Tradition and ethics instead of price competition for Ceylon Tea

Tea industry participants say the industry needs to tap into its traditions and ethics to survive the 21st century.

Sri Lanka’s nearly 150 year old tea industry is drowning in price competition. Industry practitioners say trying any harder to compete on price will be the end of the road for the venerable brew. They say the industry needs to maximise on its heritage and good industry practices to command modern markets for premium returns.

Rat race
According to Dr. N. Yogaratnam, Consultant, (NIPM) Sri Lanka’s cost of production of tea is around US$ 1.75 per kg, compared to India’s cost of US$ 1.25, Kenya’s cost of US$ 1.00 and Vietnam’s cost of US$ 0.75 per kg. Costs in Sri Lanka are expected to continue upwards. But the industry is still trying to compete on price.

“Sri Lanka can’t win a price war. Our costs are too high. We need to find other ways to compete,” says Kavi Seneviratne, Managing Director of Kelani Valley Plantations, whose company sells what is called the world’s first ethical tea brand.

The Head of Marketing of Dilmah, a company that has tried and tested the opposite high-end strategy, calls attempts to compete on price “dysfunctional.”

“Consistently, the stakeholders in our industry have adopted price as their main competitive strategy. This is dysfunctional in a situation where our industry produces tea that is of exceptionally high quality, at a high cost of production,” says Dilhan Fernando, Marketing Director of Dilmah Tea.

Already, unsuccessful attempts at trying to compete on price with lower cost, larger producers have reduced returns to the country.

“We have lost market share in terms of value, in some Eastern European countries and Vietnam,” says Fernando.

Legal protection
Meanwhile the authorities are trying to protect the brand image of Ceylon tea.

“We have legal protection, under intellectual property rights laws, for the wording ‘Pure Ceylon Tea’ and for our lion logo. This legal protection is available for our tea in approximately 60 countries. So in any one of these countries, if someone were to misuse the lion logo and the words ‘Pure Ceylon Tea’ we can take legal action,” says H. D. Hemaratne, the Director General of the Sri Lanka Tea Board.

These protective measures try to make sure that only suitable Sri Lankan teas are using the words ‘Pure Ceylon Tea’ and the Lion logo in foreign markets. And the Tea Board is careful about who is authorised to use these special Sri Lankan branding measures.

“If an exporter wants to put the words ‘Pure Ceylon Tea’ and display the lion logo on tea packets they have to first get approval from us. Before giving approval we analyse samples to make sure the tea is of the correct standard and that it qualifies to use the branding,” says Hemaratne.

However, the Tea Board has different standards for different markets based on consumer taste and other factors. So ‘Pure Ceylon Tea’ tea sold in two different countries can be different from each other.

In addition, only retail and consumer packs are allowed to use the special Sri Lankan branding. Bulk exporters are not allowed to use the branding as bulk exports are often blended in preparing the final retail tea and the final blend may not qualify under ‘Pure Ceylon Tea’ standards.

The Tea Board is also amending local laws to be able to use the ‘Ceylon Tea’ wording as a Geographic Indicator (GI). A GI is a provision that developing countries are asking for, at the World Trade Organisation (WTO) under the TRIPS agreement, because it can provide better intellectual property protection than the current system.

The current system of using copyrights on words like ‘Pure Ceylon Tea’ and the Lion logo is difficult because the copyrights have to be registered in each and every country separately. Under the proposed GI system, any product that is assigned a GI status automatically gets the same protection in all 150 WTO member countries.

“We are preparing for GI status for Ceylon Tea. We have already drafted laws to be able to do this when the WTO countries agree on the GI system,” said Hemaratne.

But even now, unauthorised tea packets carrying the words ‘pure Ceylon Tea’ and the Lion logo are entering foreign markets all over the world because the Sri Lankan authorities have limited resources to monitor markets and take action.These fakes are riding on the quality and image of Sri Lankan tea, to sell substandard goods. But the bigger damage is in misleading consumers into associating poor quality with the term ‘Pure Ceylon Tea’ and the Lion logo.

“The most problematic market is Iraq. We need to pay more attention to the Middle East in general. Dubai for instance, is a centre for packaging and developing multi-origin teas. But we (Sri Lankan tea authorities) don’t have access into their facilities. So Dubai could be a supply point for these teas but we don’t know for sure,” said Hemaratne.

Legal limits
However, laws alone are not enough to maintain the position of Sri Lankan tea. The biggest problem again is the price focus.

“Packers and exporters in Sri Lanka have used a variety of devices including blending, offering low quality teas, offering substandard teas, packing overseas, passing on to their customers tax and other benefits available to them that should go towards the development of the industry, in trying to achieve lowest cost producer status,” says Fernando from Dilmah.

This behaviour lowers the brand value of Sri Lankan tea, whatever the legal protection available.

Tradition and ethics
Fernando points out that the industry has lost sight of its strengths by getting caught up in a rat race of price competition.

“The entire industry has lost sight of our strengths, like for instance, our heritage. We have been known for over a century for producing the best tea in the world. So why are we trying to sell cheap?” asks Fernando.

Dilmah that has been successfully selling high end ‘speciality teas’ in world markets say consumers are willing and able to pay a higher price for better quality.

“In the west, consumer incomes are increasing. So even niche speciality markets are growing so fast it is now becoming mainstream,” says Fernando.

Western consumers more ethical
“Ethics are among the top three reasons to select one product over another. But in Sri Lanka, although the tea industry has very good standards, these have not been conveyed to western consumers,” says Fernando.

“In fact, the way these standards are conveyed is disadvantageous to us. Various organisations raise a lot of awareness about poor pay or work conditions. But our industry does not go public about the strong welfare laws and strong labour laws in this country and anti-child labour laws. The fact that we have these laws to begin with means that we are a country that is committed to a very high degree of ethical standards. So this side of the story should also be conveyed to consumers,” says Fernando.

Sri Lanka’s strong environmental laws and low pesticide usage in the tea sector are added plus points, as the country produces purer tea. But again these aspects are overlooked in the selling cheap strategy.

At the end of the day Sri Lanka is trying very hard to sell a high quality product as a cheap, low quality one.

Ethical tea
At the moment only one attempt has been made to use ethical standards to sell Sri Lankan tea. Kelani Valley Plantations joined with Mabroc Teas, a brand marketer of Ceylon tea in March this year, to produce and market Sri Lanka’s first ethical tea. The companies follow the standards set by the UN Global Compact on human rights, labour rights, environment and anti-corruption to call their tea ‘Ethical Tea.’

“It’s only been a few months but the response is very good. We are getting a lot of inquiries,” said Seneviratne from Kelani Valley Plantations.

The ‘ethical tea’ venture entails an added investment in employee welfare and community development programmes, on top of investing in health and safety. But given the rapidly increasing global demand for higher health standards for consumer goods and higher ethical manufacturing standards, the plantation company feels the cost is well worth it.

How the rest of Sri Lanka’s tea industry can get out of the price competition trap though, is an open question. (DS)