Importation of cheap tea will destroy SL tea industry – Merrill J.Fernando

The budget for 2016 had a proposal which has the potential to run into a lot of opposition and gravely affect the government given the number of people whose livelihoods will be directly affected by it. This is the proposal to allow the importation of cheap tea to be blended with Ceylon tea and re-exported. The need to import tea is not because of any shortage of tea in Sri Lanka, but simply as a means of making our tea cheaper on the international market by mixing it with cheap tea from overseas. Usually an import-export business imports raw material, adds value to it and re-exports it. This is the first time that anyone has heard of imports being made to actually ‘deduct’ value from a local export! In this interview, veteran tea exporter Merrill J. Fernando speaks to the Sunday Island about the implications of this proposal to allow the bulk importation of cheap tea from overseas for blending purposes.

 Q. There is this proposal to allow the bulk importation of cheap tea to be blended with Ceylon tea and re-exported. This is being done with the intention of making our tea cheaper on the international market. Our tea is going to be blended not with high value tea to enhance the value of the product but with cheap tea to reduce the value of the product. What kind of impact do you think this proposal to allow the bulk importation of cheap tea will have on our tea industry?

A. If we seriously consider this proposal, that will be the death knell of the tea industry. Ceylon tea is respected and enjoyed throughout the world as the finest tea. At the moment we sell every kilo of tea that we produce at the highest prices in the world. The demand for the importation of cheap tea for blending operations here is being made by some traders who have no commitment to the industry. Their commitment is to money. Tea blenders and packers throughout the world import Ceylon tea into their countries to boost the value of their blends. If cheap tea is imported to make tea exported from Sri Lanka cheaper, the tea plantation industry will collapse and millions of people belonging smallholder and estate worker families will be on the streets. The future of the tea industry should not be determined by a few adventurers.

Q. It is said that our tea is priced too high and that it is not viable on the international market.

A. Every kilo of tea that we produce is sold at the highest prices in the world. If cheap tea is allowed to be imported to be blended with our tea, the cost of the imported tea will be well below our average cost of production. One of these traders agitating for the importation of cheap tea had said that they want to export tea at 2 USD a kilo. When we are already selling our tea at 4-5 USD a kilo, why would anyone want to sell at 2 USD? This proposal is just to maintain unviable trading houses who cannot sell Ceylon tea.

Q. We hear this story that the Ceylon tea image is losing its magic and that what the global consumer wants is just plain generic tea and that so long as something is labeled as tea, and sold at a cheap price, they will be happy to buy that product.

A. Price reductions have become the strategy of multinational trading houses. Not every consumer is looking for cheap tea. Multinational trading houses and big retailers seek to make all products cheap even at the cost of quality. However, the fact is that about 40 to 50% of the market is looking for good quality. If everybody sells the cheapest product, what kind of choice does the consumer have? Some of our traders engage in the practice of undercutting one another on price. Some of the teas that some traders sell is below the price at the Colombo tea auction. It is possible for some exporters to offer tea below the auction price because they don’t buy their tea at the auction but from various underground sources such as stolen tea and the like. Malpractices occurring in the industry from the plantation level right up to the f.o.b level must be stopped. We produce 325 million kilos of tea and every kilo is sold at high prices – the highest in the world. So what is our problem?

A. Wasn’t it the case in the recent past that some tea did remain unsold?

Q. Market fluctuations are inevitable in any trade. In one of our strongest markets, Russia there was a rapid depreciation of the currency. The rouble was 33 to a USD. Now it is 65 to a USD. Syria - an important market - is in turmoil. The EU is also facing a currency crisis. All those situations added together have brought about unfavourable conditions in the world market for most commodities. The prices of commodities go up or down cyclically.

Q. I have heard it being said that because of the high cost of Ceylon tea, the importers in our best markets have been gradually reducing the Ceylon tea component in their blends and increasing the cheap tea content so as to make bigger profits. Over a period of time when the Ceylon tea component is gradually reduced by imperceptible quantities, the consumers also gradually get used to the change in taste and continue to buy the particular brand even though the blend will have very little Ceylon tea.

A. People who talk like that have no experience in marketing. I have first-hand experience of the market. If pure Ceylon tea is available, consumers will buy it – perhaps not all consumers will go for it, but a significant proportion will. Lipton yellow label was the first pure Ceylon tea. Then they went to Singapore and packed Ceylon tea blended with Indonesian tea. They called it ‘Ceylon blend’. Then they eliminated the Ceylon tea completely and called it ‘Ceylon type’. That happens because the demand for Ceylon tea is so heavy that if they exclusively pack Ceylon tea, the price of Ceylon tea will go up to Rs. 2,000 a kilo. They will buy tea from any source that is cheap and consumers have no choice. About 30 years ago in Australia and New Zealand, they were only buying Ceylon tea. There were many family owned companies in the tea retailing business. Then big traders came and acquired all those companies and the quality of tea came down. I saw an opportunity there. Australian imports of Ceylon tea had declined from about 52 million pounds of tea a year to about six million pounds. It was in that context that I launched Dilmah tea in that market. The response from consumers was immediate. They thanked retailers for bringing back Ceylon tea. The respect for Ceylon tea may be different to what it is now. We must now spend money and promote the image of Ceylon tea. We saw the Middle Eastern market moving away from us, and the Tea Board did nothing. The image of Ceylon tea is high everywhere. If you start a proper campaign to re-launch Ceylon tea in selected markets we can fetch even higher prices for our tea. Even at present, every country imports Ceylon tea to boost their blends and as Lipton puts it, to ‘add sparkle’ to their tea. Now we are trying to bring cheap tea to make this a centre for cheap tea. If the government allows the importation of tea the local tea industry will be gone within one year.

Q. What you are saying is that if there are markets where the importers have continuously adulterated Ceylon tea with cheaper tea so as to make bigger profits, and the quality has gone down, that if pure Ceylon tea is reintroduced into those markets, the consumer will revert to Ceylon tea?

A. Of course. We have done research into this. The consumer perception is that the best tea is Ceylon tea. Dilmah spends Rs.1.7 billion a year in advertising and promoting Ceylon tea. There are hundreds of brands that are copying our taglines. I started using the phrase ‘single origin tea’ and now others too are using the phrase but the price is half that of Dilmah. So they have no idea about marketing. For the past 17 years we have been the No: 1 brand in New Zealand. We are No 3 in Australia. Other brands like Liptons make their teas cheaper. We don’t give discounts. What we now need to do is to re-launch tea in our traditional markets such as the Middle East. Some years ago, I gave a proposal to the Tea Board to promote a common brand for the Gulf Cooperation Council countries after forming a consortium of exporters. But it was never implemented. What is needed now is a collective effort to save the industry.

Q. Even though some exporters are saying that Ceylon tea is overpriced, what you say is that we can occupy a niche market for high quality, high priced tea?

A. If the customer is buying, how can it be overpriced? There are countries where Ceylon tea was once popular but where people have now forgotten what it was like. But there is something called consumer recall. It’s not like introducing something completely new into the market. This happened in Australia where consumers thanked Coles supermarket for bringing Ceylon tea back. When I entered the Australian market, I was told that the people had got used to Lipton’s and Bushell’s tea and that the consumers would not buy my tea. I found that if the consumers have a chance to buy the tea they once knew, they will buy. When I launched Dilmah in Australia, Lipton slashed their prices, but people still bought my tea. I proved that if Ceylon tea is made available in most countries and properly marketed we will get the market back.

Q. What about the long term viability of the tea plantations here? There has been a decline in productivity and yields.

A. The tea industry has been at the mercy of politicians and has had to go through nationalization, de-nationalization, the formation of Regional Plantation Companies and all that. Some of the plantation companies were sold to people without tea connections. There is absolutely no direction. Ad hoc decisions by politicians run the country’s most important industry. The government has interfered in the wage structure as well. About 65 to 70% of the cost of production is wages. We don’t see that in any other country. In other countries it’s 30% or so. This is the time to talk to the unions and to say that we have to get together otherwise the industry will suffer. We have the expertise in the country to put the industry right.

Q. From what you say the problem in the plantations is one of management. But is there something more insidious eating away at the industry like the decline in the fertility of the soil, and inability to produce economically viable yields?

A. Our productivity is insufficient. But over the past few years some estates have done well. They were neglected because the replanting subsidy and other such facilities were withdrawn. Each plantation company must be taken as a unit and its problems should be examined separately. Kahawatte Plantations was number 20 in terms of price. Today it’s number one. We invested money to achieve that result.

Q. There are other issues such as a shortage of labour which is affecting all agriculture based industries?

A. That is a problem no doubt and more and more mechanical processes will have to be introduced with the caveat that on some estates, mechanical plucking is not possible due to the terrain. The output per labourer in India and Kenya is four kilos. In Sri Lanka it’s two kilos.

Q. Is that due to greater mechanization in those countries?

A. To some extent yes, but the bigger output is due to the higher yield.

Q. In this budget you see certain contradictory features. On the one hand they say that the free import of cheap tea is allowed. Then on the other hand it is said that the plantation companies will have their leases extended to 50 years and all tea and rubber plantations will be free of income tax for two years. But this will be useless if the importation of tea is allowed.

A. Politicians listen to individuals. This issue should be open for public discussion with the participation of the smallholders, factory owners, plantation companies, exporters and well wishers of the industry. Can you imagine France and Scotland allowing their wine and Scotch whiskey to be blended with cheap imports just to make the product cheaper to the consumer? If I recall correctly, France has by law prohibited the adulteration or dilution of French wine.

Q. Is it the case that we have to do away with this practice of exporting in bulk or doing contract packing of tea for big foreign brand owners?

A. Exactly. I have said this time and again.

Q. How do you prevent people from doing contract packing for big foreign brands?

A. By giving better incentives for branded teas which originate in Sri Lanka. In 1982, I wrote to the Tea Board outlining the advantages of creating our own brands. A committee was appointed to study my proposal. The committee comprised of Chandi Chanmugam, Lakshman de Mel and myself among others. We recommended that building brands is essential and enormous incentives like rebates on the f.o.b price of branded tea bags were given. Then they gave an interest subsidy on machinery imported for tea bagging and packing.

Q. What about the general reality in the world where the large brand names and the large retailers have complete control over what they import or accept for retailing? In the garments industry none of the factory owners here can go above retailers like Marks and Spencer. It’s the retailer or the brand owner who calls the shots. The retailer tells the factory what to produce and for a fee, the factory owner here producers it and sends it to the buyer. In the tea industry too the big international brand names call the shots, they tell our people what to pack and what not to pack. What about this tyranny of retailers and brand owners?

A. The retailers squeeze the brand owner and the brand owner in turn squeezes the producer. We have no way of escaping this if we pack for one or two multinationals. This is why branding in a meaningful way is the only way forward for our industry.

Q. Branding and competing with the big names?

A. Yes. The big names sell a mixture of tea from wherever it can be obtained cheaply. Dilmah is single origin 100% original pure Ceylon tea. So people begin to think, 100% pure Ceylon tea – that’s what I want! The price difference between a cheap tea by Lipton and a Dilmah tea is one US cent per cup. There is also the fact that Ceylon tea has the lowest incidence of pesticides and chemical residue. This is another reason why we should not permit the importation of cheap tea from overseas because all other countries have pesticide issues. The importing countries check the product for chemical residues.

Q. If you have a situation in a big market like Russia or Turkey where a big brand is selling something called ‘Ceylon tea’ which does not actually contain much Ceylon tea, and that whole market has got used to the idea that what is being sold by that big brand is in fact Ceylon tea, how do you convince the consumer in that country that Ceylon tea is in fact a better product?

A. The way to get over that is to promote a real brand of Ceylon tea which says ‘grown, packaged and exported direct from Sri Lanka’.

Q. But that will take a huge marketing effort in that country.

A. That is why it is necessary to re-launch Ceylon tea and inform the consumer which brands contain genuine Ceylon tea. You need to identify a limited number of markets like the Middle East and re-launch the product.

Q. What you are saying is that any tea that is to be considered pure Ceylon tea should be packed in Sri Lanka and not at the destination?

A. The package should say ‘grown and packed in Sri Lanka’ - that is the consumer’s guarantee. Ceylon tea also should be patented so that nobody else can use the name except Sri Lanka. We need a ten year plan for the tea industry.

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