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Theta Ridge Coffee

Murky Waters Ahead: Troubling Future for Medium-Sized Tea

By Randy Altman

For middle-size tea companies,future means merger mania…Those medium-sized tea companies that now fail to earn profit are heading for extinction or forced buyouts in the next few years. Companies of intermediate size that lack financial cushioning, modern technology and quick-thinking management will probably fail….Tea companies sized between small and large can survive, but only the best and brightest will win.

Tea companies’ business strategies vary extensively depending on the size of the company. Small tea companies generally prosper as family-owned and operated businesses. Company founders often report working seventy hours a week during the beginning years, while plowing income back into debt service and company expansion. These entrepreneurs willingly sacrifice for the rare privilege of creating and then controlling one’s own business. Large tea companies use a very different reward mechanism to attract executives and professionals, who expect high salaries and expensive benefits starting the first day on the job. However, medium-sized tea companies are now in a squeeze, less able to attract and retain talented, experienced staff.

Medium-sized tea enterprises, while operationally too extensive for a founding family to manage alone, are still too small to afford elaborate benefits packages to all professional staff members. Middle-range tea companies frequently delegate major responsibility to recently hired young people with little or no experience in the tea trade. Professionals with more experience can command better compensation than what middle-range companies will pay. If the less-experienced individuals are talented and ambitious, they will likely jump ship when a job offer with better benefits materializes, causing excessive turn-over rates. With no ability to offer either ownership autonomy nor guaranteed high benefits, middle-size tea companies hemorrhage staffers, impairing client relationships and long-term planning. Yet, the individualized, old-fashioned attention the medium-sized company affords the client in every business transaction is a precious asset to the international tea trade. Their survival then is vital to improving industry flexibility during rapidly changing market conditions.

The full-time staff of Harney & Sons: A typical medium-sized tea company.
Harney & Sons, incorporated in 1983, is a family-run tea business with a successful track record of rapid expansion. In this year 2000, for the first time, Harney reports attaining the five- million-dollar revenue landmark, an accomplishment of steady growth. Harney & Sons is expanding into the medium-sized business structure, and is correspondingly increasing the benefits package for staff. Compensation packages maximize retention of the best workers, reducing their incentive to seek better rewards elsewhere. Harney & Sons expects continued success, and is expanding rented space into a second state, spreading this year from Connecticut across the state line into New York, for a total of approximately 19,000 sq. ft.

As a tea business expands into medium size, it usually begins looking nationwide for top talent, beyond any local labor pool. Ultimately, to retain a sophisticated, expert staff for their entire career, a tea business should consider profit-sharing incentives, an expensive compensation in any nation. The dreadful alternative for medium-sized tea companies is self-perpetuating employee attrition, with each new recruit joining a company with few mentors because of the paucity of veteran staff. This predicament further pushes the best-talented to leave quickly, looking for long-term stability for their own careers. The excessive turn-over rate for trained college- educated tea staff is now a severe problem in the United States, and this situation is worsening.

Medium-sized companies, caught in a bind of rising expenses, are especially sensitive to regional operating cost differences, and thus often locate in areas of low tax and labor costs. For example, Harney & Sons, even while expanding, employs staff solely in rural areas: northwest Connecticut and the nearby northeast tip of Dutchess County, New York. Other companies select the South or the Midwest, seeking a combination of high labor force education and moderate cost-of-living. Oklahoma City is about as middle-America as you can get, both geographically and culturally, and is the location for Neighbors Coffee, Tea & Cocoa. Steve Neighbors, founder and President, had no need for public relations experts to suggest a company name; Neighbors Coffee Tea & Cocoa, operates from the nation’s heartland with a ready-made wholesome, friendly, reliable image.

Neighbors is expanding with a dedicated focus on a small number of trademarked lines. This focused strategy avoids over- saturating the market with too many brands that confuse consumer consciousness, an error particularly damaging to medium-sized business. Neighbors Coffee, Tea & Cocoa owns the brand Neighbors Quality House and operates publicly through its subsidiary Executive Coffee Service, Inc. Neighbors tea includes loose leaf and bagged, marketed with new cardboard retail packaging and advanced economy-of-scale manufacturing features. Neighbors packages its own tea in Oklahoma, a state not widely known for tea activity, but soon to earn more recognition. Most of Neighbors tea is sold for consumption as iced.

On the other side of the world, medium-sized tea companies are strengthened by starting the business as a component of a larger, diversified corporation. This type of corporate alliance is far different from merging an established tea business into a larger beverage entity, such as Starbucks swallowing Tazo. In Sri Lanka, Nihal Brothers Group, an import-oriented diversified mega-business, supports its young subsidiary, Nihal Exports Pvt. Ltd. The Nihal Group is a powerful Sri Lankan import conglomerate, specializing in food, with tea export a new, apparently synergistic, strategy. Nihal Exports Pvt. Ltd. (NEPL) is approaching its third birthday, guided by managing director Gamini Jayaweera’s 23 years of tea management experience, which ranges from plantation field work to international marketing of value-added product.

NEPL’s trademarked packaged tea line, Bai Hou, is 100% Ceylon (Bai Hou is Chinese for “tea bud tip”). NEPL’s basic statistics display a large corporate parent’s headstart to the birth of a medium-sized tea business: 42 full-time permanent workers with approximately 100,000 sq. ft. of building space. Last year, their first in operation, exports reached 1,269 metric tons of value-added tea. NEPL already owns a tea packing/bagging factory. In a fine example of export globalization, this young company also imports tea for blending with domestic product, aiming for the re-export market, probably the highest profit-margin segment in the current global bulk tea trade.

Jayaweera of Nihal was formerly c.e.o. of BPL Teas Ltd, owned by Bogawantalawa Plantations Ltd, one of Sri Lanka’s largest multi- crop landholders. Jayantha Ratwatte serves as senior vice president - marketing and director of BPL Teas Ltd, with V.S.B. Liyanage as chief operations officer. Michael Haglind, based in Sweden, is managing director of BPL and also sits on Bogawantalawa’s Board, where he allocates his primary attention to the tea component of the holding company. Another director of Bogawantalawa, S.K. Abeyqoonewardena, pioneered mechanized processing of high- elevation tea. This mechanization was controversial at the time, but is now proven successful for the sub-sector of the private label business that seeks consistent high quality in bulk volume, especially for teabags. Bogawantalawa is also tackling three serious shortages impairing agri-business development throughout Asia and Africa: energy (for factories), fuel (for employee homes) and timber (for sustainable development), with new hydroelectric and replanting projects.

Sri Lanka maintains the most complex system of holding companies, interlocking directorates and public-sector/private-sector hybrids, making a detailed analysis of size categorization beyond the scope of this article. Whatever a company’s size, competition requires speedy response to changing market conditions. HVA Lanka is a good example of the ability of even big companies to move swiftly and take risks to strategically anticipate modern business challenges. HVA Lanka is oriented to real-time global telecommunications and branding, under chairman and managing director Rohan Fernando. HVA exported almost 5,533 tons last year, a real heavy-weight producer of “foreign” currency inflow for Sri Lanka’s economy, which is hobbled by massive currency outflow for munitions to fight the intense civil war with heavily armed well-entrenched extremist separatists. HVA both buys and sells wholesale, thus avoiding the vagaries of plantation ownership while improving economy-of-scale.

Another type of export-oriented corporate structure owns both elite plantations and the prestigious brand-name product yielded by that same land. The world’s most distinguished tea region, Darjeeling, routinely brands by the name of the producing estate, with many estates owned by small-to-medium companies. Darjeeling has its own hidden complexity with the many “export houses” incorporated to market the specific (and prestigious) estates controlled by the house’s owner. This dual corporate structure is common in India’s export segment, allowing for tax, regulatory, currency sheltering and state-versus-federal advantages. The actual size of Asian corporations is commonly non-transparent, or opaque, to use polite technical finance terms.

Medium-sized companies now rely on the sales of value-added products like these cleverly designed tea strainers.
If a tea company does own land, intangible non-financial factors are automatically added to any calculation of the total influence of the company, with the physical size of land merely one factor. The more prestigious plots are rarely even called plantations, the universally standard internal business term for land under tea cultivation. By using the term estate tea instead, there is a boost in value-addition in the marketplace via brand identity. Branded estates with high-quality, carefully cultivated tea can be very large in size, but this so far remains a rare accomplishment, an all-too- infrequent marriage of genuine premium quality with economy-of- scale production.

Bombay Burmah Trading Company’s (BBTC) Oothu estate shows the benefits of large size in elite tea production, a market segment where medium-sized estates are more numerous. Oothu is a brand as well as a huge high-quality estate, under the jurisdiction of Dinshah J. Daruvala, recently promoted to vice president at BBTC-the more typically sized small-to-medium premium estates struggle to attain even basic, elementary economy-of-scale. Any size considered not large militates against cost-effectiveness in the modern era of export globalization, in which all companies must operate. However, the smaller estates do utilize one non-Western business strategy to gain strength: alliance based on family ties.

These small and medium estates’ alliances are often informal, but effective in attaining economy-of-scale distribution and in developing long-term marketing strategies. A classic example is Goomtee, a superpremium estate in Darjeeling, which produces some of the world’s quantifiably most precisely labor-intensive, meticulously hand-plucked harvest. Goomtee is a paradox of physical size, much smaller in acreage than most Darjeeling estates. Goomtee’s diminutiveness is moderated by managing partner Ashok Kumar’s family ties, such as a sister married into the family that owns the adjacent high-prestige estate, Jungpana.

Kumar is also president of the export house Marco Polo that at times co-distributes the neighboring Jungpana estate tea, an economy-of-scale advantage. Plus, the Ghillidary estate in Assam is owned by Kumar’s sister’s nephew by marriage. In the Western business mode, this distant relation is virtually meaningless. However, in the Asian family-oriented business system, such a connection can represent a business alliance.

Throughout the globe, when small tea companies expand in size because of revenue growth, stress ensues with the transition to medium-size level. The conflict occurs between the image of a family-run small outfit that provides individual attention to every sale, and the image of the new larger size, where the family-in- charge cannot possibly know every customer. Thus, a marketing challenge born of success results: many small tea companies grow into medium-sized entities, while the owners prefer retaining the previous image of a devoted “family” business.

Serendipitea, a well-capitalized specialty company in Connecticut, handles this challenge of expansion by keeping the image of a family-run business, providing individual attention for every retail sale. Serendipitea is now considering pension and other benefits for its employees, a structural change indicative of medium- size attainment. Historically, Serendipitea’s workers were hired under the designation “independent contractor,” which is a common tactic in contemporary corporate America to legally bypass paying benefits, even social security.

Serendipitea genuinely confers individual attention to customers. Tomislav Podreka, co-owner and prominent charismatic tea personality, has clear market advice for companies whose public image involves a specific size. Podreka recommends these companies think carefully about “growing out of what you are known for.” By this reasoning, a small company that advances to medium size should consider retaining the original public identity, consistently presenting the image of “small.”

Those medium-sized tea companies that now fail to earn profit are heading for extinction or forced buyouts in the next few years. With profit margins low industry-wide, outdated business practice needs immediate improvement, especially telecommunications and branding. The trend toward mergers will continue, with highly diversified corporations marrying tea companies. Medium-sized tea companies make good mates for diversified consumer products corporation As the market gets tougher in the new globalized era, family-run companies face severe pressure to expand into the next higher size category, or fail to meet optimal demand for their product. The harsh dilemma to tea companies is “expand or die.” Paradoxically, success as a small tea business presents a crisis for founders, who now must change their corporate structure or perish in the marketplace’s tighter margins and rising costs.

Flexibility for response to rising (or falling) demand is usually met by expansion (or contraction) of staff, except with family owner- operators, who willingly volunteer to work longer or shorter days, as needed. A small tea company’s non-family employees are usually workers paid hourly, whether part-time or full-time. This type of hourly workforce is the easiest to rapidly subtract or add to company staff. Large corporations have a very different workforce, and, with globalization, the ability to shift operations among nations. Big tea companies enjoy a ready pool of good applicants in any location simply by offering comprehensive benefits packages to all professional staff.

Medium-sized companies are increasingly sandwiched between the small outfits and the large companies. In the tea trade, executives rarely refer to their business as “medium.” Successful middle-sized tea companies certainly exist, but the image publicly promoted is often that of a “small business.” The image is intentionally maintained as a small family business, while the size is actually larger. A new survival skill for tea executives is sophisticated knowledge of merger negotiations. For middle-size tea companies, future means merger mania.

As always, the focus must remain on the consumer forming an emotional bond with the product. Tea’s future is the global middle class, more residentially mobile and busier than ever, but possessing most of the world’s discretionary purchasing power. Taking the broadest perspective that encompasses all tea demographics, seemingly nowhere in the marketplace is “mediumness” a selling point.

Executives leading middle-size businesses will face major challenges, but the smart strategist with dependable access to capital does enjoy some exciting options, whether merging on favorable terms or continuing self-standing enterprise. Companies of intermediate size that lack financial cushioning, modern technology and quick-thinking management will probably fail. Medium-size existence does not always cause a problem, but offers few inherent advantages. In the globalized economy, a business without an advantage is a business in trouble. Tea companies sized between small and large can survive, but only the best and brightest will win.

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


Tea & Coffee - October/November 2000
Tecpacking

ASIC 2014


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