Category: Theory

Are they all doing the same?

May 31, 2020 / / 2 Comments

Innovation is a big word, one that is used all around us. All companies need to innovate to thrive or we all need to use the latest and most innovative concept/app/product…

It is a kind of buzz word and is all over the place.

I made a quick survey and found out for innovation and tea a lot of articles or even white papers presenting more or less the same thing: on the one hand, “innovations” to harvest/produce) tea, which more or less meant mechanising it one way or another or doing it with less human people and on the other hand innovation on the drinking side with new machines, new mixes, more information available for the customer, more small producers available on the market, more focus on health, making each experience unique…

You will probably think that I am mixing a bit of everything but what I only did was putting together some pieces written by several people (sometimes as advertising or because it is how their brand is working) and seeing that some themes keep on repeating themselves.

And don’t worry I do think that most of these companies are working along these lines and believing in the extra little bit they can bring to the customer.

Does this sound familiar to you? If not, I would sum it up as a focus on better products with higher quality and experience that are being sold at a higher price. This is part of a trend that runs through the entire food industry.

One example in another drink market is the famous 3 waves of coffee (I even read about a 4th one going on). It seems that the tea industry (but also other products) is following the same trend and path.

Why is that? Is there another way? What is theory (both marketing, economical…) saying about innovation and how can we relate it to tea? Why is that most focus is given to certain innovations and not others?

This will be the focus of my next articles.

But before I leave you, I would like to give you a hint by Clayton Christensen, an academic and consultant that focused on disruptive innovation (i.e. those that allow a company to create a new market, changing the entire market), “a sustaining innovation makes better products that you can sell for better profits to your best customers.”

Does this ring a bell? Yes, you just need to read what I wrote a little above that everything and everyone follow the same pattern and the same ideas… if they do so it is because it is a good way to sell better products for a better profit at customers and isn’t business all about money?

Back to the future

May 28, 2019 / / 0 Comments

As you might have noticed (for example here or here) I have an interest in prices of our nice little drink: tea.

I usually focus on old prices (sometimes among centuries) and I might still do that soon but another interesting thing is to focus on prices, on future prices. Don’t worry, I will not drown you into million of complex mathematical formulas or some barbaric letters like α or β but more into the minds and whereabouts of people doing this.

If you do an Internet research on this topic, you will find I am sure a lot of different things. I did it but only in English. I am sure there are other interesting findings to make in other languages such as Chinese or Japanese but since I don’t speak either, I couldn’t look in this direction, if you can and if you do, I would be interested to hear about it.

But let’s go back on our main topic.

After some research and cross references, I found several articles about price of tea and how to “predict” them in a mathematical way. However, guess what? The numbers and formulas weren’t the same. I hear you saying “how typical” and things like that.

But let’s get out of these clichés and look a bit more at what the different researchers/students worked on and how they did it.

First, some were working on Indian teas (with a further subdivision into Northern and Southern ones) and others on Ceylon ones. Obviously, if you don’t have the same geographical perimeter, you don’t get the same tea prices in the past and therefore not the same analysis.

Second, two different methods were used and both are valid. I will explain myself. In order to get models that match the past (and thus can predict the future if there aren’t too many changes in the overall conditions as mathematical models only work if “all other things being equal” (a standard sentence in this field of work), you must keep out of the system, the outliers (small mistakes or data that for one reason or another don’t fit into the general picture) and the things that mess up with the general trend. One of these things can be the season effect (which obviously is true for commodities), like for example the Christmas season is usually an important event but is not representative of the sales of the whole year and as it comes back every year, it can be discarded. On the other hand, one can make the hypothesis that the discarding of this data is a waste of efficient information (or because there is a lack of belief in the seasonality of certain things) and thus keep all the data.

With two simple explanations of the first steps when facing a lot of data, it is possible to understand why results are different from one research to another.

But how does it truly work?

OK. Let’s say that you’ve got your data (enough of it) and you cleaned it the way you want. There are several types of mathematical models that can be applied to a certain set of data to fit the past evolution and then to “predict” the future ones. This means either having the intuition or the knowledge that one might do the job (more or less) or having to test several before finding the one that suits the data you have. Earlier this was done with pen and paper but today, computers can do quickly and far more efficiently than we can, easing the task).

Random data points and their linear regression by Sewaqu

Once a model suits the data you have and you have all its values, you must check to see if the outliers you left out make any sense. In other words, is there a reason for the price dropping or increasing by 50% a peculiar month? For example tea prices could go up because the production isn’t up to what the market needs because there was flood or lack of rains or …. If you manage to find a plausible explanation for every out of place data, then it is likely that your model is adequate and that you can use it to predict the future price of tea leaves.

But obviously, it implies “all other things being equal”, which is always the tricky part and can lead to new results and a complete rework of what has been done.

And remember, Don’t worry. As long as you hit that wire with the connecting hook at precisely eighty-eight miles per hour the instant the lightning strikes the tower… everything will be fine.

On the road again

January 31, 2019 / / 0 Comments

Sometimes economists like to develop their concepts in what seems to be a sandbox way before applying them to reality to check if they are worth anything. When I say in a sandbox way, I mean based on certain hypotheses that to other people can seem completely out of reality. But this is how it works; since economics focuses on the way economic agents interact and behave and because these economic agents are complete beings and things, you need in order to study them to “simplify” things and to see then how what you found out works in real life.

One example is the work of Johann Heinrich von Thünen, a German nineteenth century economist that developed a mathematical formula to know what was the best use (in terms of production type) for a piece of land based on the transport costs to a market and the rent a farmer could afford (based on the yield of a given product, its selling price and its costs of production). Of course there are “weaknesses” or simplifications as I said earlier. For example, the differences in transportation costs, in topography, in soil fertility or the changes in price/demand were not taken into account in this simplified but quite important model.

I am sure you are now wondering why I am speaking of this right now and if the economics part of teaconomics has taken control of my writings.

But not at all. You will have to be patient for a little while before seeing where I want to go.

As I said, Johann Heinrich von Thünen didn’t take into account the differences in transportation costs and their impact on the overall chain. These differences can come from three sources: differences in infrastructures, efficiency of transport companies and different means of transport but they will have different impacts on the transport chain and thus on the best place to implement such and such resources (at least in his model).

What is the link between all this and tea? The answer is in the title of the song Hit the road Jack, transport. This is the reason why colonial empires devised and created transport networks to insure that the production of the colonies (mostly commodities) would get to the mainland as quickly, as cheaply and as efficiently as possible (okay, they also wanted to get their soldiers where needed as quickly and as efficiently as possible).

This is what was seen in tea too as earlier, you needed to get the freshest tea on market and to be the first to land in let’s say London. This is why clippers, the fastest sailing ships were built (before being becoming irrelevant because of steam and the Suez Canal (a new transport infrastructure)) and used to transport light and valuable cargo that needed to reach the ports as quickly as possible (tea, opium, people…). Today this trend is still alive for some teas (first-flush Darjeeling for example), planes are used in order to get them as fast as possible to the market.

Tea Clipper Foochow – sand painting by Brian Pike

But every journey begins with a first step. For tea, it is simple you need to get it from where the gardens/factories are to where the customers are, which means getting them out of the mountains/hills/remote locations where they are most of the time situated and then through the cities and/or the oceans. Unfortunately (or not), we are not playing in a sandbox and thus the model developed by von Thünen can’t be used right away to place tea gardens there, factories somewhere else and cities (or markets) in a third place. As with most human related things, we have to deal with how nature and humanity interacted over the centuries, creating a complicated and not always efficient network.

You will ask why does it matter? What do I as a customer get from an efficient transport system built around efficient infrastructures (one of the first steps for an efficient transport system)?

Let me tell you that the overall efficiency of any transportation system can make a lot of difference. For example, according to the World Trade Organisation World Trade Report 2004 (p.119) that quoted an article by the Economist, the poor road infrastructure in Cameroon increased the production costs of beer by 15 per cent and then you had to add the transportation costs to every place in the country. This meant that a beer costing 1 in Douala by the sea would cost 1.3 in an eastern village.

Now imagine this applied to a commodity that needs to be shipped through a country and then to another one far, far away (it seems a bit like the beginning of a fairytale, doesn’t it?). Based on the previous ratio (which might or might not be a bit too much for tea), it would mean paying tea at a much higher price. For a production process that has been refined over hundreds of years with as I said a focus since the beginning on exportation like India, it seems rather unlikely. However, it was a problem a few years ago at least in some parts of the country with two major impacts: difficulties to get supplies in and difficulties to get tea out.

Is it still the case today? I read that investments have been made with a special focus on this topic but only time and experience from people in the country will tell us how things have evolved and will evolve.

Understanding economics

July 30, 2018 / / 0 Comments

Sometimes I tend to ask myself some strange questions (strange for most people, not for me). One of them goes around the question of price (see there and there). I am most intrigued by how prices are made.

Sure every price depends on how much was needed to make the tea you are drinking with a chain of middlemen bringing it from the garden it was harvested to your cup. And every one of these people has its own costs and wants to make a living out of it. Then there is the price the customer is ready to pay based on the reputation of the tea, on the reputation of the company he is buying it from, on … But is there a way to do that? The answer is that there is always a way in economics (otherwise, it wouldn’t be fun) and it is called hedonic regression or hedonic demand theory.

Now you are probably looking at a dictionary trying to figure out what I might be talking about. And my guess is that you found the definition of hedonism but guess what? Things are well done and hedonism and the hedonic demand theory have something in common.

Hedonism is a school of thought that focuses on maximising net pleasure (pleasure minus pain) in everything. Following that, there is a whole different bunch of people and schools making some variations (more or less important) to this basis. The most famous being the Epicureanism, which is usually summed up by indulging in pleasure without any retinue, which is a misunderstanding while for true epicureans, the goal is to reach tranquillity and absence of pain.

But enough philosophy and let’s get back on topic and tea (although some might find that a tea well done is a way of following the steps of this school of thought but I won’t go any further alongside this road).

The hedonic demand theory builds on that and on the idea that you can divide everything in constituent characteristics and therefore get estimates of the value of each smaller part in the overall price. This is done for real estate economics (among other things) where a good/house is made of different attributes (number of bedrooms, distance to the city centre, size of the land…), for each one which a price or an elasticity (the way one variable responds when another one changes, for example when price go up or down) are looked after. Once the information is compiled, it can be used to compare prices or to create a price index and compare the evolution over time.

You are probably going to wonder where this will lead us but you will have to wait a little more. While I was browsing on the topic of tea and this hedonic price function, I stumbled upon an article upon something that is not tea but that is more akin to it than the real estate economics: wines from Champagne. I found out that in 1998, someone analysed and published such an analysis (for the complete reference: Gergaud Olivier. Estimation d’une fonction de prix hédonistiques pour le vin de Champagne. In: Économie & prévision, n°136, 1998-5. pp. 93-105, http://www.persee.fr/doc/ecop_0249-4744_1998_num_136_5_5940). What I found in here was something that I think can be used for tea too, a complete method about how to gather data and calculate everything to find out whether or not such a function could be made for tea and lastly a kind of value-for-money equation.

From what I read, it will be quite a challenge both for the gathering of data and the mathematical skills behind it.

I also think that like for the wines of Champagne, a choice will have to be made regarding a peculiar geographical area and type of tea (I think that flavoured teas are out of the scope of such an analysis). Even with such a smaller area, the gathering of prices and the qualitative analysis over “long” periods of time will be a difficulty. By long, I mean the longest possible as with everything in data, the longer the period of observation, the better the interpretation and thus the capacity to find correlation, function and so on.

What do you think? Is there an interest in such an analysis? Would it be worth the time investment?

And my title? It is a quote by an American economist and economics professor. The full quote is Economics is everywhere, and understanding economics can help you make better decisions and lead a happier life. Something I find well in line with the ideas of hedonism.

And it will be true

August 28, 2017 / / 2 Comments

Bronze plate for printing an advertisement for the Liu family needle shop at Jinan. Song Dynasty (960-1279). Picture taken by BabelStone

What would we be without good old advertising? Advertising, ie a form of paid message that intents to promote or sell something (an idea, a service, a product) to someone, is nearly as old as society. I learned while looking around in order to write this post that the Egyptians did it and perhaps even before that (think of it as sponsored cave art saying who the best hunter is or at least that is what I thought when I read about it).

But enough with old times and let’s get back to the modern commercials and ads we all know and dislike (let’s be honest about it even the good ones are too much in the modern days).

There are different theories relating to what people are waiting for before purchasing anything and how to “influence” them. I said “influence” because it is not like we (yes all of us) are being brainwashed or anything like that. We are just exposed to different vectors of information that try to promote and sell us some things.

And as you might guess there is no single theory regarding how we are affected and how we respond (if there was one 100% accurate, there would be no need for the others). So let’s assume that our purchase action is a rather linear process (and by doing it I follow one model but I am oversimplifying the whole process) : we get from awareness (knowing that a brand/company/product exist) to interest (“wouldn’t it be great to have that as it would suit my lifestyle) to desire (“I want it” or “I don’t want it”) to action (I plan on buying it or I buy it).

Overflow of phases in the customer journey with media by Nick Nijhuis (https://nicklink.nl/)

The message and media are adapted for each part and for each target that a company want to reach. This means that they are most of the time prisoner of their/our own stereotypes and can only play in this field as it is quite complex to change completely the image of a product/brand. For example, in English (like in French), an Ersatz good is a replacement product for something but one of inferior quality, a connotation that this word doesn’t have in German. Now imagine how hard it would be for such a product to change this connotation only through advertising (and even with some help from others). History is full of companies trying to launch new products that don’t fit with their perceived sphere of influence and that fail.

So let’s get a look at tea: what do most people expect when they think of it? Old and exotic (since it was first produced in China) but classy (the English 5 o’clock tea) and thanks to the wonder of modern marketing good and the natural positioning that most of us have in mind good for health/diet/…

And guess what? Those are exactly the words used in the different advertising campaigns. The different companies use different positioning as they know that one product or one brand can’t do it all but they go there on this safe territory where we expect their teas to be.

“Drink Coca-Cola 5¢”, an 1890s advertising poster

No one will venture out on the unknown because we (not the we the ones that know a thing or two about tea but the other we, the one that is for everyone) would be lost and if we are lost, these companies would have to rebuild everything from scratch, something that can’t be afforded for a product that was around for so long.

To change the advertising we see, we need to have new expectations and to do that, people must be better tea litterated (this works for other products too). This is the only way to have companies changing the way they act.

After all, as said in Mad Men, “I’m not saying a new name is easy to find. And we will give you a lot of options. But it’s a label on a can. And it will be true because it will promise the quality of the product that’s inside.»

That’s how it goes; Everybody knows

August 30, 2016 / / 0 Comments

I travelled a little bit these last days and I heard on radio two things that made me think about tea. The first one was an interview of a famous cook (whose name I never had heard and I don’t remember) that spoke about bakers and the return to higher quality products with a critic of the race to low-cost that has been raging through this industry in the past years. The second one was an interview (yes another) of an ice cream maker that sold high quality ice creams at a high price, saying (I am quoting from memory) that “it was not a regular ice cream” and commenting about the uniqueness and quality of the ingredients used to make them.
Even if they didn’t pronounce it, the word premium came to my mind as they seemed to imply that their products were above the others and in an area where price didn’t really matter. I don’t remember how much an ice cream was but it was for heavier scoops as usual which combined to its high quality made it something exceptional, at least according to the ice cream maker.

You will now ask me what is this premium thing you are talking about and why should I care about it when I am drinking my tea? Premium according to Merriam-Webster is a high value or a value in excess of that normally or usually expected source.
For tea, it would mean having more than you bargained for, more than you expected from what you drank. Does the tea market go that way?
I wrote something a while ago on generic strategies for speciality tea or industry wide companies but after hearing these people and thinking about it, I think that this premium strategy could work for most companies.
What is a premium strategy? It is a variant of the diversification strategy where a company tries to increase the perceived quality of its products leading to an increase in the perceived value and a willingness by the customer to pay more, allowing the company to increase its margins.
By doing this, a company manages to create a specific image, one that set it apart from the competition, one that allows it to go on another level creating a need and a market because its products are no longer perceived as one among others but because they became the standard that helps to measure the competition.
This strategy is the one adopted by several luxury cars companies, nearly all luxury good companies and some coffee companies (you know which one, I won’t dare to tell their names to you).
The first drawback is obvious; if people think that what they experienced is not worth the extra cost paid, they will turn to competitors (quite often cheaper ones). The second drawback is more complex as it will depend on the economy and the willingness of the customers to buy these products because they make them someone special and unique. Whereas this is easy for a car or a watch, it is more difficult to be perceived this way with tea (but the same goes for a lot of commodities, non-alcoholic drinks and so on).

You don’t believe this is a common strategy on the tea market? Just look at your favourite brand and the products it has decided to sell over the past years. I am sure you will find a little exclusive approach to them. This can take the form of having really rare or exotic teas or of specific blends that no one else does (even if some companies specialised in recreating any blend given to them) or a mix of both.

However what they all need to do if they want to keep on focusing on this premium approach is to enlarge their customer base, to be identified as being something special and unique, to rise through a new market level and stop fighting in a niche. Even if tea is said to be the second liquid drunk on Earth after water (even if it sounds a little strange), it needs to cross boundaries and become either something that everything will drink or develop a specific and positive image in the collective minds of almost every.
Without this awareness, the premium strategies will probably not be successful on the long run as the market will remain small in numbers and highly competitive with a lot of companies making and selling teas.
This is probably the biggest challenge faced by everyone in the tea industry.

Who needs a strategy for picking new teas?

May 29, 2016 / / 2 Comments

I was a few days ago in Germany in a tea shop/saloon (or lounge as they called it) and I went through their catalog to see what they had in stock and to compare their newest teas and blends with what I had seen in France (for example a rise in Oolong coming from “exotic” countries). Surprisingly enough, I didn’t have that feeling, although I went to “big” names on each national markets.
This made me curious about how these companies select their new products and those that come to market.

There is always the history that someone (the founder, the explorers…) made some discovery and brought them to us, the customer.
It can be true but it is more likely to happen in smaller companies than in bigger ones as people in bigger companies have too many things to do to just get lost somewhere and find a hidden jewel.
An other explanation came to my mind when I started considering each “big” or medium-sized tea company as a brand .

You know brand right? They are the little communication tools that allows one company to be differentiated from another. Usually, you would think of brands through mundane things such as logo, name…; however, they also generate a lasting impression on their customers and potential customers, because they are known, because they have values, because friends talked about it, because of the packaging…
For example, TeeKampagne is specialised in selling Darjeeling at an affordable price and in a sustainable system. Obviously, should this company sell flavoured tea, its customers would be lost and wouldn’t understand what is going on, resulting in decreasing sales.
And this is true for every company, even if most will state that they try to “bring you the best teas from all around the world” or something along that, which means that you will expect them to sell you all kinds of tea.

Once a company has a more or less clear definition of what it is supposed to make and sell, one of its strategies (a plausible one for the generalist company described above) is to enter new market segment with products they were not selling, in order to attract new customers with teas they will like or to increase the loyalty (ie the purchases) of existing customers by bringing them new experiences and new products.

This approach can be summarized through a simple example with a matrix with on one axe the width of the product mix, which means the basic categories and on another, the depth, displaying the different products sold in the different categories. The total number of products sold being the length of the product mix.
I must have lost you all, so I will write down a simple and fictional example.

Oolong

Black tea

Green tea

Taiwan

Darjeeling

Matcha

China

Lapsang Souchon

Korean

Flavoured with fig

Earl Grey

Darjeeling

So here, this company product mix has three different sorts of tea (Oolong, Black and Green), meaning a width of three and for each sort of tea, it sells three different products (a depth of three), which results in a length of the product mix of 9.
From its choices, it is obvious that this company is trying to “bring to your cup the best teas from all around the world” as it covers all the classical teas that most people know about from Darjeeling to Earl Grey while offering something for more demanding clients (Matcha, Oolong) or a few specific teas that might not be seen elsewhere (Oolong flavoured with figs, Lapsang Souchong).
This product line allows this company to experiment with different strategies that can be combined : go for one or more new non-flavoured teas, introduce more flavoured teas, create a new category with the introduction of herbal teas…

Now imagine this for your favourite tea companies and you might begin to understand why they decided to go for such or such products this year. This can go as far as launching a new category of upper quality teas or of more affordable teas.
All options are open as long as it doesn’t blur the message the company wants to sent to the customers. This is why new brands can be launched to focus on a specific new market that is totally alien to the original product line.
But this is another story.

A mix of different theories

January 27, 2016 / / 6 Comments

Price… a huge topic and one on which much could be written on.
I already wrote a post on it but focusing on a “simple” question that @lahikmajoe had asked me: how can two companies sell the same product at different prices.
This time, it is @lazyliteratus that said something about the price of some teas here.

Price is different things depending on who you ask the question to.
For most of us, it is how much we are paying for something we get but for the other part (the seller), it is an income that should exceed the production and sales costs while for others, it is also a symbol of who you are (“I paid xxx for this, which makes me one of the happy few”).

How are prices formed?
On the one hand, they depend on their costs of production and sales, as no company (at least one that wants to stay in business or one with a decent accountant) would sell anything under these costs. If you disagree with this, you should speak to someone, like him.

Uncle Scrooge doing what he likes the most, checking that his products are sold at the right price and generate enough profit for him.

On the other, it depends on how much you or me, in other words us, the customer, are willing to pay for this little something we want to drink (I will stay with our favourite drink).
When the two meet, you have a price.

This is what microeconomics (the branch of economics that studies the behaviour of individuals and firms when they decide to allocate their limited resources) defines in other words as the supply and demand model, while giving us a nice graphic to illustrate it.

Supply and demand model by Paweł Zdziarski

Who said economics couldn’t make things simple and easy to understand? If I am honest and I am, I must say that there are some hypothesises behind this model that are making it a little more complex but we shall ignore them for now.

One of them is that this equilibrium is always dynamic.
As illustrated in this curve, a low price usually means a huge demand but less supply (see Uncle Scrooge) while a high price means a high supply but a low demand (once again I am not in the world of luxury products).
But overtimes, things change and new equilibriums are found while the market and the companies react to the price producing more to get their share of the high price (and thus contributing to it decreasing on the long run) or producing less to try to increase the price (and thus decreasing the demand for the good). The demand side works the other way around.

So in this perfect world, everyone adds their costs (which are different from one country to another, just think of the differences in labour costs), take a small margin (while staying perfectly on target with how much the customer is willing to pay. Such a nice picture.

There are two problems with that.
First of all, the willingness to pay depends on everyone as we don’t have the same “sensibility” to price (depending on our incomes, our past experiences, what we think of the product…). This complicates the “perfectly on target” thing making it a mix between science (with nice algorithms and big data) and art (educated guesses/feelings/knowledge/luck).
The second is that some of the tea production is sold via auctions, which means that sometimes it can be sold under its estimated price, or via futures contracts.
Future contracts?

Great Scott!

No, this has nothing to do with Back to the future but everything with rice. You have to thanks our Japanese friends for that as apart from making tea, they also invented in the 18th century this interesting financial tool and all of this because the samurai were paid by a mix of silver and rice. In order to secure stable incomes, a new trading tool was invented by which the parties agreed to buy and sell a certain amount of rice at a certain price and a certain time. If the price goes up during this time, it is all benefit for the buyer but if it goes down, it is good for the seller. In other words, if I agreed to sell you something at 10 and the market price goes up to 12, you managed to make a profit of 2 if you sell it again and if the market price goes down to 8, I made a profit of 2.

There are still a lot to say on prices but I think it will be enough for now.
So to sum it up, price, however it is determined is just the meeting of two minds: one willing to sell something for a determined amount of money and one willing to buy it at another determined amount. When the two agrees, there is a deal and a price.
It is simple as that.

A quick and oversimplified look at a complex problem

August 25, 2015 / / 8 Comments

This post was prompted by an article I read on the Web about Mac Donald changing the way the Quarter Pounders is made with small steps made in order to improve their quality.

This strategy is called differentiation, trying to make ones product more attractive than those of the competitors to a peculiar target, whether to charge more and make more profit of it or to increase brand fidelity and making it more difficult for people to change from one brand to another.

One of the biggest name in this strategy field is Michael Porter that wrote a lot of books on competitive forces in industries, their impacts and some generic strategies to deal with specific situations.

A picture being worth a thousand words, here is a small look at those generic strategies.

Strategic advantage

Uniqueness perceived by the customer

Low cost position

Strategic target

Industry wide

Differentiation

Offering the lowest prices

Particular segment only

Focus

Michael Porter’s Three Generic Strategies

Now, I am sure you are wondering why I am talking about this and what is the link between Mac Donald and tea.

Simple, the idea hit me as I was just looking at this news, could this strategic thinking work in the tea world?

After looking at it, I just had to think that yes, believe it or not, it works (don’t worry things are not cast in stone and without a proper analysis, this might be considered as an oversimplification).

I already wrote things on companies selling speciality teas and what they can do (in strategy and marketing, there is never a definitive and absolute answer), I will summarize what I wrote below before expanding it a little and then looking at the industry wide companies.

Speciality teas companies are usually focusing on a particular segment, trying to be perceived as unique by their customers. The focus on low cost is not something these companies are trying to do as their focus is more on higher quality products, for which people are willing to pay more.

They usually stay “small” and focused on their core business and area of expertise. By small, I don’t mean no growth or something like that but a maximum size in their development (which will change for each company depending on its market, its products…) just before they get into direct competition with the big names and might lose their soul trying to fight against them on their terms.

The other approach is to “grow” but by keeping on targeting new specific needs and markets, which are not overcrowded and where there is no competition (you can call this approach Blue Ocean Strategy or White Space Strategy or even indirect approach (who would have thought that I would one day use a military strategy term for a post on tea?)).

The industry wide companies (call them whatever you want but you know them, don’t you?) have usually focussed on the low cost position on the whole market. After all, their aim is/was to offer the best tea at the lowest price, making a common product of what was before a luxury.

However, faced with increased competition from newcomers while being stuck with a bad image among those willing to pay more for higher quality products (a growing niche market) and yet with a known image for most people as well as a position on the “good quality for the lowest price possible”, these companies had to find an answer and focusing on only one strategy was not the solution as it would have blurred the message/image of the company, changed its profile, leading potentially to a decrease in their market share.

Therefore, they went for a mix between the two strategies, keeping on their low price offer while trying to bring new products on the market (to satisfy the thirst for novelty) and offering different loose leaf teas in nice boxes at a “reasonable” price (thanks to their negotiation power) to try to attract new customers while keeping on with their marketing motto of “good quality for the lowest price possible” (I am not judging the quality of their products here, just trying to explain some things).

You don’t believe this is happening? Just go to your local supermarkets or check on the websites of these companies.

Now, you probably saw three different kinds of products: the good old classical and “basic” offer, some new “innovative” products and the reworked loose leaf classical.

Can this approach be successful? It might thanks to the distribution capacity of such companies and because addressing every need on the market means they might keep their customers (which is always a better and less resource consuming option than conquering new ones) and even attract new ones.

However, if the market seems too big, newcomers might come or be launched by competitors (or the same companies) but the traditional industry wide companies have a secret weapon, their easier access to the retail industry, which allows them to “kill” any competitor trying to attack them straight ahead.

This is a glimpse at the strategies being deployed in the tea industry and its close friend and competitor, the coffee one.

To give a good overview, I had to be synthetic and generic while each company has unique advantages, targets and needs that shape its business and its strategy and with an end result that might be slightly different from what I wrote but without proper data and knowledge of one market and structure, it is difficult to be more precise.

And after all, I promised a quick and oversimplified look at a complex problem, didn’t I?

It’s in your gut

February 22, 2015 / / 2 Comments

Send your grain across the seas,
and in time, profits will flow back to you.
But divide your investments among many places,
for you do not know what risks might lie ahead.

Ecclesiastes 11.1-11.2

Why start with a quote from the Bible and one that seem to focus on investments?
To answer that, I must get a few days back in time when I was working on my stock of tea, putting them from bags into metal tins and trying to rationalise which tin should contain which tea.

 

 

Gordon Gekko in Wall Street Copyright 20th Century Fox

Then I must forward two days later when I was driving for work from one place to another and I heard someone on radio talking about stock picking, the name of a method to select stocks to invest into.
The more I heard them, the more it made me think about how we pick up teas. I kept on coming back to the way companies/banks/investors manage and pick their investments and stocks, wondering if there was anything in it for us?
Before we go any further in this post, don’t worry, this won’t turn into a lesson on investing.

What are the goals of any investor? Have the higher return on investment for the risk he/she is willing to take. Common sense says that if you risk a lot, you will probably earn more but this is not sure as it depends on a lot of factors and also on the expectations or likeness to take risks.
Classical strategies are to have some secure assets that will bring you the same amount of money whatever happens and some more risky ones that should reward you with a higher return on investments.

But how does this translate to tea selection?
Stop everything you were doing and look at your teas before thinking on how you picked them up.
Yes, that’s right, you have some you know are good ones and some newer that you expect much of.
In other words, you diversified your portfolio by splitting your stocks between secure assets (those you know) and risky ones (those you want to discover).
The split between both depends on your willingness to accept risk or if you are in an adventurer mood.

 

Technical analysis by Kevin Ryde

How do you select your more risky tea? You start by gathering some information on the place it was grown in, the kind of tea, how it was prepared, what is in it (if it is a flavoured tea), who is selling it… You will then compare these data to the one you already have, which will tell you what you should expect from it and you will perhaps even try it to see if it suits your tastes.
Based on all these information, you will decide if you want to buy a small portion of it, a bigger one or none at all.

And this was just an example as those of us who have a fondness for a peculiar tea (like Oolongs, Darjeelings…) are following an another strategy: the index fund, in which you try to replicate the moves of a peculiar set of an index, believing that no tea picking can beat on the long run, the constant quality of these peculiar assets you like, making the search for other good quality teas not worth the time and energy spent on it.

By acting like this, we just went to the same decision process that portfolio managers when they decide to invest in something.

Tea Cupping at Kairbetta Tea Estate, Nilgiri Region, South India Photo by Jack Strand

The only difference between both is that for tea, there are no mathematical models or computers trying to decide if you have to buy this tea or not based on a lot of maths.
And this is something I am sure will stay forever as I think that between personal tastes, crop quality, soil, harvest, the man behind the tea processing… there are too many human or natural factors turning a tea into the tea we like for a computer or model to summarize and decide for us.

And just when I was writing this, I found something said by a Canadian Kevin O’Leary (that I don’t know) that sums it up quite nicely.
“When you’re an investor, you can look at the quantitative and qualitative elements of an investment, but there’s a third aspect: What you feel in your gut.”