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Why
Are Wholesale Tea Prices
So Low?

BY RANDY ALTMAN

The most frequently asked question in the tea business is “why the low wholesale price?” There are many opinions, almost as many opinions as tea traders. The worst hit major growing region is probably South India. In every region, the debate is framed in terms of supply and demand. Randy Altman focuses on the demand side of the equation, with a subsequent article covering the supply side, titled “Global Glut Ahead.”

Demand for tea is flexible, which is both good news and bad news. Recently a cereal company announced, for the first time, fortifying with green tea extract (for health). Cereal is a new use for tea, in a channel perfectly suited for family daily consumption. And, pushing demand, Lipton again spends millions on its “Brisk” brand Ready-to-Drink, including advertising at television sports’ events. At the super premium end, a small category of tea, white tea, is expanding. White tea is now listed in more catalogues than ever before.

Yet, prices in general are low at the wholesale level, and negative factors affecting demand are at work, fighting the positive factors that push demand for tea. Three big “push” factors are: continuing research findings of tea’s healthfulness, advertising budget upcreep, and the expanding demographic segment termed “baby boomers.” One less obvious factor that can push demand is the plan to create an international body to promote producing nations’ interests.

A director at one national Tea Board, calls the potential international body a “forum.” Paradoxically, any such forum would almost certainly be powerless regarding the supply issue, as nations will not be held legally liable for amount of growth, and nations will grow whatever their determination of self-interest. Such a forum, however, can have real power promoting the demand for tea. While the originators of the idea for a new international forum started by planning future supply control (and reduction), the forum becomes a reasonable idea because of the other side of the business equation.

To begin to decipher the low price, measuring demand comes first. I can attest, after five graduate courses in statistics, that consumption data is only slightly more accurate than production data, with layers of unreliability. This is not the venue for mathematical-statistical analysis, but we all agree that increasing demand is good. Even holding demand constant, the price should still be higher factoring for inflation, except that the wholesale buyers can get away with offering low prices. The typical response by producers is to overly focus on manipulating the supply factor, usually by a “hold back” of stock, requiring storage in a (humid) warehouse.

This “carry forward” of tea into the next year involves storage cost, inventory control issues, and aging of the product, which are all quite opposite of the goal to increase demand by selling tea that is fresh and “value added.” The small South India tea farmer is unlikely to grow quality tea and, not coincidentally, is suffering severely. North India, while in real pain, is doing better, and tends to have consciousness of quality control. The typical Southern small farmer requires both government assistance and improved quality.

However, merely improving quality of tea is insufficient. The best evidence is the suffering within Darjeeling, where quality is usually good to excellent. Low wholesale price for prestige estate tea involves most of the same factors for low price for mass-produced “bulk” tea. Labor costs, compared to U.S. business practice, reflect intolerably rigid employment policy, resulting in reduced budget for needed advertising.

While wages and benefits have risen greatly compared to price paid to growers, this is just one labor-cost variable. The main obstacle is inability to lay-off unproductive workers. Producers require more flexibility with workforce, or no worker on the farm will get paid after business failure.

Yes, we are still discussing demand manipulation, because the producers have little budget for advertising, instead paying idle workers, plus counterproductive taxes and statutory fees. Progress is possible. Sri Lanka is currently planning streamlining at Tea Board, with some degree of privatization. All Tea Boards’ limits to pushing demand frustrate producers. The hard-working bureaucrats earn their pay while the slothful eat up money needed by the growers.

Growers’ finances are worsened by many unnecessary costs, sapping the ability to generate brand awareness. Even Darjeeling tea is sometimes seen as fungible (a technical term meaning easily replaceable because the items are indistinguishable). Buyers of Darjeeling too often do not care which estate they list in their catalogue. That is, too many retail outfits desire only the name “Darjeeling” and will list any estates up to the number of producers sought, without much concern for which particular estates they buy from. This lowers demand and price.

Paradoxically, tax deductions for promotional activity to push branding (and therefore demand) of tea is of minor help. Even Darjeeling owners often show no profit, hence pay little or no tax on income. Excise taxes must end, a politically difficult accomplishment, but more likely to occur if regional bodies lobby. Interest-free loans are needed. Domestic consumption sales taxes should be lowered for this “essential commodity.”

However, let’s not just blame government bureaucracy, taxes and cheapskate buyers. The growers themselves can lack sophistication. One reason wholesale prices are low is producers’ typical sample policy. Distributing samples is an under-recognized problem that is worsening as the auction system (itself a wholesale price factor) undergoes more change. Tea companies remain slow to use modern methods of sample distribution and presentation.

Samples represent an opportunity for branding and image building, but routinely appear in plain plastic containers, blank folded foil, blank pouches, or other bland, unbranded object. This saves a little money as the sample is sent to potential buyer, but such old-fashioned method loses an opportunity to impress branding on clients. Many sample packets have not changed in decades, some are messy to open, and others too hard to open, sealed with wrong type of tape. This problem goes to the days when the only concern was that the product gets to recipient, a time when staffs were larger, including more assistants to open, clean up and arrange samples.

Today, the extra expense of labeling a sample pouch with brand name is cost-effective, compared to flying out a sales/marketing executive to win a client with an expensive dinner. Producers are now reducing client-hopping travel. For the cost of flying out one executive making the round of potential clients, hundreds and hundreds of additional attractive samples can be mailed. Like auctions, distributing samples is an old system, but samples are less under review for progress.

Sample distribution is a typical case of an old tea practice that somehow avoids examination for modernization. Those companies upgrading sample packets should select attractive containers that show brand name. The topic of samples is surprisingly complex, especially when premium tea is involved. Specialty tea outlets are often small businesses, perhaps only three or four full-time employees, mailing out samples directly to moderate-volume buyers, such as restaurants or executive suites. The elite small tea venues usually rely on internet and catalogue sales, and attract loyal individual customers by sending samples. Many of these tea businesses now charge a nominal fee for samples, such as a few dollars.

Samples are essential to selling tea at higher prices. Like the more-often-discussed auction system, samples can be a controversial method to promote tea. Distribution of samples is rarely monitored, both internationally and within nations, although when samples are part of an auction, a layer of oversight is assumed in the form of the brokerage. I am receiving more frequent evidence of sampling corruption, hurting prices in the long-term. A classic example of misuse is a sample sent to a recipient that results in a “buy” order, but then the shipped product is of lower quality than the sample. Basically, this is one of the world’s oldest trading deceptions, the “bait-and-switch.”

This increasing problem reduces demand, as buyers lose interest, especially premium outfits that also sell coffee and can easily shift away from tea. Producers complain to me that improper sampling practice might give a competitor a short-term, even long-term, advantage. As the auction system continues to undergo worldwide change, samples become the bond that holds together the tea trade. In this era of export globalization, telecommunication such as emails, faxes and cell-phones simply do not provide a potential buyer with evidence of the product under consideration for purchase.

Misleading samples fall into two categories. Mass-produced bulk tea, for example, is sent as relatively fresh sample, but the shipped product is “carry forward” tea stored from the previous year. The second category occurs more with specialty estates, when the sample is higher grade than shipped product. In this second scenario, the age of the sample and the sold tea are the same (at least the same season), but the actual shipment is a lower grade.

I have heard from buyers who refused shipment, sending the tea back to producer. This is a legal right, but often the buyers keep the worse tea even if they realize the product is worse, because they need the tea at time of delivery, such as to meet deadlines in packaging, distribution or marketing. Wholesalers, to cut costs, less often fly out (or contract out) tea buyer-tasters, thus more likely than ever to make decisions based on mailed samples. Wholesalers have also laid off employees, with remaining staff generally overworked, less experienced and less loyal.

Even recently, I have encountered samples identically labeled from single estate in Darjeeling, but of clearly different quality category. This inconsistency is more a problem than one might assume. Some premium buyers have just started their business, and the seller can take advantage. Such new enterprises are exactly what the trade needs, as additional venues for retail are thus created. The new buyer may know nothing about tea grading. This situation occurs rather frequently, especially in the US.

One complicating factor is that any plan to increase the demand for tea should not focus solely on consumers. Goals must move beyond just getting more people to drink more tea. Yes, increasing consumption remains an essential component to wholesale price improvement, but everyone already knows this. In terms of market components under producers’ influence, consumer demand is obvious, such as pushing the “health” attribute. But under-discussed is increasing the number of venues and wholesale buyers at the intermediate business size.

One newer method to push demand is the promotional tie-in, especially with charitable organizations, which usually are not large, but locally respected. However, to benefit from such an association, the tea must be branded and protected by trademark/copyright. Charitable events are becoming new venues for value-added teas, and inherently attract an affluent audience with discretionary income. Elite packages of tea are provided by the company at cost or below cost. This product-placement is demographically precise and timely. Now, after 9/11, the public is especially receptive to displays of charity. Coffee, and particularly colas, is less suited for charity tie-in marketing, giving tea a further edge in the beverage competition.

A host of additional factors affect demand, such as diversification of tea types. Good news is that Sri Lanka and India are apparently willing to institute new mechanisms that are global market oriented. Sri Lanka seems most willing to undergo serious change, from dollarization of auction to reconstruction of Tea Board to creation of a potentially feasible Futures Exchange.

The next step is a clearer realization of the priority to allocate money to push demand, from training smallholders in quality control to increasing advertising budgets. The changes within some nations are positive in their long-term strategizing. Additional money may be coming from these changes and from “trickle down” consequences of the War on Terrorism. Nobody predicted the current global condition. Is it now possible to predict a rise in tea prices?

Randy Altman has advised the United Nations and other transnational organizations, and has held directorships and officerships at various non-profit corporations. He also holds several adjunct academic appointments.



Tea & Coffee - July/August, 2002
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