Business Feature

Sri Lanka must cross Rs. 100 bn in tea exports:

Position Ceylon Tea to be the cleanest in the world

Rohantha Athukorala

Chairman Tea Advisory Committee

Sri Lanka's tea exports crossed the magical mark of Rs. 80 billion as at end September 2007 which is encouraging at a growth of 18 percent above last year in value.

However, this is due to the supply chain issues driving the prices up, based on demand pull rather than actual stable market conditions of free enterprise as there is supply constraints in the market place.

So in actual volume terms Sri Lanka's market share would have declined in the global market place, resulting in a loss of share in some key markets which needs to be analysed and corrective action taken.

In volume terms the drop of 5.4 percent in comparison to last year's explains whilst the average price per kg of tea has catapulted to a 35 percent growth which would have helped improve the profitability of the industry that is under pressure.

The key hurdle to cross is the magical 100 billion number so that influence can be exerted for key policy changes to make the industry competitive.

On the total export of Rs. 91 billion Sri Lanka's value added teas which were at a dizzy height of forty eight percent of the total exports in 1997, dropped to 36.2 percent in 2006. In order to increase the value Added teas under the Industrial Development Board(IDB).

In order to drive this segment harder, a cross functional team consisting of industry experts representing all stakeholders was put together, that resulted in the Tea sector getting a moral boost with the Industrial Development Board teaming up with the Sri Lanka Tea Board where an innovative solution by way of pooling of funds a Rs.70 million was raised for the purchase of a Liquid Chromatograph Mass Spectrometer that can check quality of tea for ingredients, flavours and chemical residue including pesticides so that Sri Lanka can enter the global markets that are stringent on quality as well as increase the competitiveness of the value added tea's of Sri Lanka globally. Sri Lanka can now has the ability of position our teas to be 'Cleanest Tea in the world and become the Tea Nation of the world".

Production drop

The latest production data released by the Sri Lanka Tea Board reveals that production has decreased by 18.6 million kilograms as at end September 2007 to 219.43 million kgs of tea as against the last year volume of 238.1 kgs of tea in the corresponding period.

There are many reasons for the drop in production. The plantation 'Go slow' and strike experienced in the last quarter of 2006 and first quarter of 2007, followed by the adverse weather delayed bringing the tea into full bearing. Further, the high cost of fertiliser resulted in the lower application which further effected production.

The impact of the revision of the urea subsidy last year an analysis revealed that a 5 percent drop in fertiliser will result in a revenue loss of Rs. 2.8 billion and a volume drop of 12 million kgs of Tea. Which can explain the drop in production of the 18 million kgs of tea this year as at end September. What's worrying is that production in the month of September was only 25.3 million kilograms is well below last year's number of 28 million kilograms.

High growns declined to a ten year low of 4.5 million kilograms which is the lowest since the year of the El-Nino year in 1996 where 4.4 million kilograms were produced. Current estimate is that Sri Lanka will end the year at 305 million kilograms of tea.

Which means that we will be below last year's figure of 317 million kilograms of tea, which was an all time record for Sri Lanka.

But in value terms the performance will be higher than last year.

Given that 95 percent of the tea produced in Sri Lanka is exported, may be we should look at the industry just like a company enjoying BOI status, which can make the industry competitive with countries like Kenya.

Of the total tea exports of Rs.91 billion, seventy five percent of this income comes from the small tea holders. There are 460,000 tea smallholders in the country and a majority of them are in the districts of Ratnapura, Galle and Kalutara.

The estimated cost of the subsidy for the tea smallholders works out at Rs. 4,109 million where as the consequence of not having a subsidy will cost the country Rs. 40,500 million due to lower production which explains the importance of a need for a timely policy decision so that Sri Lanka retains its competitiveness in the global tea arena. Most Industry experts say that the current coupon system only encourages the misuse of the subsidy. Hence this needs to be corrected.

Infrastructure and developmental plan

An area to focus on is the Infrastructure development in the estates. The road network needs to be developed connecting towns with by- roads. This can have a spin off encouraging entrepreneurship in the estates into animal husbandry and the cultivation of vegetables and fruits.

The latest World Bank report reveals that nearly 42 percent of the estate households cannot use the road to the nearest town at all times of the year.

The improved network will have an impact on the quick transportation of tea leaves that will result in a higher quality of tea produced.

The lorries that transport tea must have shelves so that damage to the tea leaves can be minimised. It has been reported that sometimes as much as a 35 percent loss has been recorded during transit.

Apart from addressing the developmental needs on Infrastructure there has to be structured plan to modernise the factories and thereafter move to be HACCP certified.

Increased investment on Research and Development that includes developing high yielding clones of tea will drive productivity in the estate sector. If not Sri Lanka will loose out in the global tea industry.

Marketing and value addition

Sri Lanka needs to get savvy to the best practices in Marketing. For instance we need to analyse each market and then identify why Sri Lanka has lost business in markets such as Russia, UAE, Syria, Japan, Iraq and significantly in Jordan.

Is it that the total consumption of the market has dropped or was it that a competitor has taken share from Sri Lanka.

Based on this information Sri Lanka can drive promotional activity and once again monitor the movement of market shares for corrective action.

On the other hand in markets like Iran, Turkey, Saudi Arabia and Finland Sri Lanka has grown the business substantially. Hence an analysis could be done to determine from which segment the growth came and thereby invest marketing spend to build on these strengths which are emerging in the global market place.

There is also a need to protect intellectual property of Ceylon Tea brand name and the Lion Logo. There are many countries' teas that are passing off using the Ceylon Tea identity that has resulted in a loss of value to the Sri Lanka brand which needs our attention.

Value addition and differentiation

Sri Lanka must invest on value addition rather than exporting in bulk, said Athukorala. Research must be conducted to understand which value that best differentiate Sri Lankan Tea. Some of the propositions that Sri Lanka can concept test are; Sri Lanka - Tea for Quality, Sri Lanka Tea for Cleanest Tea, Sri Lanka Tea - for Hygiene, Sri Lanka Tea - for Health, Sri Lanka Tea - for real taste of Tea.

Once the concept has been tested in each of the countries above and in the potential markets like Tanzania, Malawi, France, Austria, Belgium, Bangladesh and some other key countries, the winning Idea can be given to the marketers of Tea (Exporters) so that branding and packaging can be developed accordingly.

Sri Lanka must develop ten brands of tea with the support of the Government so that just like Dilmah and Mlesna we will have a strategy of building brands based on research in markets and then letting the private sector take the lead for commercialisation based on value addition. We have to make value added teas of 70% of the exports so that we can get the best for the country on the limited production base.

Branding and promotions

We need to have a stronger thrust on this side. A strategy that can be pursued is 'Ethically Produced' platform which will be in line with the garment industry positioning launched globally recently on the 'Garment without guilt" positioning. This positioning can help Sri Lanka claim a premium in the global market place. May be to move to dollars 10 per kg from the current four dollars.

On the branding promotions we need to have a wholistic perspective where the nation as a whole gets involved in the development of the Sri Lanka's tea industry. Just like the baristas of the world we need to have Tea Boutiques", All city hotels must have a tea parlour where all brands are available under one roof with a typical Sri Lankan tea experience.

All Sri Lankan flights must serve "Pure Ceylon Tea".

The Sri Lanka Tourist Board needs to drive a special campaign on foreigners coming over to Sri Lanka to visit a Tea Estate and stay and one experiencing the total process from plucking, withering, manufacturing and packing of Sri Lankan Teas.

Take part in the world sporting events like World Cup rugby, cricket, olympics with strong branding of Ceylon Teas - billboards, tea kiosks, caps and sampling.

Poverty

Around 1 million people reside in the estate areas of the country.

The poverty head count in the estates have increased by 7 percentage points than the national average and they tend to be clustered around the poverty belt.

Which means that a small shift in income due to weather, natural disaster or inflation can result in a major swing in the poverty level in the estate sector. The latest research reveals that almost 40 percent of estate households depend solely on the estate wages for their income.

Hence the recent wage increases in December 06 and the one in October 2007 will have a positive impact towards moving households away from the poverty belt.

Another important piece of data is that the possession of an identity card tend have an impact on increasing one's wages. The reason being the ability to work outside the estate.

The key thing is for an estate to diversify the crops and there by pass down the benefits of higher wages to the workforce thereby driving down poverty in the estate segment.

An image building campaign should be done to increase the dignity of labour in the tea industry so that the best talent can be attracted into the tea industry and maintained.

The future

Whilst we are focusing on driving internal policies which are more consumer oriented which can help the Industry become a Rs. 150 billion industry we must be sensitive to the global trends.

The Dubai trade centre has exported over 90 million kilograms of tea even though the desert sands are a worlds away from the rolling green hills where tea bushes flourish.

May be we need to revisit the viability of inter-pod trade, so that once again we can attract the global leaders on blending like Unilever back into Sri Lanka.

Another option to pursue is to link up the exporter and manufacturers of tea into one company so that we can make a RPC financially viable.

If we do not make some drastic changes to drive this key industry forward we will not a cup of tea in the generations to come.