Should Sri Lanka become a ‘tea hub’?

In the last three years I have seen how the country’s tea business has grown from around 900 million dollars to a 1,300 million dollar business as of today.

Apart from growing up on a tea estate, since my father was a planter by profession, the industry has intrigued me because it has survived vulnerabilities – some manmade and some external – but survived nevertheless.

If I am to be specific, droughts and extreme cold spells that have affected agricultural crops like tea to manmade disasters like the wage increases driven by political decisions have sometimes hit this industry. There are times the cost of production has exceeded the net sales average. The magic in this industry is that it adjusts to each of these situations and bounces back. But we must keep in mind that the line will snap and may God forbid that day ever arrives.

Being on many private sector business boards, I also know for a fact that the need of the hour is to test business models based on facts and data. I hope that at least post 22 November, we can discuss serious business as an industry rather than having to face the uncertainty of a political economy at play. This is all the more important given the entrenched competitiveness that is seen in the global market place.

Best in class

The good news is that with an industry captain at the helm and a Minister who is undoubtedly one of the best the industry has experienced in the recent past, Sri Lanka tea is in good hands for strong decisions to be made. The challenge is how the macro decision-making happens to give the industry what it deserves.

It can be said with responsibility that the industry does not require any handouts. It can survive and thrive on its own. But what the industry has been voicing at many forums is the freedom to do business with consistency of policy and a timeframe whereby the benefits from the investments made can be realised, especially in a mainstay economic activity like tea.

Patience

Whilst one can state this perspective from an industry, given that I headed the National Council for Economic Development (NCED) under the Treasury Secretary for over two years, we must accept the fact that managing the Sri Lankan economy, especially in the recent past, has been a balancing act.

Sri Lanka is just raising its head and seeing positive vibes coming in from independent sources like Forbes and the World Economic Forum, not forgetting the IMF. Hence, the private sector must learn to be patient as the system cannot take the pressure overnight to implement drastic policies. This even holds ground for the tax commission recommendations that the business sector is eagerly awaiting.

Problem at hand

One of the big issues at hand Sri Lanka is grappling to manage is global markets, which are just about coming out of the recession. The challenge is to have value for money brands on supermarket shelves. Given this challenge, we now have no option but to face the demand for lower priced teas. Sri Lanka currently commands the highest prices for its teas in the world.

With these lower price points, one can drive in a stronger brand marketing programme by the respective owners of global brands, which is what is happening now. But a point to note is that Sri Lanka cannot play the game on both fronts, given that brand marketing in an overseas market is prohibitively costly, unless one has deep pockets to unleash a strong marketing campaign.

If we take the Russian Federation as an example, it is the number one market globally for importing tea, touching 175 million kilograms of tea per annum. This also happens to be the number one export destination for Sri Lankan tea, with the value last year exceeding US$ 161 million.

No: 1 market for SL

If one examines hard facts and data, we can see that in the Russian market the bulk tea exports out of Sri Lanka into this country have increased in volume from 21,166 to 28,743 metric tonnes during a nine-year time horizon as per the details in table 1.

On the other hand, packeted tea volumes have come down from 18,377 to 7,516 metric tonnes during the same period, which to my mind is a serious situation that Sri Lanka should have arrested immediately together with the Government. But for some reason it has not happened.

If one examines the reason for the shift in demand from the Russian end, it is due to the import tax in Russia being increased for packeted tea from around 30%-40%, whilst on the other hand the import duty on bulk exports has been reduced to zero per cent.

In fact the masterminds of Russian policymaking are such that it has introduced labelling registration to allow tea products to carry the name ‘Ceylon Tea’ even if it contains only 51% of tea from Sri Lanka whilst the rest can be from other countries.

Hence, we see that the Russian policymakers have given space for companies to set up in Russia to pack teas that are imported from many countries and thereby spruce up FDIs into the country and also address the its unemployment crisis.

In Table 2, this analysis is validated whereby teas that are being imported into Russia from countries such as Kenya has increased from 5,123 metric tonnes to 11,821 during the period 2002 to 2009 whilst imports from Vietnam have catapulted from 4,720 metric tonnes to 13,183, which very clearly demonstrates the thinking of the policymakers to drive the internal economy.

Hit to SL

If we want to further validate these macro numbers, if we examine the volumes of the key exporters of tea from Sri Lanka, we can see that the top six exporters’ volumes have dropped from 15,623 metric tonnes in 2002 to 9,346 metric tonnes in 2009, a decline of almost 40%, which is colossal in value terms.

If this same behaviour is extended to the rest of the key markets for Sri Lanka, the hit to Sri Lanka’s export revenue can be catastrophic. Hence, it imperative that Sri Lanka prepares the attack strategy now and launches it with aggressiveness in focused markets, if we are serious about protecting the country’s tea industry.

If we dig deeper, what we see is that Sri Lankan brands packed in Russia are making inroads to the Russian consumer, who incidentally consumes almost 175 million kilograms of tea, together with a range of branded products across the world.

For instance, the Ahamed brand is making inroads and is enjoying increased market share from 13% to 19% within just three years. As per Tea Board statistics, a brand called Green Fields has increased its share from 3% to a staggering 11%, which aptly demonstrates that Sri Lanka has a brewing problem that needs to be solved as a matter of priority.

Sri Lanka must react

Given these developments, Sri Lanka has no option but carefully evaluate the best option to devise the attack strategy. This is all the more important because if this strategy does not take ground globally, Sri Lanka’s tea industry will be under severe pressure.

This is all the more important given that the World Bank and ADB together with the IMF are advocating that countries focus for growth inside their own country, like what has been done in Russia, before venturing out to global markets so that the risk can be mitigated and global trade will be on a more solid platform. Hence time is of the essence for Sri Lanka.

Option 1 – Drive branding

One option is to drive consumer pull and retail pull by building strong brand equity on the ‘Ceylon Tea’ proposition. This in turn will drive demand pull to brands which are manufactured with high quality, single origin Ceylon Tea.

However, the issue is that this strategy requires a very fat advertising budget which is a luxury that we cannot afford at this moment in time. A point to note is that even the proposed US$ ten million promotional fund will not garner enough share of voice to attract brand equity that is required to support this kind of brand pull strategy.

Option 2 – PTL with Russia

The other option is to engage the Russian policymakers and get a Preferential Tariff Line (PTL) for value added tea imported from Sri Lanka on the premise of high quality single origin Ceylon Tea. This can be done at two levels – from a government to government diplomatic cum trade angle and from a private sector high level delegation.

But the challenge is that local businesses have already set up in the home country, employing thousands of people, and this can be tough decision to pursue. Nevertheless, given the strong relationship that the two countries enjoy and as a peace dividends initiative, it must be pursued together with the Ministry of Trade and Commerce.

Option 3 – Establish tea hub

The last option and I repeat, the final option, is to set up a Free Trade Zone (FTZ) where enterprises can set up blending facilities by importing teas from other origins. However, a stipulation that policymakers should enforce is that 51% of the tea in any pack must be pure Ceylon Tea, whilst the rest can be teas from other origins.

I would strongly recommend that we develop a new logo that must be carried on every pack of tea that leaves the shores of the country on this strategy. This will enable us to ensure that there is a clear differentiation between ‘Pure Ceylon Tea’ and that which comes out of the FTZ on the retail shelves.

I would strongly advocate that we test market this concept targeting one country so that in Sri Lanka too we make sure that checks and balances are in play, to ensure the imported multi origin teas do not trickle into the traditional business that Sri Lanka has, which is a US$ 1 billion foreign exchange earner.

Once the test market duration is over, an independent 360 degree evaluation must be done and the lessons captured for the overall marketing strategy for Sri Lanka tea.

Probable impact

One issue that can come up if option three is followed is that if it is not properly monitored, it can affect the current business model of tea, which commands the highest tea prices in any auction. This is why if the concept is only test marketed, it can be checked out if the country is ready to be tea hub.

The other issue is that there can be brand imagery diffusion in the global market retail shelf once information gets diffused that low quality multi origin teas are also being exported out of Sri Lanka. One way to avoid this is by way of developing an identified new logo, which will be equivalent to a second line trademark that Sri Lanka will showcase to the world.

It’s not a bad idea given that we are the champions of the business globally. The point is that I prefer to get the original business model perfected, arresting the supply chain issues, and then driving in the second line brand identity. But from the development in the Russian market, it is clear that we will not have any option but to be sensitive to the dynamics in the global market place and react.

Other spinoffs

There are other spinoffs by pursuing the third option. There will be many support industries that will come into the economy, such as the printing and packaging sectors which will include the corrugated cartons business that ideally can be developed and maybe even enter the stock exchange, adding value to the overall economy of Sri Lanka.

The other is the employment that the ‘tea hub’ concept will propel to the country where we must drive to become a zero poverty nation by 2015. This in fact will make brand Sri Lanka powerful in the UN Millennium Development Goal agenda.

US$ 2.5 b target

In conclusion, the essence of this strategy that is unfolding is that we are moving away from a product-oriented quality argument to becoming a market-driven business that can take this industry to be a US$ 2.5 billion business for Sri Lanka.

The logic being, with a supply constraint at 300-325 million kilograms of tea annually where expanding the supply chain is a daunting task, even if we peg our prices in the auction by 20 per cent we cannot reach this export target unless we innovate. Hence, one way out is by way of the tea hub concept hitting the country’s growth agenda. But there has to be stringent discipline and monitoring if not it has the propensity to harm the established reputation of ‘Pure Ceylon Tea’. However, as the ethos says, without risk there is no return.

Next steps

A white paper must be must be developed by the stakeholders who support the ‘tea hub’ concept, perhaps under a chamber banner such as the National Chamber of Exporters.

This must be debated at the highest policy level, where a decision must be taken by a private-public partnership.

Once approved, a new business model must be architectured with a detailed game plan on the suggestion of test market proposition.

When the project is in place, close monitoring must be done and corrective action taken on the run whilst at the end, a 360 degree evaluation is done not only in the local business climate but also on the tested export market with the aid of an international market research agency. I would suggest a brand equity study and a U&A study so that an informed decision could be made.

The lessons learnt must be captured to the master plan of the tea marketing plan in the Vision 20-20.

(The thoughts expressed are strictly the authors own views based on his doctoral research studies and not any perspective of the offices he holds in the private, public or the international Public sector that he serves.)