40 years, not overnight. So yes we are recovering but the ramifications are still being felt

Q: Do you see any change in customer preference over tea especially with the new generation? Is the new generation shifting to substitutes like coffee or juice?

A: Consumers today are used to a multitude of options. The customer doesn’t come with a predetermined notion of saying I›m going to drink tea or drink coffee. They look at what›s on offer. It’s up to us to make tea look good. Does tea look good? Infinite variety in taste and the taste is determined in tea, not by the manufacturer. It›s determined by nature. You have Nuwara Eliya tea. Can you produce Nuwara Eliya tea in Ratnapura? No, because there are inherent geographical and climatic characteristics that define light bright tea. We must communicate this positively and say look here›s what we have in Sri Lanka. There›s a multitude of options. You have tea for your morning, for your afternoon, to have with your salad, to have with your biriyani, etc. So make the product relevant, and look good to the consumer. Create occasions. The new consumer isn›t moving away from tea. Today tea is more relevant than any other beverage. There is no herb like tea. It›s varied in taste, with natural plant antioxidant goodness, and a variety of taste. If we build a strong ethical and environmental sustainability proposition in tea we have a compelling offer. You have what a consumer would say, look when I drink this tea. Not only am I doing something good for my body, engaging my taste buds and appealing to my taste buds but also I›m helping the plantation workers in Sri Lanka. Because when they produce this and when I pay a fair price for this they get a fair wage. We just need to be able to communicate that and make tea look good. 

Q:  What is the future of the Sri Lankan tea industry?

A: I think the future has never been as bright as now. The reason for that is gen Z, the younger generation, millennial are conditioned by the pandemic for health and wellness. They›re looking for products that offer health and wellness. Any scientist or if you go online you would find over 45,000 research papers that confirm the natural antioxidant goodness in tea. So it is scientifically proven. Tea has a therapeutic impact on every single lifestyle disease such as diabetes. Tea enhances cognitive ability but also enhances mood. Tea reduces the impact of stress on the human body. Tea reduces the possibility of stroke. The list is endless. The future for Ceylon Tea has never been brighter than today in my opinion.