Business Times

Protecting the Ceylon Tea brand

Part I: Open imports vs restricted imports
By Natasha Gunaratne & Bandula Sirimanna

A crisis is brewing in the Ceylon Tea industry over calls for a tea ‘hub’ by some traders who are also appealing for laws to be changed, allowing all tea imports to be permitted in Sri Lanka to package multi-origin teas. Long standing tea producers and exporters say that if free imports of all tea are allowed, a change from the current law which only allows importing specialist tea such as green tea, it will signal the end of the premium Ceylon Tea brand and lead to a socio-economic disaster for the two million Sri Lankans who are directly or indirectly employed in the industry.

Tea Hub

Calls for a tea hub by traders are always connected to tea prices, one industry expert explained. Whenever tea prices go up for an extended period of time, traders talk about consumer demand for multi-origin teas. Ceylon Tea, being world famous and of the best quality, fetches around US$1 more at auctions in comparison to other origin teas. Sri Lanka doesn’t have control of marketing Ceylon Tea so it is at the mercy of major tea brands. Tea industry brands are more concentrated than perhaps any other industry with only 2 or 3 multinational brands that call the shots.

The expert explained that foreign brands build consumer loyalty on Ceylon Tea’s prestige and then moved to other origins, be it Vietnam, Kenya, China or India. Often, Sri Lankan exporters expedite the process by contract packing and helping fledgling foreign brands that become big competitors.

Multinational brands that were once pure Ceylon Tea have moved to other origins purely to lower costs to compete in the supermarket and shareholder era even thought consumer preference is for pure Ceylon Tea.

The hub lobby says exports can grow if there are free imports but the industry expert says that foreign brands will not come to Sri Lanka because they use little or no Ceylon Tea. Packaging is highly automated and they need to be situated in close proximity to consumer markets due to shorter supply chains and ‘just in time’ deliveries.

There have also been statements that Sri Lanka’s exports are diminishing and that volumes need to grow (through the hub concept). However, marketers do agree that size is not everything. A specialist or niche strategy is needed by Ceylon Tea because as a premium product, it should not be sold as a commodity. Fundamentally, the expert said the hub lobby comes from Sri Lankan contract packers under pressure from their principals threatening to move to other origins and Sri Lankan ‘trading’ brands who sell on price.

The expert said not all packaged tea or teabags are value added. Private labels should be discouraged as it is a temporary product with limited value addition that may cause medium to long term damage by creating competitors for Ceylon Tea as in the case with Russia.

He said Sri Lankan brands should be discouraged from price focused marketing. With a high cost and high quality tea growing industry, marketing has to naturally be on a premium platform. Ceylon Tea consistently fetches the highest prices at auctions and marketing has to adapt and take advantage of this. Any attempt to control imports would be futile as even current regulations are not being adhered to.

Impact on producers

Most critically, he said the impact on Ceylon Tea producers are not even been considered. Any drop in demand for Ceylon Tea at auctions due to switching to foreign teas, will naturally result in significant price drops. This will also shift the focus o Ceylon Tea producers from quality to cost.

Approximately 10% of the population is dependent on growing tea for their livelihood and any measure that reduces that demand for Ceylon Tea will have a severe impact on tea producers who operate on high cost, low margin structure and play a key socio-economic role.

The expert says relaxing the importation of tea is guaranteed to reduce demand for Ceylon Tea and drop prices. The negative impact of high Ceylon Tea prices on traders would be dwarfed by the impact of less demand and price drops on the two million people dependent on tea growing, plantations companies and small holders.

(Next week, the Business Times will be reporting more views from the industry - exporters/packers and some who import a few categories of tea for blending-, while looking at the pros and cons of permitting an open import policy on tea).

Russian example of multi-origin teas

The Sri Lanka private label/foreign brand packing industry have helped create major foreign brands from scratch. Due to the lack of the development of Sri Lankan-owned brands and packer preference to take the easier private label route, foreign brands have become the mainstays for many companies. Foreign brands have no allegiance to Ceylon Tea and always look to bring their costs down. Any benefit from private label packing is in the short to medium term. In the long term, private labels damage the interest of Ceylon Teas as the Russian example points out.

In Russia, brands such as Orimi and May were fostered in Sri Lanka using pure Ceylon Tea and low cost packing facilities, eventually relocating to pack in the consuming market and changing the origin of their blends.

In 1989, factories in Russia that were packaging tea shut down and Russia imported packaged tea from Sri Lanka. By the end of 2000, around 60 million kg of the 300 million kg of tea Sri Lanka produces a year was being exported to Russia in packaged form.

During that time, other private label brands were also created that wanted multi-origin tea to be packed in Russia itself. The Russian brands created in Sri Lanka then successfully lobbied the Russian government to impose a 20% import duty on teas packe in Sri Lanka as an anti competitive measure against Sri Lankan brands. There are no import duties on loose tea.

Tea Board

Director of Promotion at the Sri Lanka Tea Board (SLTB) Hasitha De Alwis told the Business Times that he does not want to comment on the import issue at the moment since the SLTB has convened a committee to look into the matter. The committee has had its first meeting. He added that an independent body, MTI Consulting is also preparing a global promotional plan which will also address the import issue.

Mr. De Alwis said the Mahinda Chintanaya II talks about the tea hub concept in its agenda so there is also a government policy plan. He said the tea industry will have to communicate with the government on a plan of action. Planters’ Association says...

Sri Lanka should not import unconditional and open ended tea under the guise of liberalization of tea imports as it will bring drastic consequences to the industry in the long run, Chairman of the Planters Association of Ceylon G.D.V. Perera told the Business Times. He noted that imports of tea in small quantities without chemicals and on conditions for blending and re-export could help improve value –addition. But a high percentage of Sri Lankan tea should be blended with imported tea, he said. Ceylon Tea has been recognized as the cleanest tea in the world in terms of pesticide residues. He pointed out that that exporters should understand the concerns of producers and the ill effects of large scale tea imports without any conditions.

‘We must have guidelines to protect the industry as Ceylon Tea is the only commodity in which Sri Lanka has managed to earn a brand name internationally,” he said. Several exporters have managed to set up their own brands which compete against international brands of multinationals. “More stringent checks on imported teas are essential and we should not completely discourage the servicing of multi-origin blends with a high percentage of Sri Lankan tea,” he added. Mr Perera pointed out that the commitment of all stakeholders in the industry has helped Sri Lanka to sustain its leadership in the world orthodox tea market and also in the value added tea export sector. This commitment should be continued, he added.

Over the years Sri Lanka has earned a reputation as a producer of high quality tea and Ceylon Tea is synonymous with quality and taste. Sri Lanka exports almost 90% of its production and has been able to maintain her global exports share at 20-21%. “We should maintain this position in the future as well,” Mr. Perera said.

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