Quality woes plague tea

Despite being one of the largest producers of tea in the world, Indian tea is losing its markets abroad and its production stagnating over the years, primarily due to decline in productivity and quality.

In order to improve realisations as well as achieve volume growth, the tea industry needs to adopt a two-pronged strategy "� undertaking the varietal upgradation and quality improvement on one hand, and match it with increased operational efficiency through reduced cost of production, says a joint study done by Yes Bank and Indian Tea Association (ITA).

The study says that brand building effort will enable specific tea brands to enhance penetration in markets across India, Pakistan and Bangladesh and grow market share in the UK, Canada, India and Bangladesh.

The shift in focus to provide specialty tea offerings, green tea variants and acquire capability to do so through organic and inorganic growth routes will "catapult tea market in the days to come".

Producers should focus, as a strategic decision, says the study, on the beverage and branded business of tea. Value added streams of brand and beverage opportunity will be the focus segment in the years to come, it says.

Over the years tea has moved from being a commodity to branded consumer good, however it has still along way to go with only 40 per cent of the tea being sold in India being branded.

The branded tea segment, which is estimated to account for 60 percent of the tea industry, presently consists of few integrated players with national presence and a large number of small players with small or non existent brands in the domestic market.

There is requirement for schemes, similar to the Special Purpose Tea Fund (SPTF), for developing of Indian tea brands and creating consumer awareness, in addition to developing infrastructure and research and development activities.

Another noticeable trend in production, found the study, has been the shift in pattern from orthodox to CTC. In the 1960s, India was predominantly an orthodox tea producing country, with the orthodox variety accounting for 57 per cent of total tea production.

However, over the past few decades, most tea producers have shifted to CTC tea manufacturing. This was because domestic demand since the mid-70s was essentially for the CTC variety.

Further, export demand from CIS countries (traditionally orthodox consuming nations) after the disintegration of the USSR in 1991 and the economic downturn that followed, was increasingly for the cheaper CTC variety. CTC cultivation was also lucrative as against the orthodox method of production since the former method yielded higher cuppage.

While orthodox production declined at a Compound Annual Growth Rate (CAGR) of 2.3 per cent between 1990 and 2003, the production of green teas decreased at a CAGR of 4.2 per cent between 1990 and 2002.

This shift to CTC cultivation, though lowered the production cost, had a negative impact on exports, especially when Russia, India's largest export destination, slowly began reverting to the orthodox variety after an economic recovery, found the study.

Further, as black tea consumption in western markets is fast declining, Indian tea is left with the challenge of developing markets for specialty and green tea.

The study says that players have to energise innovation and enhance the pace of new consumer offerings to overcome the lack of growth of the ambient black tea category in certain markets.

The study also found that while tea is considered as an essential drink in India, people are not ready to pay a premium for tea. Further, the rapid spread of chained coffee shops has helped coffee to gain popularity even in the non-traditional coffee drinking regions of the country.

These coffee shops are slowly becoming attractive option for youth to hangout at. Consequently, tea is increasingly regarded as a family drink while coffee is increasingly viewed as more a social drink to drink with friends at coffee shops.

As the level of standard tea consumption in urban pockets is already high, the only way forward for manufacturers, says the study, would be to move these urban consumers up the value chain. Green tea as well as fruit/herbal tea could appeal to these population groups, who have expanded disposable incomes as well as the desire to spend more on lifestyle products. Green tea is well known for its health benefits.

With an explosion of green tea extracts in food, drinks and cosmetics and toiletries in the Asia Pacific region, it will surely only be a matter of time before demand for green tea grows in India, it said.

The study also found that due to a consistent increase in domestic consumption, irrespective of change in production, there has been a decline in exportable surplus since 2000.

This has resulted in prices firming up by 6-8 per cent in 2007 and is expected to be up by another 5-6 per cent in 2008. Indian auction prices during the first 5 months of 2007 were up by about 6 per cent over prices prevailing in the corresponding period of 2006.

The study further projects that by the end of 2010; tea production is expected to cross 240,000 tones in volume, translating into constant value sales of over Rs. 39 billion. Off-trade volume and constant value CAGR are predicted to remain slow in the forecast period at around 3 per cent each.