Category: Analysis

Any damn fool

January 24, 2013 / / 9 Comments

«Any damn fool can put on a deal, but it takes genius, faith and perseverance to create a brand.»

David Ogilvy (1911-1999)

With such a quote to begin with, it is obvious that I can only speak of two things: deals or brands.

I hope your bets were on the second one as I will be talking about brand and the tea world.

According to the American Marketing Association Dictionary, brand is the “name, term, design, symbol, or any other feature that identifies one seller’s good or service as distinct from those of other sellers.”

But this is not all, a brand is also something else, it is a promise made to the buyer that he/she buys something special or solid or good or… and this is what we will be dealing with here.

A brand has :

  1. some unique attributes (a brand is known for being expensive, cheap, long lasting…) ,

  2. some unique advantages (this is the message behind each attribute),

  3. some values (a brand is the mirror of the company that created it),

  4. a culture (a Japanese brand is not at all like an American one),

  5. a personality (what would you associate this brand with?),

  6. some specific buyers (a brand is linked to a specific set of people that are expected to be suited for it).

As you might have guessed, this list comes from a marketing book I had as a student (Marketing Management by Kotler & Dubois, 9th Edition) but I just wrote it down there as a reminder of what a brand is.

Now you might ask me how does this relate to tea because we all drink teas and you don’t drink brands (although some of us only drink tea from one or several specific companies because they are who they are (isn’t this a brand thing?))

You can see it that way but I don’t think it is simple like that, otherwise why would some people only drink Darjeeling (you can write here Chinese, Taiwanese or any other tea producing country)? or teas from a specific estate? or only one kind of tea?

Let’s spend a little time on this example and don’t forget that all the things I write are my ideas not the truth.

What is a Darjeeling tea? According to the Tea Board of India and its Geographical Indication for this type of tea:

“the definition of Darjeeling Tea has been formulated to mean tea that:

  • is cultivated, grown or produced in the 87 tea gardens in the defined geographic areas and which have been registered with the Tea Board;

  • has been cultivated, grown or produced in one of the said 87 tea gardens;

  • has been processed and manufactured in a factory located in the defined geographic area; and

  • when tested by expert tea tasters, is determined to have the distinctive and naturally occurring organoleptic characteristics of taste, aroma and mouth feel, typical of tea cultivated, grown and produced in the region of Darjeeling, India.”

Source : Tea Board of India, http://teaboard.gov.in/inner1.asp?param_link_id=610&mem_link_name=About%20Darjeeling%20Tea

This definition is good but not enough to tell us if Darjeeling is a brand or not.

If we read it, we can summarize it into an unique set of attributes (quality, distinctive taste and aroma, grown in a specific place), advantages (you get a good deal for your money, you have a good tea, you can trace it to where it was grown) and values (the Champagne of tea).

To find the three other items, we have to think a little about the background of this tea.

Looking at its history and even its current organisation, it is easy to see that Darjeeling is a product of the British Empire. We now have the culture (a British Empire/British India one)

Based on all the previous lines, we can guess a personality (traditional, high quality, British), which helps us to define or to imagine what a specific customer for this tea might be (someone a little bit snobbish but still wanting a high quality product).

With this we managed to go through all the 6 items that makes something a brand and we can now say that Darjeeling is indeed a brand.

So next time you drink a tea, stop for a minute and see if your favourite tea country, type of tea or even estate would qualify as a brand.

And guess what? the answer could be yes.

Hamburg or Free is the name of the game

November 25, 2012 / / 15 Comments

Hamburg holds a special place in my heart not because it is a major hub for the world tea trade but today we will only focus on this aspect (sorry for those too curious about me).

I will first call everyone knowledgeable about this topic to tell me when I am wrong as it is a complex matter and information is few and people are not really ready to answer questions (or perhaps I didn’t ask the right persons or the right questions. Who knows?).

 

English tea box by Hannes Grobe (published under Creative Commons Attribution-Share Alike 2.5 Generic licence)


First, here is an extract of the website of the Port of Hamburg.

The Port of Hamburg has been the leading European trade centre for tea for many years. The major exporters are India, China, Sri Lanka and Indonesia.

Hamburg’s docks handle about 50 to 60 percent of the worldwide trade. Around 70 percent of the tea sold in Germany passes through Hamburg.

Imported teas are also blended and flavoured in Hamburg, before being exported worldwide. Great Britain and France are among the traditional destinations. About half the tea is shipped to the USA after being processed in Hamburg. The Russian market has also been gaining in importance recently.

Source: http://www.portofhamburg.com/en/content/tea

If you read the first paragraph, you might not understand why this happens since Germany is not known for its tea consumption (0.23 kg per capita and per year in 2009 according to the Food and Agriculture Organisation, which is even lower than the USA and far beyond the average yearly tea consumption per capita in the European Union (0.48 kg)).

However reading the second and third ones, you might begin to understand there is something as:

  1. the Port of Hamburg is not only the major European tea port but also the biggest one at the world level

  2. there seems to be a lot of further shipping (I won’t comment on the half of the tea shipped to the USA since I don’t have enough data for it).

Obviously, tea like other commodities is a trade where economies of scale is the name of the game for most companies (some won’t follow this strategy but most will).

Why? Because when you are big enough, you have more bargain power (look at articles on the Glencore-Xstrata merger) during the whole buying, transportation and processing chain.

This explains why once these companies have selected a hub, they are more than likely to put all their eggs in the same basket.

However this really quick analysis doesn’t help us to understand why Hamburg and why not Antwerpen or Rotterdam or Southampton.

Obviously, if a lot of companies involved in the tea business are there, it helps but it is not the only reason as companies move around, markets evolve…

So the explanation for the concentration lies not in the sole existence of what we could call a tea industry cluster (even if I think I might be exaggerating with the cluster thing).

In order to get a major tea port is adding to a tea industry cluster some historical background enough?

“Northern Germany as far as the Bavarian and Austrian Frontiers; Handbook for Travellers” by Karl Baedeker. Fifteenth Revised Edition. Leipzig, Karl Baedeker; New York, Charles Scribner’s Sons 1910. “Courtesy of the University of Texas Libraries, The University of Texas at Austin.”

 

The development of Hamburg in the colonial goods trade (coffee, tea, spice, cocoa, tobacco…) has its roots in the immigration of Protestant and Jews traders fleeing the religious conflicts of the 16th and 17th centuries.

These people came from different areas but also from the Netherlands and they brought with them their knowledge of these markets, their relations and their money.

Such was their success that in 1747, you could find in this town 246 coffee and tea traders and 267 in 1777.

The opening of the Chinese ports following the Opium War in 1842 and the end of England’s Navigation Acts in 1857 gave new opportunities to the tea business in Hamburg (If you want a more in depth analysis on Hamburg, its history and globalisation, you should read Capitalising on change in a globalising world by Wolfgang Michalski).

We now know that the tea industry has been concentrated in Hamburg for a long time.

But this is not enough as the following two examples will show.

Hamburg was the centre of Europe’s beer industry between the 14th and somewhere between the end of the 16th century and the middle of the 17th century. It was also the centre of Europe’s sugar industry between the end of the 17th century and the beginning of the 19th century.

Conditions and competitions changed and this two industries went away.

There is one final advantage provided to the tea industry that might explain it all. It is something that companies are always looking after, i.e. a financial incentive.

By financial incentive, I don’t mean subsidies but something more “subtle”, customs rights.

Yes you read it right, one of the main reasons behind Hamburg position is simple: part of it is a free port and it has been so since 1888 when the Free and Hanseatic City of Hamburg became part of the German Empire.

view from Poggenmühlenbrücke at Speicherstadt in Hamburg, Germany by Thomas Wolf, www.foto-tw.de.(published under Creative Commons-Lizenz Namensnennung-Weitergabe unter gleichen Bedingungen 3.0 Unportedc license)


This is a legal thing and the European Commission has approved it and published a list (http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2002:050:0016:0018:EN:PDF).

The idea is simple: when you import goods in a free zone, you only pay import taxes when the goods leave this area.

When you apply this to a yearly stock, you understand why it is really interesting in financial terms.

To say it with other words, you imported 1,200 tons of tea at once, since you had a good price thanks to your bargaining power. You sell each month for 100 tons in the European Union. Thanks to the free zone status, you will only pay each month the import taxes for your monthly consumption.

You might then say that it explains the importance of the Port of Hamburg for the European Union but not for the rest of the world since everyone can do it in its own country and you would be right.

What I must add to this explanation is that when you re export our of the EU goods from a free zone after some allowed transformations (e.g. improving the live span of your product or putting it in a new packaging…), you don’t pay taxes at all.

Let’s use another example. You have bought 1,000 tons of tea and you imported them in the free zone part of the Port of Hamburg. You change their packaging to meet your customers needs and re export to the USA for 1,000 tons worth of tea in teabags. At the end of the year, you won’t pay any import or export taxes for the EU (not even on the raw teabags).

When you add all this, you can understand why Hamburg has such a dominant position in the tea world as the industry is there and the customs “easiness” too.

For any company with a focus on the economy of scale approach (remember I said most companies in the tea business are following this model whether they are in the bag tea business or in the loose leaves one), this is a winning situation.

Will this ever change?

YES because the status of part of Hamburg as a free zone will end in 2013.

Because of this, we might see some changes in the manufacturing, transportation and pricing strategies of the whole tea industry.

I told you in the title “free is the name of the game” but soon, it might become “we are living interesting times”.

Women drinking tea

October 23, 2012 / / 4 Comments

Women drinking tea…

At first, I thought it would be easy to write about that topic and say out loud that the tea drinkers are not all old grannies drinking their tea in English china but I found out I was wrong.

Now, I will probably have lost half the people reading this and angered the remaining half but if you can bear with me for a few more lines, I will try to explain why I found that out.

So why?

Because after thinking a lot about it, after watching people at their places, at work, in tea salons,… I found out that there is no such things as a specific or more womanly way of drinking tea. It is more the result of a tea culture (the famous 5 o’clock tea, the Japanese tea ceremony, the Chinese way of doing it,…) and of personal preferences/experiences.

True, most of us like to take our time to drink our tea and to appreciate it but we can also prepare and drink it as quickly (and perhaps even quicker) as any coffee drinker.

Why don’t we do that more often?

This comes from the spirit behind tea drinking and in this way, drinking tea is more akin to wine drinking than to coffee drinking.

Would anyone think that wine drinkers that take their time are old grannies and grandpas? The answer is no. Why? Because in the French culture, it is the way, wine must be drunk and the French think that people drinking it like the Russians are supposed to drink vodka (one shot and all down) are sinning. To see that, just send a French to a Scandinavian party and look at his face when they will drink everything quicker than their shadow as if it was water.

But to come back to the initial idea, people who think that tea drinkers are old grannies drinking their 5 o’clock tea with their small cakes are all wrong

This is just one way of drinking tea and people might go from one to another depending what they think is right, on their mood, the people they are with, the places they are in, the teas they are drinking…

So whether or not you are in a hurry or have time, are alone or with friends, are travelling or at home, working or relaxing, you are more than welcome to make yourself a tea and to drink it.

I am sure you will find a way to enjoy it.

“Café du Commerce” and tea

February 6, 2012 / / 2 Comments

Let’s start with what is called in French a “Café du Commerce” analysis (mostly a popular wisdom analysis that you can hear in most cafés): tea prices are too high.

You do agree, right? How many times did you hear that? Or perhaps even say it?

I once explained why the same teas sold by two different companies could be sold at different prices(Whats in a name?…Price) but this is not really the point made by popular wisdom here.

The point is more that the price of the commodity itself is high.

Since I begin to write this blog, this question of prices has been fascinating me. Why?

Because tea is for now still sold through auctions and is one of the last (if not the only one) commodities to be sold that way.

This means no futures (to be simple and unfair to what was supposed to be an insurance product about bad crops, let’s say that it is a way for the financial markets to speculate on the prices of commodities but if you want a more impartial definition, just follow the link Futures Contract) and therefore no speculations, only the good old supply and demand meeting each other and deciding for a price.

The perfect dream of any economist, no?

Don’t be afraid, I won’t try to find out if there is speculation on the prices of tea but I will try to find out if it is true that prices are high.

To do this, I needed data (yes, economists can live on a diet made mostly of statistics, data and figures but not without a drink, which for me is obviously tea) and I was lucky to find two online sources: one with the monthly prices (in US cents per kg) of the last 360 months (starting for me in November 1981) at the London and then at the Mombasa auctions (Monthly Commodity tea price from IndexMundi) and the other with the weekly average prices of tea at the weekly auctions of Sri Lanka, Indonesia, Kenya and Malawi from December 1999 to June 2002 (Dharmasena, Kalu Arachchillage Senarath Dhananjaya Bandara (2004). International black tea market integration and price discovery. Master’s thesis, Texas A&M University. Texas A&M University. Available electronically from International black tea market integration and price discovery)

Then I had to cross check the data to see if it was usable for me and the answer was that the first set of data was usable while the second wasn’t.

Why? Because according to the methodology from the author, he had to make some guesses and assumptions (that might be right but I wanted fully reliable data) and second because I had no easy way to know when these auctions were hold, making the second step of my analysis a lot harder to do.

So what does these sets of data look like?

To be as complete as possible, you will find below both of them (for the second one, I put everything at 100 in the first week so as to compare the evolutions of different prices labelled in different moneys) but I will only use and comment the first one.


Click to view


Click to view

You will all see that after a kind of bubble in 1983-1985 and another in 1997-1998, the price was moving around a central value of more or less 200 cents per kg and this until 2005 when it began to rise to reach a little over 350 cents per kg in November 2011, meaning a rise of 175% between 1981 and 2011.

Not bad?

So now, you will begin to wonder why did it rise like that? That is a good question but one I will not answer here as there are several plausible explanations and one set of data even over 30 years might not be enough to find the good one (or good ones).

The next thing you will begin to say is that the good old popular wisdom was right and that we are all sheep waiting to be sheared.

Since you know me a little by now, you can easily understand that the answer might not be as easy as it seems.

Why? I hear them (you know them, the guys sitting at “Le Café du Commerce”) say, “the data is here, you must recognise that we are right.”

I am sorry guys but there is still a little something I need to check before telling you that you are right or wrong.

What do I have in mind exactly? A simple thing : nominal vs. real values.

You are probably thinking this is another strange concept but it isn’t.

You all know that the value of money changes overtime or put it in another way, for 1$ today, you don’t buy the same amount of a given product than 20 years earlier.

You might argue it is just a trick to make things more complex but it has more to do with inflation than with tricks, ie prices go up and down each year following inflation or from time to time deflation, so 1$ of 1991 would be more or less worth 1.6$ of 2011 (I said more or less because I didn’t bother what should be written after the point).


Click to view

So, what do these new figures tell us?

We see that the same bubbles over the years but what is more important is that tea prices have decreased.

Yes, you read me right. In the last 30 years, the price of the auctioned tea has become cheaper in constant money.

You should feel lucky to live nowadays, shouldn’t you?

Is bigger better?

December 19, 2011 / / 15 Comments

If you ask this about blogging, the answer is obviously no.

You want an example? I have several files, articles and so on about Teavana IPO, finances and such (this is the nice part when a company goes public) but I have tried to analyse all of it in depth and I have been stuck in nowhere, unable to go anywhere but unwilling to let it go.

How does this connect to tea?

When I asked myself what I should do and found the question I asked myself at the beginning, the answer came to me: What is the growth strategy of Teavana? Where do they do make their money? Where do they make their profits?

I don’t know if I will be answer to answer all these questions but I will focus on them (this means I won’t cover everything but perhaps I might come back to it later).

“Teavana is a rapidly growing specialty retailer of premium loose-leaf teas, authentic artisanal teawares and other tea-related merchandise.”

I will come back to the growing part later on, so let’s focus on the sales mix.

Here is Teavana’s sales mix over the last years.


 2008 2009 2010
Tea 51,00% 54,00% 56,00%
Merchandise 44,00% 42,00% 40,00%
Beverage 5,00% 4,00% 4,00%

Tea is the biggest part of it but not by much (only between 1 and 6% more than the two other categories put together) but its importance is growing while Teavana is experimenting a rise in their sales (from 63, 86 millions $ in 2008 to 124,70 in 2010), so when you mix the two of them, you see that tea is really important for Teavana.


 2008 2009 2010
Tea 32,57 48,74 69,83
Merchandise 28,10 37,91 49,88
Beverage 3,19 3,61 4,99

So important, that their tea sales were in 2 years multiplied by more than 2.

This is coherent with Teavana’s strategy as “A primary driver of our expected margin expansion will come from the continuation of our sales mix shift away from tea-related merchandise towards higher margin loose-leaf teas that our stores generally experience as they mature. In general, this trend is consistent with the evolution in our customers’ buying patterns as they graduate from purchases with a greater focus on merchandise with which to prepare and enjoy tea towards transactions centered more on replenishing their favorite teas and experimenting with new blends.”

To sum it up, they aim at opening more and more new stores but they also aim at bringing the consumers to the world of loose-leaf teas where their margins are higher.

Does it work or is their future growth the result of a growing number of stores?

Here is a first hint to see if it works.

The graphics provides us with a first analysis: the growth in the number of stores is obviously linked to the growth in revenues and also to the growth in profits (even if it takes time to get a return on investment, even if Teavana claims to do it rather quickly with a payback period of 1.5 year) but it is only one of their main components (I checked also using statistical formulas but I don’t want to bother you here with them).

So it seems that Teavana figures are in line with their strategy :

expand the number of stores,

  • increase the same-store sales,

  • expand the online presence.

 

Will this strategy work? Perhaps and since I don’t read the future in tea leaves, I won’t answer that question. However, what I know for sure is that perpetual growth is an unknown phenomena.

If we get back to Teavana, from all the weaknesses they have identified in their strategy, I think the most important one is the potential problems with the new stores (suitable locations, lease terms, cash to invest) and the personal (train and retain it).

Why?

Simply because quality is not enough, you need to have the right people able to create a specific relationship with the buyers, allowing them to come back and to “upgrade” their experience.

You also need to be visible, meaning being in the right place, which comes at a cost.

So is bigger better? Only up to a certain point.

What point? It all depends on how a company is able to evolve and make the best of its size but sometimes, it just becomes too big to fail, which usually leads to a failure.

But one thing I know is that for now, Teavana is not going the Starbucks way and comparing the two is like comparing broccolis and carrots, they are both vegetables but that’s all. Teavana and Starbucks are both beverage companies but that’s all.

 

Transformed in Germany, a new paradigm for German tea?

October 28, 2011 / / 6 Comments

I had a few discussions and mail exchanges with @Lahikmajoe about the German tea culture and its importance mostly in Northern Germany.

According to him, one of the reasons behind it is that this area is the hinterland of the port of Hamburg.

This was coherent with other things I had read about the importance of Hamburg for the importations of coffee in the whole Europe.

So I decided to try to find a little more information on this and asked the Port of Hamburg Authority about this.

I must say that their staff was really friendly and sent me quickly some data.

According to the German Tea Association, 76.778 tons of tea were handled in Germany.

This figure includes the 50.838 tonnes imported of which about half (25.940 tonnes) were re-exported (probably after some blending and/or repackaging).

About 75% of these tonnages went through the Port of Hamburg, making of it according to the Port of Hamburg Authority the most important European hub for tea trade.

However what I found most fascinating is the data provided to them by the German Tea Association regarding imports and re exports.

When you look at them, you can see two interesting changes over time:

  • the sudden increase from 1988 on of the imported tonnages,

  • the rise of re-exportation (a little over 50% of the imported tonnes in 2010).

This prompted me to look at the few figures I have one more time and to drop the re-exportations to see what is really consumed in Germany.

 

Now, we have a completely different picture.

The 1988 increase is still there but after that, it seems that the importations are more or less flat (in terms of tonnage, value being another interesting indicator to look at).

Is Germany a country famous for its teas? Perhaps or the reason could be different as I read in my Tea Lover’s Guide that Hamburg is home to a certain number of large tea brokers that supply almost all the European “importers” of a certain standing but the problem is that the figures don’t really support that.

For now, the set of data I have is not huge enough to allow me to go further into that direction but my next task is to gather more data and to see with the German Tea Association if they have any ideas on the reasons behind these figures .

So far, I didn’t receive any answer from them but I won’t let them run away with it.

After all, I have all the time in the world as long as I have my tea cup near me.

Middlemen surround us and for once, we should forget the Alamo

October 5, 2011 / / 11 Comments

I was in holidays and during that time, I saw something I already knew but sometimes you rediscover things you already knew: in hotels, camping places, bars, coffeehouses… you don’t have loose leaf teas but only the “not so good” old tea bags (from several brands, some completely unknown to me).
This puzzled me and I thought about it after coming back from holidays.

Are the people in these places unwilling to give good quality products? Probably not as you could buy/drink/eat other things that you would consider of good/upper quality.
Do they care for their tea customers? Perhaps or perhaps not. Tea is not the most drunk beverage out there and they probably (I didn’t dare to ask them) think that with 3-4 different tea bags (let’s say Darjeeling, Earl Grey, Lemon or Mint and then Assam or Ceylon), they have all it takes to satisfy all their customers. We know this is wrong but do they?

However, after giving it a second thought, blaming the shops (a generic term I use here for all the places where you can buy/drink tea from) is perhaps a bit too easy.
After all, they are only a small part of all the things that are happening between the producer and the final consumer (see the picture below) and most of the time, they don’t have access to all these wonderful products we do have access to but only to the catalogue of wholesalers, which are the middlemen helping them to get all kinds of supplies in an almost efficient way (after all, they don’t sell them good quality teas).


Now that you see the picture, how does it work in real life? Let’s take a simple example: a small baker that makes different small breads.
He might need up to 10 different flours to bake his breads and some in really small quantities.
Does he have the time to visit potential sellers and ask them for price? The answer is obvious: no and this is where middlemen come into the game. Another advantage (remember this is theory) of these people is that they buy more goods, allowing them to get better prices.

So if you want to change things on a big scale, those are the men you should target as they are the one buying and selling to others.
No comes the tricky part, convince them of changing everything. You will probably say, “they should sell better quality teas. People would drink more of these higher quality beverages. This way everyone would be happy.”

Right but wrong.
Nowadays, they have a rather standardised product that can be bought from identified suppliers. Tomorrow, they will have to buy/store/sell a lot of different teas with big questions on constant quality, quantities…
A second argument against the change is price. Who is willing to pay more for this higher quality tea? You will answer me: “I am”. Yes but the “average” people in the street? It is one thing to have a better product, it is another to have people see it that way and it is a third one to make people pay more for what is basically the same thing: drinking a hot beverage.

So is there no solution to this endless tea in bags thing?
I wouldn’t be so grim.
People (and this is a trend in a lot of products) want more quality, traceability and for some a fair attitude/experience.
If you don’t believe me, just look at Lipton (I know this is the example that everyone uses but they are among the most famous and the usual bagged tea reference): not only do they now sell their teas  also in loose leaf boxes but their Yellow Label is fair…
There is also a new product with cube shaped tea bags that gives more space to the tea leaves.

In the end, what people want is simple: they want a better experience and they want more for their money.
Is it possible to achieve this and to replace the usual teas in bags from the different places I mentioned earlier?
I do think so but it will take a lot of work towards the wholesalers or the shops.

For example, several “small” shops could get together and decide to focus on a few higher quality products at a reasonable price and by banding together (which is not easy to achieve), they could achieve this.
Why? Simply because what is needed to get this is critical mass and the willingness to skip several middlemen that can be useful but sometimes add really low added-value or no value at all for a rather high price.
For example, imagine your business is just collecting tea from different small blenders, repackaging them and selling them to hotels. What would be the price of your products? I stop you before you begin answering me in an accounting way, the answer is simple, you take the price of your supplies and you multiply it by 4 (or 3 or 5).
If you don’t believe me, this is a true story I learned from the boss of a small company working in the food industry.
Obviously, for our shops to be able to offer good quality prices, these people have to be skipped (sorry for them but such is the way of the market).

Another way around this could be to lobby the wholesalers to convince them that they should change.
This is probably out of our reach as individuals but companies and professional associations could and should do it.

As usual, all it takes to begin such a revolution is a few good men that are convinced that they are right.
Don’t stop asking for tea in restaurants, hotels… but ask them if they have real tea.
If we all do this, we might change the world, probably sip of tea by sip of tea but it will still be another step in the right direction.

Is forecast on the French tea market like the weather forecast?

September 1, 2011 / / 6 Comments

Is forecast on the French tea market like the weather forecast?

I found a summary of a study on the tea and coffee market in France in 2011. It was made by a company that specializes in market analysis and has been doing this for years.

I know that two third of the year is already behind us but I still wanted to share with you what is happening on a “mature” market and I swear that next year, I will be more reactive.

I only have access to the French summary but if you know someone with money that might be willing to subsidise me, let me know.

What can we learn in this study?

According to their forecast, the tea and coffee consumption in volume in France should rise by 1.5%, which is higher than the average rise of the food and beverage sector.

However, when you look at it more closely, the situation is not as bright as it might seem.

Coffee and tea capsules should be 2011 main product, the one that will still grow. Coffee (both roasted and ready to drink) and medium quality teas are decreasing.

Regarding the increased costs of supply, it seems that several health and climate issues had an impact on the industry as the tea and coffee processing industrials don’t have the bargaining power to increase their prices (the French panel that was used saw its raw margin decrease by 4 points between 2003 et 2010).

The way out for the producers seems to be innovation, both to change their products (with sometimes strange results, seeTwinnings and Earl Grey) and to create new markets through added value (check what Sylain Orebi, owner of Kusmi Tea, tells us about the launch in mid 2010 of Løv Organic, a brand of organic teas).

I won’t analyse the coffee market more than this but the hype seems to be these doses with new machines being launched, including some under store brands . And this could impact the tea market too as Nestlé launched in France its Special T, hoping to turn it into a new Nespresso.

I can’t be 100% sure about these trend analysis as I don’t have access to the full report, their summary is sometimes a bit messy with no clear distinction between coffee and tea (logical since they want you and me to buy their products) and this report focuses only on the French market.

But I thought that a “quick” theoretical analysis of this industry forecast could be interesting.

I hope to be clear enough for all of you and let me remind you that this is my own point of view/analysis.

The strategy used by all the main players seems to focus on innovation, be it either by changing the blends (exactly what Lipton does when it changes a lot of its recipes in a year), launching new brands with a different message and a different target (Kusmi Tea and Løv Organic) or trying to enter a new market (Nestlé).

Obviously, the last one is a bit different since they try to promote their know-how but it is not that much different if you think about it.

The final result is that companies are offering to their customers something with more perceived value that hopefully (for them) will cost them the same or less while allowing them to sell it at an increased price.

In other words, they try to differentiate themselves from their competitors, which is the definition of what a differentiation strategy is.

But how come these different changes of the value/price paradigm of different products all fall under the same generic strategy?

To answer that, we need to get a little more into differentiation strategies.

The uniqueness of the new offer is seen and valued by the whole market

The uniqueness of the new offer is only seen and valued by a specific market segment

Increase of the value/ price couple

Improvement strategies

Specialisation strategies

Differentiation towards the top part of the market

Decrease of the value/price couple

Purification strategies

Limitation strategies

Differentiation aimed at the lower part of the market

A posteriori segmentation that happens after the launch of the new offer

A priori segmentation that makes it possible to find what should be specific about the new offer

Adapted from Strategor, Dunod, 1997

Nice table, no? But what does it really mean?

An improvement strategy is when a company focuses on giving all customers a better value with specific products that would sell more if they were at the same price as the standard product. For example, Mariage Frères teas would be preferred by everyone if they were sold at the price of Lipton ones.

A specialisation strategy means that the company does the same as previously but only for a specific market segment Here, let’s say that a company focus is only selling teas adapted to the Chinese population in France.

A purification strategy (I am not happy with this translation but it is the best I could find for now) is when a company sells a product that is perceived as being of lower quality but at a much lower price than the standard tea.

A limitation strategy is the same but applied once more to a specific target. Let’s say that I don’t care about iced teas, a company selling me a box of teas at a lower price would satisfy me.

When you look at the “future” trends and at the above table, you can see that each of the three strategies exposed previously fits in there.

Lipton is clearly following the improvement or on the purification strategy as its target is the market as a whole and they try to change the value/price couple of their products (I don’t think we could all agree if they improve or decrease it so I won’t put them into a specific box).

Løv Organic is following what is more a specialisation strategy as it targets those interested in organic teas with high value/price products.

Nestlé gets into the market, which sets it a bit apart from the others, but I think they are targeting the whole market with a “better” quality product sold at a higher price. This is akin to an improvement strategy.

Now that we know what are differentiation strategies and that there is a differentiation strategy going on, the next question, which is very market specific, is rather obvious: when is it the right time to focus on a differentiation strategy?

To answer this, I think that Michael Porter could help us.

“A differentiation strategy is appropriate where the target customer segment is not price-sensitive, the market is competitive or saturated, customers have very specific needs which are possibly under-served, and the firm has unique resources and capabilities which enable it to satisfy these needs in ways that are difficult to copy.” (Source: Wikipedia, Porter Generic Strategies)

Are tea drinkers price-sensitive? Yes like everybody but I think a bit less than most people (at least when these people moved away from tea in bags) since they want value their money and .know that a quality tea can be costly (which doesn’t mean that people are ready to pay any price for a tea).

Is the market saturated or competitive? Right now, I (and I do mean I) think the French tea market is rather saturated. You will always be able to find new niche players focusing on specific aspects but I see it as less competitive than the market in the USA. Why? Because the market is not that huge, is quite “old” and people prefer flavoured teas coupled together with the prestige of specific big names. Is this likely to change? It could change but it would take a radical shift in the way people in general think about tea.

Do people have specific needs that are not fulfilled? With the modern trend of customisation and differentiation among people, the answer is quite obvious and it is yes (and the tea industry isn’t the only one to be in this kind of situation).

Do companies have unique resources and capabilities […] that are difficult to copy? Yes and no. Yes because a blend is something unique, people are not eager to try to copy them and other companies try to differentiate themselves, which means that copying each other is not a good thing but no because as a lot of you know that with the right raw products, you can always get really close to the original blend.

Dealing with market analysis is a bit like dealing with a stormy weather forecast: in the end, it is either completely wrong or right but only in small pieces of the country.

Things are moving fast and what is true one day could be wrong the next one.

And in your different countries, how is the tea industry positioning/repositioning itself?

What’s in a name? … Price

August 17, 2011 / / 5 Comments

Inspiration can come to you all of a sudden.

I had already talked with lahikmajoe about prices and tea and when we met in the 1st ITTC, he told me a story about two identical teas that had a huge difference in price, all depending if you buy in one store or in another.

Interesting no?

Then I read a couple of articles about tea, price and value:

Generation Why: The price of tea in Teavana by Hilary Matheson from the Journal Standard posted on July 17, 2011 http://www.journalstandard.com/lifestyle/x920793235/Generation-Why-The-price-of-tea-in-Teavana

Price and sustainability: What is Overpriced Tea by Alex Zorach from the Alex Zorach’s Tea Blog posted on August 1, 2011 http://cazort.blogspot.com/2011/08/price-and-sustainability-what-is.html

The Price of Tea by Lainie P from Lainiesips.com posted on July 19, 2011 http://www.lainiesips.com/2011/07/the-price-of-tea/

and I thought, perhaps it is time to answer lahikmajoe’s question or rather to try to do it.

In order to be able to do it, I will make a couple of simplifications since otherwise, it would bring us too far away from the price topic.

  1. My example (and it will remain that) will only focus on two different “generic” companies,

  2. I will assume that they get the same amount of non-blended tea at the same price from the same company. I know this is a big If but getting into the auction system or the direct buying and coming up with hypotheses based on that would just add complexity to this post,

  3. I will use wrong figures but I think they still make sense.

So let’s start!

We have two companies selling teas: A and B (quite imaginative, no? ;))

Both have an online store but A has three stores in different towns while B has only one.

A is widely known for its top quality products while B is nearly unknown outside of its usual customers.

Due to its reputation, A also opened tea houses in its stores while B is still focusing on selling and did not venture in something else.

The scene is set and now we can come to the price.

I will use the price of the tea bought by the two companies as the basis for my calculations (see point 3).

Why? Simply because it is a way of having costs that you can compare.

To make things easier, I will call this price X (another display of my daring imagination).

A

B

Tea price (including shipping costs)

X

X

Renting the stores

10%X (the increased percentage is because they need more space because of the tea houses)

3%X

Sellers’ wage

12%X (because you have two different categories: those selling tea and those attending the customers)

2%X

HQ paperwork

1%X

0.5%X (done by one of the sellers that might own the shop)

Logistical network

10%X (with 3 different stores even if they were in the same town, you would need a small warehouse)

0 (supplies are kept in the store)

Margin

4%X (since they have a good reputation, they can charge more there since people are willing to pay more for this “better” quality, because of the perceived value)

2%X

Total and final price

137%X

107,5%X

With this oversimplified example, you end up with a tea that is 1.27 times more costly in A stores than in B one, meaning that if you buy it for 5€/100g at B, you will pay 6.137€ for the same amount of the same tea at A.

A lot of data but no definitive answers

July 25, 2011 / / 2 Comments

All the data used in this article were found in the 2010 Tea Barometer of the Tropical Commodity Coalition for sustainable Tea, Coffee, Cocoa and are stated as being 2008 data.

The most obvious information is that there is a split in the producing countries between those favouring home consumption and those favouring exportation: China and India are both countries that drink more than 70% of the tea they produce while Kenya and Sri Lanka export 95% of the produced tea.

The explanation behind it seems quite logical as China and India have a long tradition of drinking tea whereas in the other two countries, it was only introduced to sell to a foreign market.

 

For auction and direct selling, Chinese teas are all sold directly while most of those coming from Kenya and Sri Lanka are sold via the classical auctions (see what happened in Europe when tea drinking became a must). India is in a third category as its production is sold nearly equally through auctions and direct selling.

When I tried to understand why it works like that, 3 reasons came to my mind.

The first and most obvious one is that these differences could be explained by the introduction of tea in a country “only” in order to supply a colonial power with the use of the sales techniques and infrastructures that keep on being used even when the country becomes independent .

Another plausible explanation was that the higher the quality, the higher the percentage of direct sales or the lower the production, the more the auction system is being used. However, this is not consistent with the facts as Sri Lanka has the lowest direct sales percentage but probably not the lowest quality and the difference in raw production with Kenya is not enough to explain this loss of direct bargaining power.

A third idea was that the countries with more tonnage sold were also the ones most heavily involved in auctions but again China with its “low” level of exportations goes against this rule.

Of these 3 explanations, only the first one is coherent with the 4 countries but the question would then be: why did the situation remain the same?


The smallholders/estates production split would seem to be linked to the timeframe and men behind the introduction of the tea culture (cf. the introduction of tea in Sri Lanka and how smallholders were crushed) but the facts don’t support this theory since only India has a really high percentage of its tea production coming from estates (more than 70%).

Another explanation could be that the countries producing tea in estates do sell teas strongly linked to the places they are in (a bit like terroir in wine) but the Chinese example with its 80% of its tea production coming from smallholders is an example that doesn’t support this theory.

 

Perhaps the reason lies in the workforce but even if in India, you need less men to produce one ton of tea than in the three other countries, the difference between Kenya and Sri Lanka shows that this explanation is not the good one either.

So in the end, what can we learn from this set of data? Several things but more importantly that nothing is as easy as it seems and that more work is needed to understand the tea industry.

If you have information or insights on how it works, please feel free to comment.