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C. Raja Rajeshwari

OVER the past few years, the industry that provides us with a refreshing cuppa has been characterised by one dominant feature: The pressure to survive, what with profitability showing no signs of picking up to healthy levels.

A clutch of problems in the domestic market, compounded by stiff competition from other tea-producing countries such as Sri Lanka, Kenya and China, to name a few, has left the Indian tea industry in hot water.

During the past couple of years, even some of the relatively bigger players, such as Tata Tea, Goodricke, Eveready and Hindustan Lever , have found the going tough . The smaller players in the organised sector have had even more a difficult time. Interestingly, quite a few unorganised sector players have managed to piggyback on a strategy of low-cost offerings to profit by capturing market share.

Trends that do not cheer

Sample key underlying trends in the industry: Sluggish domestic consumption levels; losing competitiveness in the export markets in terms of cost and quality; relatively newer entrants such as Kenya, Vietnam and Malawi adding to the already intense competitive pressures exerted by the well-established exporting nations such as Sri Lanka and China; and declining prices and export volumes for five consecutive years now.

In 2002, there was also a reduction in the tea crop output because of unfavourable weather conditions. Despite this fall, a significant quantity of CTC (crush-tear-curl) leaf tea has been carried forward as inventory, suggesting that the offtake has been far lower than anticipated. Of late, the growth in domestic consumption has not been encouraging. The industry is losing out to other beverages, especially soft drinks because of the lack of effective campaigning to promote tea.

Feeble signs of stability

Excess production has led to a downturn in tea prices over the past five years. During this period, the prices of South Indian teas declined by 49 per cent and North Indian teas, by 38 per cent. Over the first nine months of 2003, there appears to be a minor reprieve with domestic prices showing signs of stabilising and improving; they have not run up sharply, though.

The auction prices in the first nine months have improved marginally by a rupee per kg over that in 2002. South Indian teas fetched an average price of Rs 42 per kg and North Indian teas, Rs 62 . The arresting of the downtrend has provided the industry some breathing space, though the sustainability of the recent trends is by no means certain, as pressures from excess production and sluggish demand still exist.

With costs bloating and realisations unlikely to show any sharp spurt in the near term, the industry as a whole is in a spot. If the current low prices prolong, then the viability of many players could get affected.

Yes, listed companies such as Goodricke Group, Tata Tea, Assambrook and Dhunseri have posted profits, but the growth rates have been, at best, flat or on a down curve. Smaller players such as Coonoor Tea Estates, Jay Shree Tea & Industries, Rossell Tea and Santipara Tea have posted losses over the past few years.

The small grower effect

The steady decline in tea prices has been accelerated by the phenomenon of small tea growers, who have increased in number in the past decade or so. Small growers have the advantage of lower overheads, which allow them to supply lower-priced teas.

The emergence of small growers, while generating employment and economic gains, has been instrumental in the supply of tea to bought-leaf factories (BLF). These BLFs process the tealeaves and sell to local players. This increase in the number of BLFs is a cause for concern. According to the Tea Board (a statutory body), many of the `made-teas', which are blended by the BLFs are poorly processed and lack in quality.

Over the three-year period 1999-2001, BLFs have increased their production by 43 per cent to 139.1 million kg and now account for 20 per cent of the production. BLFs have made it easier for local brands to enter the packaged tea segment, where there has been a growing chasm between the commodity price and the final retail price.

The emergence of the strong small grower is, per se, not a detrimental issue; it is the quality of tea produced by these small growers in conjunction with BLFs. The regulatory authority has to foster awareness among both the small tea growers and the manufacturers about the importance of adopting finer plucking standards and improving the manufacturing process.

Behind sluggish exports

The increase in exports in 2002 gave the industry a breather. However, exports in 2002 were lower than those in 2000 and earlier. One of the reasons for this decline is that, world over, orthodox teas have emerged as the preferred variety for consumers. Russia and Iraq, which are key target markets for Indian tea, are also slowly switching to the orthodox variety. On the other hand, Indian producers continue to predominantly produce CTCs owing to the huge domestic intake. Also shifting from CTC cultivation to orthodox teas would require high initial investments while returns would come after a long gestation period. Quite a few players take a short-term view and continue producing the CTC variety.

The way ahead

Though the global CTC tea demand has been on the decline, it still forms a substantial part of global exports — 520 million kg (36 per cent of the world tea trade). Despite being the highest producer of teas, India misses out on substantial demand for CTC tea owing to its high cost and inferior quality. In this backdrop, the followings aspects will determine how the industry fares in the years ahead:

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