Category: Industry

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.

Of tea and strategy

July 31, 2011 / / 4 Comments

The Republic of Tea by Mel & Patricia Ziegler and Bill Rosenzweig

And no, this is neither a post on whether or not Sun Tzu, Clausewitz or any other general or theorist ever drank tea nor a real review of The Republic of Tea book.

What I intent to do here is to see if the story in this book can fit into an existing model of strategy formation.

But first, what is in this book?

It contains the various letters and faxes between Mel Ziegler and Bill Rosenzweig in 1990 and 1991 when they worked on what would become in 1992 the Republic of Tea company.

In it, they cover everything from motivation, product ideas, marketing, packaging, relations with business angels. If you want to look how a business comes out of an idea, this is a good book.

You will even be able to find their complete business plan at the end of the book.

What is “funny” and irritating at the same time is the main difference between Mel Ziegler and Bill Rosenzweig.

The first one will focus on a philosophical approach to business while the second one tries to get the practical things first while not being really willing to fully commit itself into the business.

I looked at the Republic of Tea website before writing and although the original founders sold their company in 1994 what I found the business is still in line with their original plans (for example, the children teas or the products that were launched over the years) but is not what they originally devised or had in mind (and this changed along the book too).

My analysis is that this results from a non conscious effort between the both of them to bring together two different concepts for strategy (the deliberate and the emergent one) into something else, the realised strategy.

But first, let’s define what these concepts are and then see if I am pushing the model or if it really fits here.

For this work, I am going to use the model provided by Mintzberg and Waters in their 1985 Of Strategies,Deliberate and Emergent; Strategic Management Journal, 6, 257-272.

Realised strategy is the strategy that is actually implemented.

Intended strategy is when an organisation has decided on a consistent course of action and when all its energy is focused on realising it, it becomes a deliberate strategy.

Unrealised strategy is what I call a good idea that was not practical enough to be implemented or that was no longer adapted to the context.

Emergent strategy is the answer to unexpected opportunities or to the lack of intentions.

The way all these concepts work together is described in the picture below.

As far as the Republic of Tea is concerned, the realised strategy is pretty obvious, it is the one that has been implemented.

The other ones are probably less obvious but can be found through the whole book.

Here are some examples coming from the book.

Mel Ziegler: “The fact is that creation is a projection of what already exists. What I am saying is that The Idea existed but had not manifested.”

Bill Rosenzweig: “what is the philosophy behind the Republic of Tea?”

Mel Ziegler: “To show through the metaphor of tea, the lightness of taking life sip by sip rather than gulp by gulp.

What would you say is the business behind the philosophy?”

Bill: “The business of The Republic of Tea is to sell (which means first we have to find) the best tea on Earth.”

Bill Rosenzweig: “the game, as you have so cleverly identified it, encompasses creativity and the process of being creative.”

Bill Rosenzweig: “4. In the middle of the night last night I woke up with ideas about the structure of our organization. I roughed them out on the attached sheet. I hope you can read the writing. Feel free to build on this and let me know your thoughts. And just for the challenge of it I took a stab at the first ten-year plan. This is a good exercice, even if it has nothing to do with what we end up doing, because it forces me to think where we want to go.

5. As I roughed out that org chart last night I realized that we need to write a “product charter” that guide our product-development process.”

Bill Rosenzweig: “Here are some more down-to-earth replies:

1. You’re right about painting our world too small […] I also find the packaging and pricing very intriguing. […]

I am working on a new diagram for us to show categories and distribution.[…] Waiting to have some information to come in before I can complete it.

3. Industry research. […] It will be important for us to feel confident about our point of entry.”

Bill Rosenzweig: “Last night it struck me that maybe it’s time for me to get somebody who’s a little less emotional about tea to tale a look at the business, and so I’ve appointed the other half of my brain as The Minister of Research, and here for a start is what I want him to find out:”

This is followed by a complete description of what is a tea industry analysis.

Mel Ziegler: “The key will be to find the right-talented like-minded people to own the offshoot business, and to lure them into helping the Republic of Tea creates itself.”

As you can see, we have two different strategy processes going on at the same time.

One that is rather predetermined and consistent all along the way, this is the intended/deliberate strategy.

The other one is dependent upon the circumstances and evolves all along the creation of the Republic of Tea. It is the emergent strategy that shapes the intended/deliberate one into what become the realised strategy.

Following Mintzberg and Waters’ classification of the different types of strategy processes, we are here typically in what they call a process strategy where the leadership focuses on designing the system that forms the ground from which the different patterns of action comes out.

You will say that this is what all new businesses do.

Perhaps but it is the first time I see this written in a book as most of the time, you only hear about how the creators had a wonderful idea, made it and sold it.

This alone makes the book worth reading.

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.

An interview with Kusmi

July 2, 2011 / / 12 Comments

[I rewrote this interview on a French radio of Sylvain Orebi, owner of Kusmi Tea and Løv organic as if it was made for a newspaper.

Here are the original transcriptions: Kusmi Tea – BFM Radio – French and Kusmi Tea – BFM Radio – English – ed.]

_____________________

» Could you present yourself in a few words for our readers that might not know you?

I am Sylvain Orebi, president of Orientis, owner of Kusmi Tea and Løv Organic.

» Sylvain Orebi, how did you decide to get into the tea business?

I followed the family tradition of coffee and cocoa trading before founding in 1985 with my father and my brother a new company specialising in coffee and cocoa trading.

Our business flourished until the early 2000s when challenged by the large global trading companies and by the food manufacturers, we decided to go downstream and we bought a coffee importer in Le Havre., Olivier Langlois.

It had a small department importing bulk teas since the 30s and it was right after this purchase that I began to look at tea from a business point of view and after finding out that there were good margins in it, I decided to go there.

» How did you do that?

For 2 years, I recreated the tea activity with a B2B approach but then I found out that there was a business opportunity in the niche market of B2C premium tea but in order to deal with my competitors, people like Mariage Frères, I needed a name.

This is when I was lucky since a friend of mine bought all the premium teas available in the Bon Marché [one of the most famous department stores in Paris, Francehttp://en.wikipedia.org/wiki/Le_Bon_March%C3%A9 – ed.] and among them were several Kusmi teas and I felt in love with the packaging before falling in love with the product and decided that I wanted to buy it and luckily enough, they were on the market but I didn’t know it at that time.

Kusmi Tea Can

» Could you tell us more about this brand?

Yes. Kusmi was founded in 1867 in St. Petersburg by the Kousmichoff family but exiled itself in Paris, Avenue Niel in 1917.

PavelThe original blends that are still used today have been created in the 1870s-1900s by Pavel Kousmichoff, a real creator , and his recipes were further elaborated by his son.

However, the brand belonged to a couple who had it for over 30 years after having bought it to the Kousmichoff family and that were not doing much to develop it or to make something out of it.

» The brand seems to have been barely alive when you bought it. How did you change this?

It was a lot of work. I had to completely rebuild it from the ground; we started from scratch, to be honest, we broke everything, we worked on the quality of the teas, on the packaging, on the distribution concept in France and abroad, quite a lot on communication too.

Luckily enough the company still had the blending expertise and know-how in its workshops but I modernised everything, including the packaging, which was at that time done by hand.

As far as the communication is concerned, it was my first management decision and I hired a part-time press secretary specialised in beauty who thought that Kusmi was a wellness, a beauty product and it allowed me to be in the “nice” media, such as Elle, Vogue… These magazines were obvious media for our brand as 80% of our customers are women that are attracted by our baroque packaging and that keep on buying our products because they are really good.

» How do you sell your products?

It took us two years to completely rework the products and the strategy and then in 2005, we were ready to sell again.

The distribution was and is still made only in selected places and corners in the whole world, in towns like Paris, Kyoto, Tokyo… We also have five stores in Paris, one in New York, another in Montreal. Right now, I am looking to open stores in Milan, London, Hamburg and Munich.

» You also created a new brand called Løv Organic. Could you tell us a bit more about it?

I created new blends for Kusmi and one day, I decided to listen to the people who keep on asking me for organic teas, not so much in France but rather in Scandinavia, Germany and the United States.

We went for a new brand because a brand is organic or not but it can’t be both.

For the same reason, even if both brands are distributed via mostly the same channels, there is now a Løv Organic shop in Paris.

» How do you see the future of the tea market? When a company like Nestlé launches a new product, it means something, no?

There is something going on but I am not sure it is a hype because tea is a product that has been drunk for a long time in China, India or the UK. Even if in France, people didn’t drink and might do so now, I wouldn’t call this a hype.

People have a taste that is changing, they want to be good and tea is a wellness, a health product.

The market has also changed thanks to companies like Mariage Frères that opened the market, allowing people to find premium teas at a price that was not necessarily low.

» And the future of your company?

In 2011, Kusmi Tea should have a turnover of 20 million Euros and I think that in 2015, the whole business should reach the 100 million Euros mark.


Dubai Tea Trading Centre

June 23, 2011 / / 5 Comments

I just read something incredible, even if it isn’t really new: Dubai has opened in 2005 a Dubai Tea Trading Centre (DTTC).


Check their website and you will see, it is not a crazy idea I had in my head..

To help you understand it, here are some facts.
1.Dubai Tea Trading Centre registers 26 per cent growth in tea trade during the first half of 2010.
2.Overall tea trade through Dubai rises to 642,000 tons during the first half of 2010,
3.Dubai remains 2nd largest export destination for Indian and Sri Lankan teas

The first question I asked myself was why?
The official answer is: “Dubai’s strategic geographical location between the world’s major tea-producing and tea-consuming markets has positioned the emirate as the industry’s international gateway for tea trade.”
Really nice but it sounds so official that it is not really convincing.

Now, let’s see what services are being offered:
Teabag Packing
DTTC’s temperature-controlled tea bag packaging facility has the capacity to pack a variety of tea bags, including both paper envelopes and service types.
Loose Tea Packing
DTTC is able to pack from 50 grams to 1 kg of tea on Vertical Form Fill Seal Machines, for both crush, tear and curl teas, (CTC) as well as orthodox/leaf tea varieties. Larger sized packing is also carried out as per client’s specific requirements.
Blending
DTTC offers blending services through a 2 tonne blending drum system that can carry out blends of both CTC and orthodox/leaf teas.
Tea Tasting and Evaluation
DTTC offers in-house tea tasting and blending expertise to ensure that its members can develop the best product for their customers. The Centre has a centralised tea tasting room provided with tea tasting equipment and staff available to set up tastings.
Storage facilities (Warehousing)
The DTTC warehouse facility exists within the Jebel Ali Free Zone and has the capacity to store up to 5,000 metric tonnes of bulk teas at any given time. DTTC provides dedicated individual storage space as well as limited free storage to all its members. All consignments are palletised and stored within racks.
Office Lease
DTTC offers regional and international tea companies the option to lease space within its purpose-built premises. The units vary from approximately 250 square feet to 350 square feet, providing clients with the perfect space solution to their business requirements, as well as a unique clustering benefit of being located alongside other industry participants
Everything one might needs to be a good tea company.

What can we learn from this?
First, Dubai is clearly going through a diversification policy to prepare itself to the end of the oil business (and this is their main reason for offering these new services, their location being just an interesting “coincidence”).
Then, when they decide to go into a business, they do whatever is needed to succeed in it.
Last but not least, if Dubai goes into this business, it means there is potential in tea business.

Perhaps not now but in the future, perhaps your tea will come from there? Who knows?

How did Lipton conquer half the world (and is probably planning to invade the other half)?

June 14, 2011 / / 12 Comments

 

I know that after reading the title, I already lost half of my readers and that the other half will probably think that I am either sold to those you should not speak about or that I am totally crazy/out of my mind…

 

As usual, the truth is slightly different.

I just went in holidays and I found in the place I was staying at a January 2010 French magazine talking about Lipton and entitled: “Lipton, the art of making the whole world like tea”.

I sat there and I read through these three pages and found some facts that Teaconomics had to give others the opportunity to get access to these information.

Before I begin, let me remind you that this article was published in January 2010, written in December 2009 (at the latest) and that all the figures are from the period 2008-2009.

 

But first, just a couple of figures and data.

Lipton in 2009 sold 52 billions of tea bags in the whole world.

The company is also the second brand drank in the world (behind Coca Cola) and saw its turnover and profits increased in a huge way in 2008.

 

Now let’s have a look at Lipton’s situation in different countries…

  • In France, 1 out of every 2 tea bags sold is a Lipton. 2 times bigger than Twining, Lipton keeps on changing its products to fill the sales space.
  • In the USA, a special mix for iced tea. Lipton has a share of 30.7% of this market and made an unique recipe that can be used even with cold water.
  • In Saudi Arabia, Lipton’s colours can be seen in the whole country. Lipton became famous there by painting all the tea houses in yellow and red. It has a market share of 66%.
  • In China, Lipton is one of the few Western brands really known. To bring Chinese consumers to their black teas in bags, Lipton created a mixture ready to drink with powdered milk and sugar.

 

So the big question is: how is Lipton so successful?

First of all, they have a huge estate in Kenya (14,000 ha), with a total output equal to 10% of their yearly tea production.

Obviously, this also helps them to standardise the quality of their products (really important when you target the mass market).

 

Then, they have the Lipton Institute of Tea.

This unique facility (located in Sharnbrook, North of London) is home to a hundred biologists, nutritionists, aroma experts… (plus 40 scientists in Kenya and 50 testers in India, China, Japan and the United States).

Their mission? To drink 10,000 cups of tea per week but in a scientific way, much like an expert in oenology does when he tastes wine.

This allows them to change their teas really often (in 2008, 13 out of the 73 products sold in France under Lipton’s two brands were changed).

 

Lipton also focused on market areas that other mass market players (Twinnings and Tetley) had left open:

  • flavoured teas (with a new crystal bag and with natural products) allowing them to increase their prices,

  • dieting products (until now, it didn’t work well but Lipton is still there),

  • fair trade products (with their Kenyan estate being certified by a NGO Rainforest Alliance and in 2015 all the estates selling tea to Lipton will have this certification).

This costs money to Lipton but gives them an advantage as every certified estate sells their production to them at a premium price, giving Lipton access to non auctioned teas.

At the same time, Lipton invested in advertising and their sales force (going as far as helping the supermarkets to put the products into the shelves with Lipton’s products being the most visible ones).

 

With half the world yet to be conquered and a good tactic to invade new markets, it seems that the sun is shining for Lipton Yellow.

The classical economics (Part I)

May 27, 2011 / / 5 Comments

According to classical economics, prices are the result of the interaction between the quantities of a good supplied by the producers and those demanded by customers.

However for tea, the process is a little different as it involves auctions.

But in spite of this, I decided to stick with the classical economics and to try to describe the market with a first focus on the production side.

 

For this and other similar posts, I will use the world data provided by the FAO, the Food and Agriculture Organization of the United Nations, which goes back to the year 1961.

Here are a few findings (probably quite obvious but who knows?).

 

The world production averaged in these 47 years to nearly 2.2 millions of tonnes per year with only 983,825 tons being produced in 1961 against nearly 3,896 millions in 2008.

As can be seen below, the growth rate is quite impressive and almost constant.


But there is more to it.

 

I looked at the 7 (why 7? only because this number is more or less 20% of the total number of countries and together they produce more than 80% of the world tea production, another illustration of the Pareto Principle) biggest tea producing countries in 2008 (China, India, Indonesia, Kenya, Sri Lanka and Turkey) and the growth of their average production is more important than the growth of the average world production (*4 vs. *3).

Over the same period of time, the number of tea producing countries increased by nearly 30% (and this is without counting the new Republics from the former USSR) but almost a third of the producers have a yearly averaged production below 1 000 t (I checked and this ratio was the same in 1961 and in 2008).

Along the years, the weight of the 7 biggest tea producing countries in 2008 is slightly increasing (from 77.3% to 84% of the world production with a low point at 73.2%) with an important increase from mid 1980s on (linked to an increase of the Chinese production).


What can we learn from this?

Tea production is clearly fragmented with a “high” number of countries involved but with only a few “big fishes” and with one becoming the n°1 producer country and yes, it is China, which sees its share of the world production from 9.9% to 32.7%.

For those interested, the Indian share decreased over the same period of time from 36% to 20.7% (China became n°1 in 2005).

 

The real questions start from now:

  • Why did the Indian production grow less than the Chinese one?

  • Why was there an increase in the number of producers?

  • Why was there an increase in production?