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In search of the right blend - Views on News from Equitymaster
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  • Jan 8, 2000

    In search of the right blend

    As I am merrily punching away at my computer, my colleagues come up to me and say 'chai peene chalte hain'. Much to the consternation of my boss, I close my word file and go on to taste the wonderful beverage known the world over as 'tea'. I am not the only one with regular tea breaks, all across India, whether you are an executive or a peon, you look forward to your chai-breaks. It just goes on to show how well entrenched this beverage is in the Indian mindset. This should not be surprising, as India is the leading producer of tea in the world (over 805 million kgs in 1999) and yet it is not the largest exporter. This is because India consumes almost 82 percent of its tea production (over 657 million kgs).

    Ideally, such a scenario should see the industry in a state of joy. Ironically, it is not so. All along, the Indian tea industry has remained the largest producer of tea as a 'commodity', but in the process it has reduced itself to being just a raw material supplier, who gets a transfer price for the product it sells. Today the industry finds itself at the crossroads. On one hand it is plagued by low productivity and lower price realisations and on the other it is grappling with changing consumer profiles and the threat of imports.

    Industry majors like Tata Tea and Hindustan Lever are not only slugging it out among themselves through increased branding to gain market shares, but are increasingly aware of threats emerging from other beverage segments like coffee as also aerated drinks like Coke and Pepsi. Interestingly, the Coca-Cola company had actually tried to displace tea as the most preferred drink in India, but failed miserably.

    Until now, tea has managed to remain on top despite repeated onslaughts by other beverage segments largely because of its price advantages. But in recent times, the price gap between coffee and tea has narrowed, which on the longer-term might erode tea's reputation as the most preferred drink. Also, the Indian youth is increasingly getting attracted to aerated drinks and fruit juices etc. and hence, the potential tea consumers are on the wane.

    But all these problems have led the industry to look within itself and find ways to cope with the emerging situations. Already, there has been a trend towards consolidation of the existing tea plantations. Smaller players are being bought over by larger estates or global consumer goods majors, as in the case of Unilever Plc. buying over Rossell Industries recently. Apart from buying tea estates, these companies are also moving up the value chain through increased branding of products across all segments in the industry and introduction of new blends.

    During these trying times, the industry also saw history being created when Tata Tea bought over UK-based Tetley's tea businesses for a consideration of over US$ 420 million. This deal may lead to another round of consolidation among the global tea majors.

    All this is aimed at not only improving realisations but also to attract new consumers (especially the younger generation). In effect, the industry is gradually maturing from commodity-based businesses to market savvy branded fast moving consumer goods (FMCG) companies. The mantra being followed in the industry is simple: "shape up or you will be forced to ship out".

    Whether all these efforts will energise this sector remains to be seen, but the churning will definitely segregate the men from the boys. Industry majors will be hoping that this golden beverage stands the test of time and continue to be India's most preferred drink even in the next millenium. Cheers to that!



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