By working hand-in-glove with small tea growers, a bought-leaf factory can outperform the market. One business proving it is Sri Lanka’s Tea Smallholder Factories Ltd., a listed corporation that operates six factories in Galle, Ratnapura, and Ginigathhena. It helps its 8,700 small tea growers with training, credit, and price premiums for quality.
Founded in 1991 and owned by a consortium led by the nation’s largest conglomerate, John Keells Holdings, the company won the top prices in each of 84 auctions during its fiscal year ending in March 2023, including 17 record high prices. Its gross sales average increased 138% to Rs 1,601 ($4.94) per kilogram, helping it earn profits of Rs 440 million ($1.35 million) on revenues of LKRs 3.7 billion ($11.4 million).
What’s remarkable is that the company attained these results during a year of political upheaval, rioting, a currency crisis, a foreign exchange crisis, and a shortage of fertilizer. The company proactively upgraded its factories to improve efficiency and minimize disruptions during fuel shortages and power cuts. It also renovated staff housing. The company has about 400 employees.
Smallholders are crucial to Ceylon tea. Farms of 10 acres (4 hectares) or less produce about 77% of Sri Lanka’s tea, which is mostly orthodox-grade leaf.
To find out more, STiR’s tea correspondent, Dan Bolton, spoke with Romesh Walpola, appointed as CEO in 2022.
Are bought-leaf factories competitive in the global market for premium black tea?
We compete heads-up with government- and estate-owned factories. Competition is fierce, as you know. We are located mainly in Galle and Ratnapura and have one factory in Ginigathhena. The competition in Galle and Ratnapura is quite tenacious and very competitive.
Why does your company call its growers “smallholder partners”?
They are paramount as they provide the green leaf, which is indispensable as it is the fundamental raw material for tea manufacturing. The company places great importance on nurturing enduring relationships with our committed suppliers, fostering partnerships that last for years. When welcoming new suppliers, TSFL carefully considers various factors and ensures new suppliers are aligned with the company’s beliefs and value systems.
How do you work with growers?
We have our extension officers in the field daily. And they have little pocket groups that are educated on basic soil management, the type of fertilizer to apply, pruning cycles, and recommended plucking rounds, all needed to maintain their plots. We give that service to the smallholders, but apart from that, they do their own thing as well.
How do you ensure quality?
We don’t take just any leaf. We are very selective. We encourage them to bring a decent standard. You have to make sure your raw material is good for you to have a good end product. We’re very picky in terms of selecting a reasonably good standard of leaf.
What about price?
We give them a small incentive for what we call super leaf. Let’s say the current standard of fine-leaf pluck (two leaves and a bud) is at about 50 to 55% of what they pluck. When we get something over 60 to 65%, then we give them an incentive for that amount of leaf they bring.
So that’s encouraging them to raise the bar for themselves and get something back in turn. We teach them that the higher the tea price at the auctions, the higher the green leaf payment according to the tea board’s formula. That’s the positive side of this cycle, we keep telling them.
Sri Lanka’s tea industry aims to make production sustainable. Is this on your agenda?
Sustainability is something that we are also looking at. Smallholders are fully aware of its importance. Sustainable practices at the factories and by the company contribute to stickiness amongst loyal smallholders.
So, for us, it’s not about paying something a little bit more than the competition when taking leaf. It’s about actually looking at enhancing the livelihood of the community and the smallholders.
By fulfilling our social responsibility and engaging in community relations, we build a positive reputation that enhances our brand image and fosters a sustainable supply chain through trust and cooperation with growers to ensure a steady supply of high-quality tea leaves. Moreover, our support and investment in local communities contribute to their economic development by creating jobs, generating income, and promoting the growth of local businesses.
Maintaining high standards ensures that our tea manufacturing operations align with the expectations of international customers who prioritize ethical and sustainable products.
How much of your tea supplies domestic consumption?
Not much. About 85–90% is for export markets. The Middle East, Russia, Iran, Iraq, and Turkey are the main markets.
Higher prices for Ceylon tea in 2022 impacted demand, lowering export volumes. However, export earnings overall fared exceptionally well, increasing by 54% to $1.27 billion in 2022.
The main reason for the drop in export volumes was reduced demand from Russia and Ukraine. Russia dropped to no. 3 with the war going on. They had been no. 2. At the onset [of the war], there were concerns about payment and logistics. Now I think they’ve found ways and means of trading without dollars.
Iran and Turkey also purchased less tea from Sri Lanka. The lower demand from Iran mainly stems from the devaluation of the Iranian rial.
