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Theta Ridge Coffee

The State of
the Tea Industry

(continued)

Predictions for Industry Growth
Any analysis of an industry needs to first consider supply of the raw material. Those industries that are dependent upon only a limited number of sources for their raw material are much more vulnerable to wide fluctuations in price and/or availability of the material. Since tea is commercially (and competitively) grown in over three dozen countries spread across the entire globe, the likelihood of shortages of supply is extremely small.

Despite the great number of counties producing tea, shortages may very well occur relative to specific origins. This could result in increased costs to packers of tea who are dependent upon those origins to maintain their flavor profiles. Shortages of specialty tea, which many experts already consider to be in very limited supply, may also occur. However, it is a very safe assumption that as the market for these high quality teas expands, so will the supply -- as producers switch from growing lower profitability mass market tea to higher profitability specialty tea.

Also, contributing to favorable supply conditions is the fact that, with minor exceptions, there are no import tariffs applied to tea or other regulatory hindrances. This all contributes to our forecast that tea should remain in excellent supply over the next three to five years. Demand should also remain in relative sync with supply. Prices should stabilize for mass market tea but will increase moderately for higher quality specialty tea.

Macro Demands
The tea industry within the U.S. is segmented into four broad categories -- supermarkets, Ready-to-Drink, foodservice, and specialty. While some of the trends affecting consumption cross over segment boundaries, others are segment specific. Included amongst the broad based forces affecting demand are the following:

  • Pursuit of a healthy lifestyle and acknowledgment of a greater responsibility for the quality of one’s own health.
  • Improved knowledge about nutrition and better dissemination of this information to the mass market.
  • Increasing disposition to de-stress and simplify one’s life.
  • Greater reliance on natural homeopathic remedies to prevent disease as opposed to invasive procedures to treat disease.
  • Continuing appeal of natural products.
  • Concern for the environment prompts buying decisions compatible with that concern.
  • Preference for quality products offering true value.
  • Acquisition of affordable luxuries.
  • Desire for products that go beyond satisfying basic needs of satiating hunger and thirst.
  • Increasing sense of adventure and appreciation of foreign customs and cuisine.
  • A return to simple pleasures associated with family and home.
  • A continuing desire for convenience foods and “to go” foods which is specifically driving the market for RTD teas.
The macro-demand forces have been in place for many years and several major ones are responsible for the creation of a gigantic new industry -- healthy foods. This trend, by nature, is long term and will probably accelerate as more knowledge surfaces about the role foods and beverages play in maintaining health. The demand for tea is also expected to be strong over the next decade, driven by ever more compelling evidence concerning its contributions to health.

Micro Demands
In addition to the broad market forces affecting tea, there are also segment specific or micro-forces at play. Unlike the macro forces that were almost universally positive, some of the micro forces point to areas which need to be addressed to ensure optional growth of the category. A review of some of these forces follows by segment:

Supermarkets:

  • Infinite demand for the finite amount of space causing supermarket management to assess the contribution of every product category.
  • Supermarkets’ long-term share decline to other types of outlets such as wholesale clubs, mass merchandisers, drug stores, and the internet.
  • Increasing appeal of smaller-sized, higher-retail valued packages of high turnover products.
  • Blurring of brand identities caused by an increasing number of branded and generic tea products.
  • Relatively slow consumption rate, particularly with large-sized packages that take consumers out of the market place for long periods of time. This factor combines with frequent price promotions that encourage multiple package purchases and exasperates a packer’s ability to register a clear brand message.
  • Heavy reliance on trade rather than on consumer marketing.
  • Increased consumer demand stemming from heightened awareness of possible health benefits.
  • Concern of cannibalization as new package formats displace sales of traditional formats.
Ready-to-Drink
  • Demand for convenience will continue to drive the market for RTD teas.
  • Relative ease of entering this market and success of other start-up companies such as Snapple, Arizona, Lipton, and Mystic will continue to attract other companies and contribute to continued growth of the segment.
  • Compatibility of tea with a great many flavors and spices will trigger many new entries including the development of sub-categories such as chai.
  • RTD tea represents only a tiny percentage of overall consumer consumption of beverages, especially soft drinks with which the category is most closely compared. With increased marketing effort, RTD tea is likely to pick up significant share from soft drinks consumers, particularly with that segment concerned with health issues.
  • As the market for foods consumed away from home continues to grow, RTD tea will continue to benefit from this trend.
  • While the entire RTD tea category is still in its infancy, there is much room for growth for higher quality specialty brands as opposed to value based products. Evidence for this assumption is seen in the premium prices that consumers are willing to spend on branded water products. Of course, this necessitates that the branded products are supported by consumer marketing activities.
Foodservice
  • Consumers are eating more meals away from home because many of them feel that they have less time available in which to cook.
  • When consumers eat out, they bring with them a concern for nutrition that bodes well for the tea industry - in both fast food establishments and white table cloth restaurants.
  • The number of restaurants serving gourmet or specialty tea has been increasing for a number of years and will increase further as consumers’ awareness of specialty tea increases.
  • The number of coffee houses also serving gourmet or specialty tea has been increasing steadily.
  • Interest in stand-alone tea salons has been increasing rapidly over the last few years.
  • Hotels serving afternoon tea are now commonly found in most major metropolitan areas.
  • Tea has always been one of the most profitable food or beverage items available to foodservice operators and, as consumer demand goes up, there will be a corresponding increase in operator demand for tea and ways in which to merchandise tea.
  • An increasing number of operators are moving to develop signature teas as a means to increase profitability and gain a competitive advantage. It is likely that this trend will increase, driven by aggressive vendors and consumer appeal.
Specialty Teas
  • There has been a tremendous upsurge in interest on the part of operators, hoteliers, entrepreneurs, and consumers for specialty tea. This interest is strongest in the Pacific Northwest, but there is much evidence that it is spreading to the rest of the U.S. as well.
  • The trend to specialty tea is following on the curtails of a similar expansion in the coffee industry. Today, specialty coffee accounts for a third of total coffee sales and an even larger percentage of the profits.
  • Consumer awareness of specialty tea is receiving a big boost from the exposure it is getting in coffee houses as well as free standing tea salons, retailers, and catalog distributors.
  • Several other categories provide evidence that specialty tea will continue to grow to become a much more important segment than it currently is. In addition to coffee, there is bottled water, premium fruit juice blends, imported beers, and micro-brewery beers and ciders. Other examples are found in the foods segment and include premium imported vinegar and olive oils, ice creams, and even fine cigars.
  • The move to specialty tea is triggered in part by the lure of high profits, but is also in response to perceived renewed consumer interest in the entire tea category.
  • Interest in specialty tea will also benefit from renewed marketing support on the part of producing countries interested in increasing the revenues and profits that they derive from this segment.

These predictions appear to paint a rosy picture for the tea industry over the next 5-10 years. The forces in place are time-proven and significant, and should continue to positively affect growth for the future. However, as the saying goes, the only things guaranteed in life are taxes and death. Consequently, nothing should be taken for granted and the tea leaves will miss its boat unless the industry aggressively pursues the growth opportunities before it. On the basis of the growth realized over the last five years, it is safe to predict that the only hot water the tea industry will encounter will be that used to make the world’s favorite brew.

Joseph Simrany has been the president of the U.S. Tea Council for over nine years.


Tea & Coffee - January 2000
Tecpacking

ASIC 2014


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