Tea producers take action to boost sales

With an output of 826 million kg in 2002, India accounts for around 30 per cent of the world's total tea supply, according to recent data from market analysts Euromonitor​. But the domestic market has struggled as a result of the ever-increasing rate of output, with prices failing to keep pace with volume gains: volume sales have risen by 28 per cent since 1998, while value sales have dropped by 10 per cent.

Oversupply is not the only reason for the difficulties faced in the domestic market. The Indian government lifted quota restrictions on commodity imports in 2001, resulting in an increase in cheap, low-quality tea from neighbouring countries such as Nepal, Vietnam and Indonesia, and while this pushed down prices across the board, there was no corresponding rise in consumption - as is frequently the case with staple products, according to Euromonitor.

Faced with a domestic market on the verge of crisis, India's tea producers have adopted a dual marketing strategy: pushing sales into international growth markets and investing in revitalising the image of tea in the domestic market.

India consumes the largest quantity of tea in the world, accounting for nearly 14 per cent of global retail volume sales, according to Euromonitor, and is widely consumed in the north, east and west of India and by a wide variety of social classes and consumer age groups. But despite this overwhelming popularity, in value terms tea ranks in only seventh place in the total drinks market because of its relatively low unit price. Black standard tea constitutes nearly 80 per cent of value sales, although the more expensive green tea has recently seen its popularity rise.

Despite the fact that tea is the most traditional and affordable beverage in India - and probably because of as well - it is perceived as being old fashioned and less functional than some substitute products, according to Euromonitor.

For instance, malt-based beverages such as Horlicks (from GlaxoSmithKline) and Bournvita (from Cadbury Schweppes) are the favourite type of hot drink in the south, and are also the fastest growing. This type of drink is consumed as a substitute for milk in this milk-deficient region, and is favoured for its functional benefits.

Furthermore, in the south, coffee is bigger as a proportion of total hot drinks than in the rest of the country. The south is India's main coffee-producing region.

But soft drinks such as carbonates also represent a significant threat to the dominance of tea, especially in the longer-term. Aggressive marketing campaigns from leading multinationals have successfully persuaded many young consumers to migrate from tea to soft drinks for various drink occasions.

To combat this growing threat, the tea industry has launched a series of campaigns to promote tea as a health drink, with celebrities and scientists invited to endorse the health benefits of tea. Furthermore, the Tea Board and leading players such as Unilever and Tata Tea have set up a fund of Rs200 million to promote tea drinking.

These two companies are by far the biggest players in the domestic market, accounting for almost half of retail value sales. Unilever (Brooke Bond and Lipton) is the clear leader, holding over 30 per cent of the market, while Tata Tea (Tata) trails it with almost 20 per cent. The remainder of the market is far more fragmented and shared between numerous small players.

Both Unilever and Tata Tea have seen a fall in retail sales as a direct result of the drop in the price of tea between 2000 and 2003, as have also seen their margins squeezed in the face of increased advertising spends and competition from unpackaged tea.

Despite its more international presence, Unilever has played second fiddle to Tata in terms of pushing tea in the wider global market in recent years. Tata's high profile acquisition of the global Tetley brand in 2000 effectively consolidated its position in the international tea market, and the company is now seeking to leverage the brand as a springboard to new markets, claims Euromonitor. For example, Tata Tea started retailing its eponymous flagship brand in the US in 2003.

Australia is another big market for Tata, and the company recently closed a production facility there in order to increase the capacity of its Sri Lankan joint venture packaging company, which serves the Australian, Polish and Russian tea markets. China, itself no small producer of tea, is also being seen as a major market for the Tetley brand.

But despite the drive to promote tea brands in foreign markets, the domestic market still remains the most important for Indian producers, and Euromonitor is predicting retail value sales growth of around 2.5 per cent by 2008. The reason for the growth - despite the continued oversupply and low prices - is likely to be the rapid development of the out-of-home market, according to the analysts, driven in particular by vending sales.

The total number of vending machines in India was estimated at 45,000 in 2003, and this is likely to increase further in the future. Many of these machines are branded to carry the name of the company whose products they distribute, but an equally large number are not, making the vending sector a convenient means of increasing volumes even if it often does little to help promote brands. Furthermore, many vending machines sell coffee and soft drinks as well as tea, making it something of a gamble for the tea players.

A more tea-focused avenue of growth in the out-of-home market are Cha bars, which offer a wide selection of teas at premium prices and are considered fashionable among a certain Indian demographic, according to Euromonitor. Hoping to emulate the success of coffee shops witnessed in many major cities, including in emerging markets, they mainly target expatriates, the corporate entertainment market, or high income locals keen to show individual tastes.