A cup of woe

This year, tea men will stare gloomily at an estimated 864 million kg bumper crop, 33 million kg more than last year's 826 million kg.

Exports are down, thanks, among other things, to the war in Iraq. So an additional 61 million kg will enter the domestic market.

What is more, the Indian Tea Association (ITA) thinks that tea consumption at home will increase by 1.8 per cent this year, down from the earlier estimate of 3 per cent.

Reflecting this situation, the average price for tea at auctions has dropped during the last four years, so much so that the difference between average auction prices during 1998 to 2002 is Rs 26.79 per kg, with the difference in south Indian tea being as high as Rs 39.48 per kg.

All this, of course raises a fundamental question. Are plantation companies that sell tea at auctions unviable? Will they have to become something like fast moving consumer goods companies, dependent on outsourced raw materials, blending and packaging?

Indeed, the facts suggest that this may well be the case. Companies that sell loose tea at auctions have made lower profits than companies that hawk tea in a packaged form. What is more, tea companies are selling tea at prices that are well below the cost of production. According to Kiran Desai, chairman, Calcutta Tea Traders Association (CTTA), at this time of the year in 1999 the average price at north Indian auctions was Rs 78.13 per kg versus Rs 55.22 per kg now. Typically, the average cost of production is around Rs 65 per kg. The situation in south Indian gardens is even worse.

As a result, tea plantation companies are not exactly flourishing.

To cite but three examples, Eveready, which hawks bulk tea, reported revenues of Rs 297.09 crore in 2002-2003, down from Rs 295.29 crore in 2001-2002. It made a net loss of Rs 6.27 crore last year, versus a net profit of Rs 8.90 crore in 2002-2002. Assambrook reported net sales of Rs 9.5 crore, down from Rs 42.9 crore in the previous year, and a net loss of Rs 1.9 crore, versus a net profit of Rs 1.5 crore in the previous year. Goodricke reported net sales of Rs 164.7 crore in 2002-2003, marginally lower than the Rs 166.5 crore in 2001-2002. But its net profit fell to Rs 50 lakh from Rs 80 lakh the previous year.

So what's the solution? Plantations can, of course shut gardens to cut production. Indeed, more than 20 tea gardens have been locked out or announced suspension of work in north and south India. However, even a lockout does not lead to a drop in output.

Desai says that when gardens close, the workers sell the green leaf to bought leaf factories (around 150 of them have cropped up in north Bengal over the last few years). With few overheads, they sell tea at low prices. This forces prices down further, squeezing gardens that are still being run. G P Goenka, chairman of the Duncan-Goenka group, complains that unless the bought leaf business is controlled, the tea industry's plight won't improve.

Some tea garden owners also want the Centre to ban tea imports for some time. In 2002, 22 million kg of tea was imported, 29.4 per cent more than during the previous year (the ITA, however, predicts that 12 million kg will be imported in 2003). The US did try and protect its industries by controlling impotrs, but can India do this?

The third solution advocated is slashing labour costs. Each tea estate supplies rations to thousands of workers at 1960s prices. Workers have demanded a 20 per cent bonus this year. Tea growers say they paid a 20 per cent bonus when the industry was making profits but can't pay anything today. Inevitably, the West Bengal government has stepped into the labour dispute. Meetings are still on.

Fourthly, tea garden owners want bank finance at sub-prime lending rates. The industry wants money from banks and institutions to tide over the crisis but says the interest is too high. ITA chairman C K Dhanuka, says that interest must be lowered for the industry. Last but not least, domestic demand could be jacked up by promoting tea. S K Dhall, chief executive, plantations, Hindustan Lever, points out that per capita tea consumption in India is 660 gm, versus about 1.25 kg in Pakistan. In some states like Bihar, per capita consumption is just 350 gm.

Faced with all this, more and more tea companies are focusing on branding and retailing, which right now is where the money is. In other words, many have discovered that running an FMCG company is more profitable than running vast plantations.