May 18, 2015

What are all the sustainability issues associated with the tea industry?

INDIA’S CUP OF TEA

Dr Achinto Roy, School of Management and Marketing, Deakin University

In 1823, tea plants were found growing in the wild in Assam, eastern India, setting in motion commercial tea plantation activities.¹ The first tea bushes were planted circa 1837 by British planters in Assam. By 1838, the first batch of Assam tea was sent for public sale in Great Britain.² A combination of the climatic conditions and the ingenuity of the tea planters created the first of many premium Indian teas such as the ‘Darjeeling’ and ‘Assam Orthodox’ during this period and led to the formation of a few hundred tea estates in the country. A new industry emerged from a value chain that involved the planting, plucking, withering, fermenting, curing, processing, packing, transporting and auctioning of tea controlled by British companies. It is also during this period that tea drinking was promoted both in India and Great Britain by the nascent tea industry, highlighting the health benefits of consuming tea. The industry’s nineteenth century promotional campaigns left a permanent mark in the form of generations of tea drinkers in both countries that continue to provide a market for the industry even today.

India is the world’s largest consumer of tea, consuming 25 per cent of all global production³, and the second largest producer of tea, accounting for 30 per cent of global tea production.⁴ It also has a complete monopoly over premium teas such as ‘Darjeeling’ and ‘Assam Orthodox’. The country is also the fourth largest exporter of tea after China, Kenya and Sri Lanka. This is as a consequence of a huge domestic market that pays higher prices than export markets. India’s tea industry is growing at a compound annual growth rate (CAGR) of 15 per cent per year⁵ and is likely to keep growing since over 1.4 million hectares of land are under tea cultivation⁶, coupled with enthusiastic tea growers and a very supportive Tea Board of India.

In recognition of the industry’s importance to India’s economy, the Tea Board of India was established in 1954 under an Act of Parliament with the purpose of extending marketing support, encouraging research and development, and rendering technical expertise and assistance to small growers (including welfare schemes to protect tea plantation labour). The Tea Board comprises 31 members drawn from parliamentarians, planters, tea companies, exporters and trade union representatives representing key stakeholders. It operates 17 domestic and 3 overseas offices⁷ to promote the business interests of India’s tea

industry which is estimated to be worth A$4 billion.⁸ Industry structure

India’s tea estates are located mainly in the north-western, eastern and southern regions of the country. Around 74 per cent of India’s tea estates are in the hands of tea companies in the corporate sector while 26 per cent are in the small grower sector. ⁹ Most of the tea estate-owning companies have their origins in the pre-independence era — as evident from names such as McLeod Russel, Brooke Bond, Warren Tea, Lipton, Hindustan

Lever (Unilever India) and Goodricke — although they are all

Indian owned. The small grower

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sector is a post-independence phenomenon, comprising individual farmers who started tea cultivation because of certain events in tea-growing regions. In Assam, the eastern part of India, sometime during the early 1990s, the plywood industry was closed down by legislation in order to protect the forests from exploitation. The erstwhile plywood factory owners and timber growers/suppliers consequently shifted to tea cultivation. Around the same time, Assam also experienced a political situation that involved a group of people — known as the United Liberation Front of Assam (ULFA) — engaging in armed rebellion against the government. Later, these people surrendered their arms through a process of negotiation and were provided with income opportunities by way of land, advice and support by the government to start growing tea. In South India’s Nilgiri Hills region, villagers used to grow vegetables (mainly potatoes) on the lower and middle slopes of the hills. This led to a soil erosion problem. The villagers also suffered as a result of crop failure due to disease (experienced by potato farmers), affecting their income. As a result, many of the vegetable growers found it difficult to make ends meet and needed government support. The Tea Board helped out by providing advice, financial support on soft terms, free tea bushes and planting support to help these vegetable growers shift to tea cultivation.

In West Dinajpur, Eastern India, a number of pineapple growers shifted to tea production because tea offered a better cash incentive as compared with pineapples — the latter yields less money due to lack of appropriate transport access to big cities and pineapple processing facilities.

Later, the proliferation of small growers in both the eastern and southern regions of India led to the establishment of ‘bought leaf factories’¹⁰ in near proximity to the growers. In 2011, India had approximately 160 000 small growers who accounted for 26 per cent of India’s tea production — that is, approximately 250 million kilograms out of over 950 million kilograms of total tea production.¹¹

Between the two sectors (i.e. corporate and small grower), tea leaves are grown, plucked, processed by factories and smallscale units near the plantations, bulk packed, repackaged and auctioned within India. Typically, India’s small grower sector is involved in planting, growing, plucking and selling loose tea leaves to ‘bought leaf’ factories in their immediate vicinity while the corporate sector is involved in the entire value chain from planting to the final retail product (i.e. packaged tea). The corporate sector also exports a part of their production, selling value-added products that command premium prices in overseas markets through marketing offices in almost every continent.¹² India’s corporate sector and its marketing operations are associated with well-known international brands such as Lipton, Unilever, Twinings, PG Tips, Tata Tetley and Elephant, to name just a few. Indian tea companies have also extended tea-growing operations to other parts of the world such as Vietnam, Uganda, Kenya and Rwanda. In fact, the world’s largest producer of branded tea is McLeod Russel India Ltd with a total annual production of 100 million kilograms of black tea produced on its tea estates and factories in eastern India, Vietnam, Uganda and

Rwanda.¹³

The product and the global tea industry

All forms of tea start off as a green leaf from the plant Camellia sinensis that has to be hand-picked from the tea bush. Once plucked, the process that is applied to the tea leaf creates the type of tea one wants. Largely three types of tea are processed and made, depending on the level of fermentation — namely green tea (unfermented), oolong tea (semi-fermented) and black tea (fully-fermented). Black tea can be processed either by a hand-powered roller that withers and rolls tea leaves on a flat surface to produce orthodox tea or a rotary van that curls, tears and crushes tea mechanically to produce CTC

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(curl-tear-crush) tea. India is the world’s largest producer of black tea (comprising both orthodox and CTC teas). Orthodox tea is more expensive to make and therefore a premium tea that emanates a rich aroma and colour when introduced to boiling water, whereas machine-processed CTC tea produces a comparatively larger number of cups of tea. Indian tea is also classified on the basis of the region where it is grown — namely, Darjeeling tea, Assam tea, Nilgiri tea and Kangra tea. Assam and Darjeeling Tea come from the eastern parts of India while Nilgiri tea comes from south India’s Nilgiri Hills and Kangra Tea comes from the Himalayan foothills of north-west India.

India has a global monopoly over Darjeeling tea — the champagne of all teas, coveted by tea connoisseurs. The word ‘Darjeeling’ serves as a logo and is copyrighted in many countries — including Australia, Canada, Russia, Egypt, Lebanon and practically all EU nations. No tea can be sold under the name ‘Darjeeling’ unless the tea has been grown on one of the 87 tea estates within the district of Darjeeling, West Bengal, and processed within that geographic area under licence from the Tea Board of India.

For over a century (1895–2006),¹⁴ India was a world leader in tea production. It was relegated to second place by China because of a number of reasons. First, the Chinese tea industry substantially increased land acreage under tea cultivation within a short span of time during this century. Today, China’s tea plantations comprise 1.86 million hectares of land and equate to half the land under global tea cultivation.¹⁵ In addition, China specialises in green tea, which takes less time to process and is more popular as a drink because of its health benefits. China has also consolidated its small growers and merged them into larger combines to achieve economies of scale unlike any other major tea growing nation (e.g. India, Sri Lanka and Kenya). The global tea industry comprises 36 tea-producing nations out of which six countries account for 80 per cent of global production.¹⁶ However, production and export is more prominently dominated by the ‘big four’ of the tea industry: China, India, Kenya and Sri Lanka. Agritrade¹⁷ confirms that out of 3.9 million tonnes of total world tea production in 2010, China accounted for 1.4 million tonnes, India produced 966 403 tonnes, followed by Kenya at 398 500 tonnes and Sri Lanka at 329 300 tonnes.¹⁸ Although both China and India consume a large portion of their production within their home markets, both countries form a part of the ‘big four’ in global exports alongside Kenya and Sri Lanka, who concentrate on exports as a consequence of smaller domestic markets (see table C5.1¹⁹).

TABLE C5.1 The ‘big four’ in global tea exports (in million kg)

Challenges and the tea industry’s future

India’s tea industry is poised for growth according to an estimate by the Associated Chambers of Commerce

(ASSOCHAM), an Indian trade body.²⁰ It estimates that India’s tea

(Grant 445-447)

Grant, Robert, Bella Butler, Stuart Orr, Peter Murray. Contemporary Strategic Management: An Australasian Perspective, 2nd Edition. John Wiley & Sons Australia,, 08/2013. VitalBook file.

Question 1:

Using Porter’s five forces model, analyse the Indian tea industry and identify the advent and role of the small grower sector.

Question 2:

Explain the nature of competitive advantage enjoyed by the Indian tea industry.

Question 3:

Conduct an independent study of the global tea industry and comment on whether the dominance/monopoly of the ‘big four’ will ever go away. Explain your reasoning.