The Hindu Business Line : ‘Tea industry challenged by supply crisis, climatic hurdles’

The Indian tea industry is going through a phase wherein the production does not seem to be keeping pace with consumption. –Mr M.C. Appaiah, COO, Duncans Tea

D. Murali
S.P. Srinivasarangan

India is one of the largest tea producers in the world, with last year’s production exceeding 900 million kgs. However, this year, the tea industry is going through a supply crisis, especially from the north-east region. There has been a very small carry-forward stock from last year, and the current crop has been delayed due to climatic reasons. Crop from South India, while good, has not able to make good for the shortfall.

Mr M.C. Appaiah, Chief Operating Officer of the Kolkata-based Duncans Tea Ltd, told Business Line in an interview that he expects a big shortfall in the domestic industry, thereby creating pricing pressure in the second half of the year. “The probability of prices softening, if at all it happens, is likely only in October-November, but is not expected to go back to the levels of last year.”

Mr Appaiah is hoping that the string of new initiatives — partnership with Indian Railways and BPCL, increased thrust in the Southern market and a rural expansion — Duncans Tea is taking this year will help the company achieve growth in sales.

Excerpts from the interview:

What are the challenges the industry is facing this year?

The Indian tea industry is going through a phase wherein the production does not seem to be keeping pace with consumption. The very small carry-forward stock from last year resulted in a rush for the teas, at the beginning of the new season, leading to a rise in price by approximately Rs 8 a kg.

Internationally, the crop failure in Kenya and mounting export enquiries put additional pressure on the market, resulting in the prices firming up by another Rs 9 a kg. Thus the total impact on price was about Rs 17 a kg.

A clear challenge for the industry this year is with the availability of tea. With increased export demand, the current crop will be available only till December. Companies will have to stock up teas for January-April 2009. This will put working capital pressure on the packet tea industry.

Increasing procurement prices could impact on revenues/bottom line. What new initiatives are you are taking to keep up the growth momentum this year?

Given the constraints, we are looking at expansion of our distribution base to achieve growth in sales. Our distribution network is strong in ‘B’ and ‘C’ class towns. Our plan is to target select ‘A’ category and emerging markets this year through expanding our direct distribution network and through our associates such as HPCL and BPCL.

In order to overcome the squeeze on margins, we have launched Double Diamond Gold in the super premium leaf tea segment, Kings Cup in super premium dust tea segment and Double Diamond Green Tea (tea bags) in super premium life style/health segment. We expect 10 per cent of our turnover to come from this super premium category during the current year.

What are your expectations from your partnership with Indian Railways and BPCL in the first year?

The initial response has been positive on this front. Serving our tea in the Indian Railways has given the product greater visibility and trials. We are expecting about 10 per cent of our volumes from these businesses.

Are there plans to strengthen your presence in the southern region?

The southern consumers are very brand conscious and prefer super premium teas. The launch, in Tamil Nadu and Andhra Pradesh, of Double Diamond Gold in the leaf category and Kings Cup in the dust category will help us achieve growth in the South.

In Chennai, we have tied up with Leo Coffee to sell Kings Cup. Buoyed by the initial response, we have introduced Double Diamond Gold and Double Diamond Green Tea through their outlets this month. We will also be expanding these operations to Leo Coffee outlets in Tiruchi later this month.

The contribution from the South to our total sales has moved up from 13 per cent to 20 per cent with the launch of these new brands.

What about the rural markets? What is your strategy to tap into this segment?

With increased exposure of the rural market (to media), there has been a shift from loose tea to branded tea. In order to penetrate into this price-conscious market, we have launched AAAG tea in the economy segment. Our tie-up with ITC eChoupal will also help expand our presence in this market. Over the next two years, we expect rural India to contribute around 30 per cent of our turnover.

What about the market for branded tea ‘sachets’? What is your game plan in this segment?

The ‘sachet’ tea industry in India started with 5p/10p sachets and gradually went up stage-wise to 25p, 50p and Re 1. With the consumers now up-grading themselves to Rs 5 and Rs 10 sachets, we have introduced these variants in all our brands to help penetration into the rural markets. Branded sachet market is estimated at 10-12 per cent of the annual packet tea market. Our aim is to increase the penetration and our market share in the rural and semi-urban markets through sachets.

What is the outlook for the tea industry? Do you expect things to look up in the second half of the year?

With export demand for Indian teas increasing, a larger percentage of the Indian crop will be converted according to export specifications creating a larger shortfall in the domestic market. We expect this to create additional pressure on tea prices during the second half.

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