Why tea firms are exiting plantation operations

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Kohinoor Mandal

Kolkata, April 8

FOR the major tea companies in India, producing tea in bulk no longer appears to be attractive due to high costs, huge manpower and extremely low competitiveness.

As a result, two companies have opted out of plantation activity. Instead they are concentrating only on marketing tea where the margins are higher. Moreover, there is tremendous potential for value-addition here.

Tata Tea, which used to be the largest producer in India, has divested stake in its South India gardens. On Friday, Hindustan Lever announced that they are transferring their gardens in Assam and Tamil Nadu to wholly owned subsidiaries.

According to Mr K.S. David, Managing Director of Goodricke Group Ltd, big companies are realising that, for several reasons, there is hardly any scope for development on the production front.

"But growth is there in packet tea business. Hence, these companies are focusing on marketing," Mr David, who is also the Vice-Chairman of Indian Tea Association (ITA), said.

A major tea producer and a senior office-bearer of ITA, seeking anonymity, said cost of production was extremely high and plantation business was not at all attractive at the moment. The big corporate houses are also afraid of maintaining a huge workforce.

"No CEO would like to live with such high manpower costs as it would shrink his company's profitability at the end of the year. Moreover, big companies cannot indulge in unfair practices. It adds to their overheads," he said.

According to an ITA report, the per-kg cost of production of tea in India during 2004 was $1.70, the highest in the world. Last year, the average price earned by the producers was only $1.35 per kg.

Mr N.K. Das, Chairman of the Tea Board, agrees that the moves of these two corporate houses are aimed at reducing overhead expenses, though he was not inclined to accept these developments as a trend of sorts.

"Even today, there are many companies who are successfully running their plantation business but everyone is taking steps to reduce their cost of production. However, after a point you cannot reduce it further," he told Business Line.

Mr Aditya Khaitan, Managing Director of McLeod Russel India (recently recreated after the de-merger of Eveready Industries), said these two companies have moved up the business ladder as they can outsource teas from other genuine producers.

"Production is not a nemesis, as such, for the tea companies. But what matters is the focus of a company. HLL and Tata Tea might have felt that their return on investment in the marketing business would be higher than the plantation activity," he said.

Another interesting aspect is that HLL is comparatively new in the plantation sector. Tata Tea, on the other hand, inherited the gardens.

The south Indian tea industry has been suffering huge losses for many years.

Mr Khaitan, who now heads the largest global tea plantation with an annual capacity of 43 million kg, said their expertise was in production and they would not go the HLL or Tata Tea way. "We would continue to build on our expertise," he said.

(This article was published in the Business Line print edition dated April 9, 2005)
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