New tea industry model: By default?

At the 75th Diamond Jubilee celebration of the Ceylon Planters Society, a key thought shared by an industry strategist and Chairman of the Tea Cluster Ministry of Industry and Commerce Rohantha Athukorala was that the tea industry of Sri Lanka must use the current global and local economic upheaval to shape in a new industry model based on a niche strategy for the country and correct the current anomalies even if it is painful.

He went on to say that even though this design coming into form was by default rather than by design, it should be accepted as long as Ceylon Tea can be made globally competitive and locally sustainable once again.

However, he emphasised that it was up to the industry to champion the shape of this new model with the support of the policy makers and not the other way around.

The tea industry in the recent past has been under severe pressure from a demand perspective, with the political uprising in the Middle East and the lower demand pull in the Russian market being some of the reasons for declining auction prices.

From commanding Rs. 400 plus per kilogram of tea in the early part of 2011, prices have reached on average around Rs. 350, which has taken the industry to the wire on sustainability. The global economic embargo on Iran further catapulted the situation by putting pressure from a cash flow end, said Athukorala.

From a supply chain perspective, the recent wage rate hike has made the average cost of production range from Rs. 375 to 450 as per the latest research studies done by the Tea Research Institute, which clearly illustrates the financial trap that the industry has got in to. According to Athukorala, this needs immediate attention as at the end of the day the tea industry is a main stay crop of Sri Lanka, for which it is globally recognised.

Given the fallout in the Eurozone and the declining purchasing power in the key tea consuming countries, one can forecast that the trading situation can only become tougher in the short term, warned Athukorala. Hence, rather than getting into an analysis mode from a negative perspective, a better option would be to take another look at the industry.

“A probable shape of the tea industry can be to ruthlessly focus on increasing the quality of the tea even if you have to take a hit on the production volumes. May be focusing on the ‘two leaves and a bud’ ethos can be considered by the industry so that a superior product can be offered globally,” commented Athukorala.

However, he accepted that this could increase the cost of production in the short term, while commanding a higher price in the medium to long term if supported with a strong marketing campaign.

From a demand perspective, the speaker suggested that an aggressive marketing campaign on the theme of ‘Ceylon Tea’ must be activated immediately so that the proposition of the high quality Ceylon Tea can be registered globally, which will be part of the new tea industry model.

“The good news is that this is already at the stage of implementation and the industry must be commended,” he said. “It’s a best practice that other industries can learn from,” added Athukorala, who is a member of the Tea Board Marketing and Promotional Committee.

“I guess with a 3.9 billion metric tonne global production annually, when a country is producing a mere 0.3 billion metric tonnes, niche marketing is the only way out. But for such a move to really work, the current anomaly on the wage must be corrected with policy support,” he noted. If not, he said the private sector could not come in with stringent business strategies on the quality model.  He pointed out that this strategy was not new given that in 2008, during the financial and commodity crisis, the industry moved in this direction and it steadied the sector, but now it must be done with more ruthlessness with stringent quality standards whilst also taking another look at the recent wage increase.

Athukorala said that given that in 2012 there would be fewer elections and the focus would be more on improving the business and investment climate, the tea industry must push for strong reforms to make it sustainable and a model to the world.