Tea industry’s sustainability in the face of rising production and operational cost

Tea is one of the most popular, most consumed and low-cost beverage in the world. It is due to its specific requirement and sensitivity to changes in growing conditions, that its cultivation is confined to the specific regions of the globe. The major producers and exporters of tea are China, India, and Sri Lanka, they together account for a total 60% of the world’s tea production. The Global tea market is divided into two categories: leaf tea (black, green and Oolong) and CTC tea (crush, curl and tear). In India CTC tea is mostly produced, whereas in Sri Lanka leaf tea is largely produced and has a higher price realization because of the better quality.

The global tea production has grown at a CAGR of 4% over the past decade, while consumption demand increased at a slower pace registering a CAGR of 3.25% during the same period. It is interesting to note, that while the world tea production and consumption increased in tandem till 2013, the tea consumption has been declining thereafter due to changing taste preference of consumers. This has led to a decline in the tea prices.

However, the major challenge faced by the tea industry is increasing production and operational cost. In this blog, Televisory tried to analyse the sustainability of tea industry in the wake of rising production cost, particularly in India and Sri Lanka.

The two neighbouring nations, India and Sri Lanka account for 23% and 6% of the world’s tea production, respectively. However, India consumes around 80% of the locally produced tea owing to its large population. On the contrary, in Sri Lanka the strong domestic demand is missing, therefore, it exports the bulk of the produced tea. Although, tea production in India and Sri Lanka registered a CAGR of 2.22% and 0.57% during the last decade, the production declined on a YoY basis for both in 2014-15 due to adverse weather conditions that prevailed in the tea plantation sector.

Although, tea production has increased over the past ten years. Televisory’s analysis of tea prices reveals that though tea prices have declined in 2014-15, there has been an increase in the CAGR at 2.89% and 4.52% in the same period for India and Sri Lanka. But, operational and production cost has increased at a CAGR of 7.04% and 6.83% during the phase. This significantly impacted the profitability and raised the concern for the sustainability of tea producers in the region.

Televisory’s analysis of tea manufacturer companies’ and their cost structure in India-Sri Lanka divulge, that a continuous rise in cost trend in the tea industry is largely attributable to a variety of factors. This includes an increase in raw material, power and labour expenses, with labour being the highest contributor. The tea Industry is extremely labour intensive and labour cost accounts for 50-55% of the total cost of production, while energy and raw material costs constitute nearly 15-20% of the total costs, leading to a high fixed cost intensity of operations.

Labour, raw material and energy expenses have seen a rising trend in India and Sri Lanka in the past 5 years. Even though labour expenses increased in both the countries on account of the low availability of labour as workforce migrated towards other lucrative and high earning jobs, the increase was more profound in Sri Lanka.

The tea industry is also energy intensive as withering, drying, grading and packing of tea requires 4,000 to 8,000 kWh of energy per tonne of tea production. India and Sri Lanka experience frequent power outages and are prone to the unreliable power supply, this also increases industry’s troubles.

The changes in the annual monsoon season and the effects of climate change are a threat to tea yields and quality of the crop. In India, low rainfall and long dry spells impact irrigation and pest management costs. This leads to high usage of fertilisers to increase the fertility of soil, adding to the total cost. This, in turn, leads to high raw material expenses for the tea industry in India as compared to Sri Lanka.

Considering that the tea industry is a price taker, manufacturers are not able to pass on the increase in the cost to the consumers. A higher growth in operating expenses for tea manufacturers in India and Sri Lanka than the growth in revenues realised by them led to a continuous decline in operating profitability for tea manufacturers. The average EBITDA/tonne for tea manufacturers in India declined by 65% (2015) to Rs. 8,268 from Rs. 24,328 (2011). However, on an average basis, the Sri Lankan tea manufacturers were incurring an operating loss with negative EBITDA/tonne in 2014-15. This left the tea manufacturers to contemplate shutting down operations or selling off to big companies. 

In conclusion, while, the tea manufacturers have no control over the prices of tea, rationalisation of operational costs is the only way for the sustenance of the tea industry. Improving labour efficiency in the wake of rising wages and increasing the level of mechanisation in plucking operations can lead to sufficient cost savings on the labour front. Moreover, mechanisation would increase yield per labour to 600 kg of tea leaves plucked against 300 kg per labour. Integrated use of hand plucking and shear harvesting can prevent a reduction in crop yield and help in maintaining crop cycles. Furthermore, implementation of better farming practices can help in increasing the yield, thereby rationalising operating expenses. The only companies having the leaner cost structure and higher loss bearing abilities will survive in the rising operational cost scenario, until, the tea prices improve and stabilise, and others measure like mechanisation are implemented and revamped.  

Also Read:- Key coffee growing nations – key operational criteria analysed

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