Saturday, October 31, 2009

Tea Economics 101

This is a well written article from the Financial Times (15 Sept 2009) written by Tom Millar.  He explores the economics of tea and tries to explain the weak economics of Chinese Tea.  Here is the very interesting and thought provoking article entitled  "Why foreigners are beating China’s tea-makers on their home turf":

"China is rightly proud of being the home of tea, the world’s most popular drink. Celebratory cups of cha were sipped when China recently regained from India its historical position as the world’s pre-eminent tea producer and consumer after a 100-year hiatus.

But the country’s failure to produce a single internationally recognised tea brand is a source of frustration for cheerleaders of the native Camellia sinensis leaf.

Both at home and abroad, Chinese tea brands struggle to compete with foreign competitors. In China, Unilever’s Lipton brand has a market-leading share three times that of its closest local rival.

“Why is Lipton more powerful than 70,000 Chinese tea companies?” lamented a recent article in a Beijing newspaper.

The challenges facing China’s tea industry are the same as those facing a host of Chinese industries: product quality issues; excessive competition in the domestic market; low prices and meagre earnings abroad; and weak branding.

The root cause of these weaknesses is simple: extreme market fragmentation.

The problem begins on the tea plantations. Around 8m farmers work on plantations across the tea-growing areas of central, southern and western China, mostly tending tiny household plots. Consolidation of the land into larger plantations is constrained by China’s land laws, which prevent farmers from owning – and therefore selling – their land.

The result is that China’s tea industry is far less industrialised than in less economically developed countries such as Kenya or India. In Zhejiang, one of China’s largest tea-growing and richest provinces, there are over 1m smallholdings, each averaging less than 0.2 hectares.

Monitoring quality across millions of scattered tea gardens is an impossible task, and Chinese tea exporters have consistently had trouble meeting foreign safety standards. Chinese tea sells for an average of just US$2 per kg on international markets, compared with US$2.70 for Indian tea or US$3.40 for highly regarded Sri Lankan leaves.

Chinese exporters will not get consistently good prices for their tea in international markets until quality controls are improved across the board, which first requires far greater consolidation of plantations and tea processing factories.

At home, fierce competition among thousands of producers and brands translates into puny market shares and slim profits. Chinese teas are traditionally sold by type and place of origin, rather than by brand, and every region has its own local favourite.

Leading brands like Lipton, on the other hand, understand that creating mass value depends on nationwide marketing and an efficient, integrated distribution network. Lipton sources cheap tea from independent producers, packages it into teabags, and markets its distinctly average “Yellow Label” brew at an outrageous mark-up.

It’s not great tea, but it is great business.

In China’s highly fragmented retail market, no national brand has emerged to knock Lipton off its perch. Instead, premium players selling organic teas are attempting to carve out lucrative niches, both at home and abroad.

Take, for example, the tea grown by the Hunan Tea Company on White Cloud Mountain in the southern province of Hunan, where the warm, wet climate and the deep red-brown soil is perfect for cultivating quality tea leaves.

Behind a copse of dark green conifers, bees buzz lazily over neat rows of shiny tea bushes soaking up the summer sun. A list of rules pinned to a board instructs tea-pickers not to keep long fingernails or to powder their faces; smoking is banned. Instead of pesticides, bug-zappers protect the crop from leafhoppers and other tea-loving pests.

When these virgin leaves are picked next spring, one batch will be shipped to Japan and sold as high-grade organic tea under the exclusive Kaito Brothers label; another will be packaged for the domestic market under the award-winning Guanyuan brand, priced at a hefty US$100 for two small 10g boxes.

Wealthy Japanese and Chinese tea drinkers will happily spend hundreds of dollars on the best spring-picked leaves, much as Western oenophiles splash out on a good bottle of wine.

But speciality teas will not bring China the international brand recognition it craves. For that to happen, widespread industrial consolidation and far more sophisticated marketing are needed.

Despite having the oldest tea producer in the world, China has only begun to create a modern tea industry. It has a long way to go before local tea companies reach the economies of scale and branding expertise needed to capture the full value of their product.

In the meantime, the big revenues will be scooped up by strong foreign brands selling convenience and lifestyle. Anyone for a cup of Yellow Label?  "

My thoughts on this article are the government of China did not place tea export / production on top of their economic agenda in the past 40 years and correctly focussed its effort to transform China into a modern economic superpower.  I would like to point out that during the past 40 years , there was no major economic issues with chinese tea; in that there were no major excessive production of tea or drastic fluctuations in tea prices.  In fact, I felt that the demand for Chinese tea had risen through local and high foreign demand and prices are rising steadily.  Even Lipton is carrying a range of Chinese tea from pu erh , jasmine and Tie Guan Yin.  My solution -  The Chinese authorities can easily boost the Chinese tea market by acquiring these foreign tea brands.  This not only gives a greater market share of the tea market and it also allows easy immediate access to the tea drinker distribution network in Europe and Americas.  I believe that such a theoretical acquisition (makes a lot of economic sense actually) would work out well for the chinese tea market as the acquired tea farms, technology and research, and infrastructure (India, Sri Lanka and Africa), from this purchase, will solve most of the "chinese tea" problems listed by the author in the above article.  

Storm in a teacup? Tempest in a teapot?  Think about it when you sipped your chinese tea.

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