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An upgrade in digitaltechnology financed by thetrillion dollars needed tomanufacture and distributedvaccines marks the dawningof a new era of logistics.
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Tea shipments quarantined at ports around the world.
The pandemic’s unprecedented “stress test” of the world’s food supply chain accentuated its weakest links as it accelerated innovation.
Nothing concentrates the mind like a life-threatening, economy-shattering crisis. Unlike in 2020, millions of kilos of tea will not remain unplucked at the onset of the harvest. Lockdowns and labor restraints remain a threat, but tea production is expected to return to pre-pandemic levels.
The other end of the chain faces disruption through 2021. Retailers and distributors that survived order cancellations from foodservice clients by the thousands, while struggling to meet demand for packaged teas from panicked grocers begging for expedited delivery, report a “new normal.” Inventories that disappeared in days are still not fully restocked, and tea blenders struggle to source some inclusions.
Anticipating out-of-stocks as consumers rushed to fill kitchen pantries, wholesalers and importers upsized orders that require scarce containers. Meanwhile, ports essential to the tea trade prioritize vaccine transport, their nearby warehouses overflowing while trucks and trains idle, and air transport remains disrupted.
Eliot Jordan, vice president of tea at Mighty Leaf in California writes that he is backing up orders by a month on anything that has to move on the ocean. “The problem is, as long as Covid-19 is running rampant, all the forecasts I have are throwing darts in my basement with the lights off – sometimes it’s better to throw very few darts until the lights come back on.”
Economic Threat
Nothing in 2021 will equal the economic shock of last March as restaurants in 135 countries closed their doors, eliminating 20% of the tea industry’s revenue. Permanent restaurant closings through December exceeded 110,000 in the US alone, according to Bloomberg News. Citing the Natural Restaurant Association’s latest survey, NRA reported to Congress that “more than 500,000 restaurants of every business type — franchise, chain, and independent — are in an economic free-fall.” Seated diners in seven countries tracked by OpenTable declined 85% year-over-year during the Christmas holidays, but NRA in January saw a 10.2% sales increase, a stark contrast to a 19.2% decline in 2020 which NRA called the most challenging year for the restaurant industry.”
In testament to tea’s resiliency, consumption held steady in 2020. Sales of packaged tea to home-bound tea drinkers in Canada put tea sales growth at the front of the fast-moving consumer goods categories.
The Great Recession is a reminder that tea drinkers did not stop drinking tea in 2009; they traded down, spending three cents a cup for discounted commodity brands that never recovered their previous profitability. Imports were still flat in 2012, but the dollar value of wholesale teas grew at a steady 4-5%. Sales in coffee shops sustained the specialty tea segment and premium teas, like specialty coffee, first appeared on the top shelf in grocery, mass-merchant, and club warehouse outlets. Greater availability of “healthy” green and specialty teas and the convenience of ready-to-drink brands, along with refrigerated “economy” tea concentrates, were the big money makers.
Conditions are different now in the industrial tea consuming nations. Economic malaise presents the greatest threat to the industry. In many tea-loving nations, including the UK, Russia, France, and Germany, young people prefer herbal infusions, fusions, and fruit teas. They and their elders now drink functional and condition-specific wellness teas. Competition in the beverage segment is fierce.
Tea retains its appeal
Market research firm Technavio projects the foodservice tea market in the US will grow by $2.66 billion through 2024. Full-service restaurants serving ice tea accounted for 35% share of foodservice tea sales in 2019. Unfortunately, full-service is the restaurant format that suffered the greatest losses during the pandemic. Tea will retain its appeal on the menu, but tens of thousands of foodservice clients will disappear. Restaurant and bar employment declined by 498,000 in December, bringing to 3.9 million the number of leisure and hospitality jobs lost since March and suggesting a long recovery.
Will future revenue be sufficient to react to challenges brought by climate change and the rising cost of labor and inputs, which is not sufficient to attract critical outside investments?
The World Bank estimates the global economy at $80 trillion. Combined, the economies of the US, China, Japan, Germany, UK, and India account for almost 60% of global GDP. All six play a vital role in sustaining tea, but the world’s industrial markets are saturated, reporting sluggish growth (or slight declines). Tea volume growth is stagnant in all but two of the six largest global economies (India and China). Everything that can be done will be done to restore economic stability in these countries but a prolonged recession in Europe, doldrums in Japan, the catastrophe still unfolding in the US and India seriously threaten the financials underpinning specialty tea.
Upgrading logistics
Offsetting this gloom is the dawning of a new era of logistics thanks to an upgrade in digital technology financed by the trillions of dollars needed to manufacture and distributed vaccines to end the pandemic. The promise of real traceability, defined as price discovery at the farm gate, and the economical distribution of “fresh” tea present a huge opportunity.
Imagine tea marketed like produce. Residents of Sochi, Russia are accustomed to daily delivery to local markets of tea processed within 18 hours of when it was plucked. Leaf tea is on display next to spinach.
Upgrading cold chain infrastructure alone will cost billions of dollars, but delivering enough sub-zero vials needed for 15 billion jabs is just the start.
Alexander Barrett, founder and c.e.o. of iFinca in Colombia, sees a bright future for growers using technology to establish a “direct relationship” with consumers. His mobile platform connects consumers with cafes and brands, importers and exporters, roasters and farmers and cooperatives.” Consumers using smartphone cameras to scan a QR code to “meet the farmer.”
“You don’t have to know the importer or exporter,” says Barrett. “The definition of traceability from my point of view is the ability to find the farmgate price. Ideally everyone in the supply chain shares the price of their services.” His company is at the forefront of building a global community built on transparency, he says.
At iFinca, the focus is coffee, but in the past five years, each of the world’s major tea producers (several reluctantly) disclosed their suppliers with website maps showing gardens and garden workers with pledges to eliminate slavery, child-labor and unfair-labor practices.
Sourcemap.com, a supply chain mapping software company founded in 2007, enables consumers to visualize social, financial, and environmental risks. The site lists Lipton’s tea suppliers by country but there is no application to track tea like that for coffee or cocoa.
Founder Leonardo Bonanni describes Sourcemap “a ‘wikipedia for supply chains’, used by hundreds of brands to map their supply chains publicly, disclosing the origins behind flagship products. The platform goes one step further by allowing consumers to trace any product all the way to the source of raw materials, and learn key information about standards and certifications. For the past decade Sourcemap has been widely used to trace high-risk commodities including cocoa, coffee, cotton, and palm oil, and in the coming year you’ll see additional disclosures for new materials including teas, herbs, and fragrances.”
Tea supply chain vulnerabilities
Tea production consists of eight stages: growing, plucking (mechanical or by hand), withering, rolling, fermentation (ending in a kill-stop), drying, blending, and packing. All are labor-intensive and, therefore, slowed by Covid-19 safety concerns. The challenges in 2021 become apparent once the tea departs the farm gate for either export or domestic destinations.
Trucking. Covid-19 has polarized the trucking industry. Loads that are considered essential are exempt from many restrictions. Drivers who transport non-essential goods and those who supply non-essential businesses are parked – in many cases with no end-date in sight. After a burst of activity to replenish retailers like Kroger (which experienced a 30% increase in sales in March) loads for commercial truckers are in decline. Attempting to cross borders with loads of tea often results in lengthy delays. In East Africa, finished tea delivered to the Mombasa Auction may take weeks to arrive or depart warehouses as drivers deal with quarantines and Covid-19 testing. In India, the problem is more acute as millions of kilos of raw leaf must be transported from the field to bought-leaf factories within five or six hours. Smallholders negotiate with pickup truck drivers in the local villages, promising a portion of payments that vary by load.
Globally, the trucking crisis has resulted in widespread consolidation. Bankruptcies are common, and many thousands of drivers were infected, spread the disease to tea-dependent villages, and died.
Ports. Cargo traffic at India’s top 12 ports declined for the ninth month in December. Containers are badly out of position and warehouses are bulging. The cost of booking a container increased ten-fold on some routes and delivery schedules along the most heavily traffic tea routes are in shambles due to quarantined crews. Moisture content of tea must remain between 2.5-3%. Tea awaiting shipment is often poorly sheltered and once on board, tea is subject to great differences in temperature and humidity as it streams from tropical destinations to the Baltic and North Atlantic ports of Europe.
The situation greatly accelerated consolidation and digitalization of logistics. The World Economic Forum estimates that 20% of the $9 trillion worth of goods traded annually is spent on administration. Covid-19 has forced intermodal transport to quickly adopt 3PL (third-party logistics) services, forcing fiercely competitive incompatibility at rival ports to give way to digital collaboration. DP World in Dubai, for example, developed a fully integrated logistics service on the India-Europe trade lane by acquiring logistics feeder operators, according to The Loadstar. “This integrated offering will solve complex logistics challenges for customers using seamless combinations of DP World’s global maritime and logistics footprint and P&O’s expanding pan-European network of warehouses and integrated road, rail and sea links,” according to DP World.
Planes. A global vaccine air corridor to ensure timely delivery will sideline air shipments of specialty tea and other goods. India is the largest manufacturer of vaccine, globally. Two Covid-19 vaccines approved for manufacture will get priority along a special flight corridor to Dubai, the region’s largest airport. Given the challenges of utilizing trains, trucks, and ships, demand for airfreight surged in 2020.
Cost is a big concern. Airfreight rates will remain at multiples for at least six months. Restocking drives demand as bottlenecks developed for critical parts. The unknown facing the transport industry is e-commerce which grew much faster than predicted. Ultimately the small size and one-time nature of vaccine shipments is manageable. “The bottlenecks are more likely to come from container availability, storage, handling, and road distribution,” according to Bruce Chan, v.p. global logistics, at Stifel. In rural India, drones will carry the precious and perishable freight to remote villages.
Trains. India announced a national rail program to move tea, rubber, and other plantation crops by rail. The Northeast Frontier Railway will connect Siliguri, Guwahati, and Dibrugarh in Assam, all three important hubs for tea. The government significantly increased allocations that would extend and improve the network including an elevated corridor from Kamakhya to New Guwahati and a freight business development (FBD) Portal. During Covid-19 the speed of rail transport increased from 27 kilometers per hour to 47 kmph.
Tea supply-demand equilibrium
In 2021 demand is predicted to outpace supply. Global production declined slightly in 2020 due to a 12% shortfall in India, but stocks remain plentiful. There is a growing likelihood that prices will firm up at rates above $2.85 per kilo, a 10-year arithmetic average of auction prices at Mombasa, Colombo, and Kolkata. Whether these rates compensate growers is an open question since the spike in costs due to Covid-19 span the entire length of the supply chain.
China remains the motherland of tea as well as the largest producer and consumer. China accounts for 32% of tea exports and 40% of global consumption, some 2.72 million metric tons in 2020. Together with India, these two Asian countries account for 60% of tea consumed, up from 48% in 2010 according to EIU. Daniel Workman, at World’s Top Exporters, writes that “the value of worldwide tea exports fell by an average -12.8% for all exporting countries since 2015 when tea shipments were valued at $7.3 billion. Year over year, global tea exports depreciated -18.8% from 2018 to 2019.”
Tea exports continued that decline in 2020. During the past five years, as the cost of inputs increased by 8%, India’s tea prices grew at a compound annual rate of only 1%.
Labor accounts for 65% of total production expense, accelerating a transition from registered plantations to small tea growers (smallholders) and bought-leaf factories. Smallholders now produce 50% of India’s tea during a time when production has increased from 986 million kilos in2007 to 1,338 million kilos in 2018. Production fell by 152 million kilos in 2020 due to Covid-19 but is expected to recover in 2021 (an unfortunate development given that scarcity led to increased prices sufficient to cover the cost of production in 2020).
The brief respite will not be sufficient to restore profitability to a sector reeling under pressures of high cost of production, low labor productivity, low price owing to oversupply and an ineffective auction model, according to Vivek Goenka, chairman of the Indian Tea Association (ITA).