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Same factory, same tea, varying quality.
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Social media building blocks for personalization, relationship-building, and analytics: it’s not just Instagram and Facebook anymore.
No one can reliably predict business, social, economic, and industry basics once the Covid-19 pandemic moves from its disruptive stage to a rebuilding phase. But companies can’t just wait and hope. They have to make decisions now on the basis of two extremes of possibility: a return to business as usual, with strategies as usual, or an environment that changes structurally and requires strategic and operational repositioning.
It’s clear, for instance, that in many businesses, the old advantages of physical location are now a problem; classrooms and movie theaters are prime examples. There is no plausible return to business as usual here. Sports attendance and air travel: maybe. As for retailing, the Economist magazine, noted for its careful and low-key analysis, recently summarized the coming years with the observation that “not since the Industrial Revolution has shopping been in such upheaval.”
So, what about the tea industry, so complex in its parties and processes from bush to cup, with over 60 countries growing tea, giant farms and small shareholdings, intermediaries along the entire supply chain, wholesalers, blenders, supermarkets, private branders, specialty stores, tea rooms, online sellers? Guesses, forecasts, surveys, and expert judgments can help pick out likely trends, but the test will be whether the future they predict actually happens, by which time it may be too late to do much more than mutter, “Oh. Wish we’d realized that.”
How do tea business owners and executives plan when they can’t predict? This STiR review isn’t a set of forecasts and recommendations but a ‘thing about it’ list derived from sorting through facts, figures, and examples across tea and other sectors. It suggests that the most useful approach to planning is to assess four areas of premiumization: (1) product assurance, (2) customer delivery network, (3) personalization relationship levers, and (4) financial dynamics. Which of these areas will determine business performance, whatever the impacts of Covid? How much must a tea firm fit these factors together? Where must they be premiumized versus being be handled as a commodity?
The 2020 Christmas season illustrates this interaction. Sellers who had a catalog of premium teas couldn’t get reliable delivery from its wholesalers or to its customers, undoing much of its established customer relationships. Much of this came as a result of the political cutbacks on USPS services and capacity – a commodity that could be taken for granted. Is it temporary or for the long term?
What assumptions do firms now make about what is conceptualized as “supply” and “chain?” Do they rely on wholesalers, their own purchasing from gardens, blenders, and wholesalers? Should they investigate drop shipping, where product inventory and customer shipping are handled by the service provider – at a premium price?
Product assurance
Premiumization contrasts with commoditization. It’s generally discussed in teas in terms of the product itself: differentiated, with a standout identity and appeal to discerning customers, commanding a strong price. Among popular mid-range black teas, there’s a wide gap between, say, the premiumization of a loose leaf, single estate Kenilworth (Sri Lanka) and (Millima Kenya) and the commoditization of anonymous broken leaf or special blend black tea (India and Sri Lanka). Earl Grey spans the premium-commodity range, from real bergamot flavoring of a subtle blend of Keemum, Darjeeling and other leaf to sawdust equivalent lowest grade dust and fannings overpowered by ethylene glycol.
Commoditization isn’t necessarily equivalent to mediocrity. Cheap culinary grade matcha may outsell ceremonial grade on a value-for-money basis. Botanical turmeric and tulsi teas can be relatively inexpensive attractions. A few of the English/Scottish/Irish breakfast tea bags are fine blends and strong brands.
What adds premiumization to such a commodity good is reliability, availability, convenience, and ease of buying – product assurance. One likely scenario for at least a few years post-Covid is that these will be compromised. Today, one of the leading tea product categories is the “out-of-stock” brand. Tea has a short harvesting season, a week for some of the best. Seasonality, shipping, and export delays quickly turn a premium tea into a unsatisfactory product purchase. (In passing, it’s worth asking why so many tea sites list their out-of-stock items, almost willfully undermining both premiumization of product assurance and of customer relationship.)
To a large degree, premiumization in product assurance has rested on who a seller buys from. Increasingly, the pre-Covid trend was towards direct relationships with elite growers. Lockdowns, limitations on travel, and safety concerns may erode this. May, not will. Regardless, tea brokers, sellers, blenders, and sellers face uncertainty at the very core of the customer relationship. How do they select their product range and providers? Out of stock is not the best brand to show on a website.
Customer delivery network
Customers really don’t care about your supply chain: that’s your problem and responsibility. They increasingly do care, often intensely, that you meet their delivery expectations. This largely defines their ratings of “service.” The premiumization question here is what post-Covid scenarios make delivery networks – all the parties in logistics – best handled through commodity ordering, distribution, and shipping, and which must be handled as core to the identity of the firm.
Commodity operation rests on cost and routine procedures plus USP or Fedex for special orders. Premiumization is expensive and complex. Reports suggest that most tea sellers lack the money needed, staffing, and industry expertise. The more commoditized the management, the more processes can be outsourced. Take the customer order, make sure you maintain lean inventory levels and get the goods out. Let your vendors handle the supply chain at what extra price or streamlined costs.
Shipageddon: Where have all the containers gone?
Shipping is one of the major areas of uncertainty in delivery networks. Sea freight is in absolute chaos. A total 60% of world trade involves ocean transport and China constitutes about 60% of that total. For every three containers shipped from Chinese ports, only one comes back. Departure delays are averaging a month. Safety and tightening of trade and export rules have cut the processing of containers by half. Several ports have banned shipments from other countries: Iran embargoed Chinese teas for instance. Transpacific shipping rates doubled and freight is now 20% of the cargo value, a surcharge that, added to free or discounted customer shipping, kills margins and makes it a primary cost, not innocuous sounding “overhead.”
Firsd Tea reports that container ship turnround increased from 60-100 days – three months. Trucking averages a week for delivery versus three days.
An obvious difficulty in planning for both the short-term is the immediate impacts of the Covid pandemic how much of this is a temporary blip and how much accelerates or intensifies an existing trend and how much signals a disruption. Drop shipping may be the premiumization option for many firms. Every aspect of shipping and delivery is handled by a specialist service with many variants, contractual choices, payment schemes, and information resources. It loses opportunities to take advantage of wholesaler discounts.
Relationship premiumization
It’s commonplace to talk about customer relationships as the dominant priority in a service business. Many online players recognize the vital need to invest in CRM: customer relationship management. They aim to build repeat business through targeted email offers, subscriptions, free shipping, and loyalty deals and discounts. Many add topical and educational blogs. A relative few are using chatbots to augment customer interaction. They adopt software packages that generate analytics, handle orders and fulfilment, and create profiles.
In many instances, though, there’s little real personalization. A targeted e-mailing announcement of a special deal is not the same as one that is sent direct to a customer on his or her birthday or that is based on recent purchases. A site that limits customer feedback is transactional — not relationship-centered.
There are some excellent and highly inventive online tools that go well beyond standard sites and communications that focus on the customer contact point. An outstanding instance is India’s Chaipoint, whose relationship building through technology includes customer face recognition at point of sale, an extensive cloud computing infrastructure that connects to business customers for “touch free” 30-minute ordering and delivery, a real-time inventory management system, and customer feedback apps.
By and large, the state of technology in tea retailing and distribution is less than impressive. At the World Tea Expo in 2017 and again in 2018 there was not a single IT exhibit: not one. There is a narrow set of basic packages on the market which are fully sufficient for managing the operations base but often don’t establish a distinctive identity for the seller.
A number of emerging technologies promise to transform the opportunities. The main one is blockchain, the infrastructure for Bitcoin but more broadly a real-time, secure transaction ledger systems that can integrate the interactions among parties. Unilever launched a large-scale pilot to accelerate payments to 35,000 Malawi tea farmers. Blockchain provides automatic contract compliance monitoring, authentication, quality certification, regulatory compliance, etc. It is basically a universal general ledger. There are no recent updates on progress and plans, but blockchain is the announced platform for ecommerce for such firms as Walmart and a cornerstone for China’s economic development in agriculture. Over half of the world’s blockchain implementations are in China. They include a tea traceability capability for puehr teas, a major source of fraud and misrepresentation.
Where does a small or medium size firm exploit commodity IT – packages, apps, website builders – and where should it move towards premiumization in its technology, not necessarily state-of-best practice but a focus on real relationships and personalization? What platform does it need to integrate the often diverse, incompatible systems and data include suppliers, shippers, and financers? (The likely answer here is hybrid cloud).
At the growing end of the logistics complex, growers are gaining access to very large-scale services from IBM, Microsoft, and others in the area of precision agriculture. One certainty of the post-Covid era is a sustained growth in online commerce. What online capabilities do you have and need? Should you be getting ready for blockchain opportunities
Financial dynamics
When a tea seller calculates profitability, the arithmetic is conceptually simple: customer payments minus product costs indicates the gross margin. Factor in shipping costs, allocations for rent, overhead, financing, administration, and service to get operating margin. Conclude with taxes and any debt interest and depreciation charges and there’s the bottom line. It’s pretty basic.
And it’s pretty much an incomplete and static snapshot of a highly dynamic financial supply chain. It excludes cash flow timing, working capital management, supplier payment contract terms, liquidity, and funding. These are constant concerns for most small to medium businesses and a distinguishing mark of tea selling as a whole: localized, few chains, often family run, limited customer base, relatively small unit purchases, etc.
The issue for today’s planning is will post-Covid see a return to the manageable patterns of yesteryear? Again, no one knows but premiumization of the financial calculus may be the factor that sustains the stability and health of much of the tea industry eco-complex.
One of the realities across consumer markets is that once shoppers have access to a wide range of information about and choices among comparable items, prices converge for both the grower, intermediary, and seller. That invalidates much of the simple arithmetic of profitability, shifting costs and prices to a largely bounded margin range. The market sets the price and good practice the cost; fall outside these and see your business erode. The only controllable costs here are the ones that are summarized as “overhead” or shown as SG&A: Selling, General, and Administrative. Free shipping, return processing, marketing, technology support and social media, compliance with safety regulations, and storage are elements of these business necessary costs.
As is short- and long-term financing. Companies that cannot build premium relationships with suppliers, brokers, shippers, and financial institutions will increasingly lose flexibility and add to their SG&A. In particular, they must obtain the working capital needed to enable them to negotiate cost-effective contracts and supplier relationships.
The signs are not encouraging. For growers, interest rates for the short-term financing needed to buy seed and fertilizer doubled between 2008-2014 in most major producer nations, as governments, banks, and agencies cut back on their subsidies and development funding. For sellers, the future is very uncertain.
The trillions of dollars in new US national debt carry a strong risk of inflation and impacts on lending and foreign exchange. In the mid-2000s, just the threat of the UK’s Brexit decision greatly affected the price and financing of Kenya’s exports to this primary market. Tea firms with marginal profitability seem sure to have to pay a heavy extra for financing inventory, in particular.
There’s no simple answer to the questions about post-Covid financial markets. Premiumization may be beyond the capabilities and access to sources of working capital and investment capital demands scale, growth, and above average profitability. A priority is to commit as much effort and attention to the dynamics of financing as is practical and to track the full SG&A burden of, for instance, processing returns, which includes the loss of cash flow as well as increase in direct costs. Add to the old adage that cash flow is king the warning that if you don’t know your cost structures and financial dynamics, you lose business freedom.
Obviously, one factor that eases the financing constraints and challenges is high margin products. Many tea sellers offer differentiated teaware that can command a premium price: Yixing clay teapots, high end brewing infusers, and Japanese stone texture tea sets. They have to sell a lot of relatively undifferentiated Earl Grey to match the $100-200 for an eye-catching and wallet-opening English Royal Albert bone china collection.
But every week that it sits on the shelf, it’s accruing a working capital cost.
Conclusion: Think about it
This analysis is not in any way normative. Most companies that did well pre-Covid and continue to do so will have made decisions across the four areas of planning. The review is not a recommendation that a tea store or online seller build a world-class IT development function or a forecast that Shipageddon is here to stay.
The question is straightforward: where is post-Covid premiumization essential?
The recommendation is equally simple: Think about it.