Surviving the Pandemic: Vulnerabilities In the Global Tea Industry

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By Dan Bolton

Lockdowns decimated on-premise sales and disrupted tea processing and distribution this spring, but consumer demand remains strong for health-enhancing, inexpensive, no-calorie tea.

Sales of tea in grocery stores increased in March and April as consumers rushed to stock their pantries (Walmart reported a 74% increase in e-commerce with first quarter sales of $135 billion) — but tea purchases were mainly commodity brands and quickly plateaued. Commercial blenders are now busy processing rush orders for private-label offerings and packing long-established “comfort” and “wellness” blends that signal a shift to home consumption. Refrigerated and ready-to-drink tea brands are also benefitting as virus-wary consumers seek safe and convenient ways to quench their thirst. Multinationals with large stakes in tea anticipate a sustained global recession that will discourage innovation and limit much-needed revenue from premiumization.

The revenue shortfall from foodservice is significant and will be long-lasting.

“Beverages account for $1 out of every $5 US consumers spend away from home,” according to David Henkes, senior principal at Technomic market research. In recent years tea has gained market share in restaurants, according to Technomic. Iced tea, for example, accounted for 8% or $9.6 billion of the $181.0 billion U.S. consumers spent on foodservice beverages in 2017. One of the more significant virus vulnerabilities is that while many diners order tea (hot or cold) with their sit-down meal, fewer than 25% order a beverage for curbside pickup or delivery to their home.

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In fewer than 30 days, consumers worldwide reversed a decades-long trend to increase out-of-home drinking occasions. Foodservice sales account for more than 20% of industry revenue globally, according to Euromonitor International. Spending on dining out during the first months of the pandemic declined 60-80% in many markets and fell to zero in locations, including airports, subway stations, and sports venues. The overnight closure of hundreds of thousands of cafes, restaurants, resorts, and hotels in Europe, Asia, Russia, the Middle East, and North America strained the financials of even the largest tea wholesalers.

The onset of a global recession is making things worse. To Nigel Melican, “The greatest threat is that facing up to and tackling the real medium- and long-term problems will be neglected.”

“Taking our eye off the ball in an understandable urgency to contain the virus and to rejig the economy will let the industry drift further from the urgent dangers of labor shortage, land degradation, water scarcity, and rising input costs,” writes Melican, founder of Teacraft Technical Services and president of the European Specialty Tea Association.

• The export segment, unsettled by tariffs and trade upheaval throughout 2019, continues to experience turmoil. Foodservice closures curtailed demand at unprecedented speed. The price of tea, already in surplus, is falling as warehouse stocks increase — developments compounded by disruptions in logistics. As demand falls and supplies tighten, global output is expected to decline by 1.8% in 2020. Producers, squeezed by rising labor costs and unpredictable overseas orders, will favor domestic buyers. Domestic consumption in India, for example, grew by 6.2% in 2019. Tea-producing countries consume far more tea locally than what is exported.

• China’s tea industry, except for small retail ventures, rebounded quickly. As reports of new Covid-19 cases declined, the country reopened almost all its offices, factories, schools, and retail stores. Trains are running and domestic airlines are flying, but a McKinsey survey found the majority of Chinese people say they are not planning to travel until September, six months after lockdowns ended. Many anticipate a second wave of infections this fall.

• Restaurants and cafés in China doubled down on home delivery and contactless transactions and are practicing social distancing with a seasonal preference for dining outdoors. GlobalData’s ongoing consumer surveys within the Asia-Pacific (APAC) region showed 40% of respondents favor digitally advanced (“smart”) foodservice venues and vending. GlobalData reported that table service by robots appealed to 46% of APAC consumers.

Impact on supply

Producing countries successfully applied distancing protocols, facial masks, and enhanced tracing to protect workers in the fields and factories. Tea production declined by 2.2% globally in 2019, a downward trend that continues in crucial tea growing regions. A drought in Yunnan Province, the worst in 10 years, lowered yields. Weather so far this year is favorable. Supply will not be a problem for producing countries that follow China’s lead. China’s tea industry recovered quickly, writes Jason Walker of New Jersey-based Firsd Tea. “Normal business resumed around the end of February in China. At this point, China operations have implemented monitoring systems and PPE (personal protection equipment) requirements for workers. We are watching for indications of flareups, but so far, we don’t see evidence of another wave of infection,” writes Walker.

Capacity is more than sufficient in China. Export volume will likely decline from 2019. The Economist Intelligence Unit (EIU) “expects tea demand to contract by 1% in 2020 on the back of the coronavirus before picking up by 4% in 2021.” Domestic consumption has averaged more than 10% per year growth for the past decade.

In Kenya, black tea growers are having a good year, but production in Sri Lanka declined by 25% due to a combination of drought and coronavirus disruptions. Exports fell by half. Following a record harvest, India tea production is down in every growing region. Exports declined by 34% in March. Tea Board of India chair Arun Kumar Ray estimates disruptions in harvesting and production will lower annual yield between 100 and 120 million kilos. Darjeeling was hard-hit at the start of the first flush, and growers in Assam could only deploy half their workforce. The Nilgiris region in southern India reported that the countrywide lockdown initiated in March lowered April volumes by 23% compared to 2019. Factories have since reopened with reduced staff. The tea board is optimistic that quality and quantities will be better in June, ending the year at 7% to 9% below the 1.3 billion kilos harvested in 2019.

Kenya may see a 15% increase in yield; Vietnam’s harvest is holding steady. The five countries named above — China, Sri Lanka, Vietnam, India, and Kenya — account for 82% of global tea exports.

“As the pandemic dust settles, the immediate effect will likely be a glut of tea,” predicts Melican. “The tea industry still embraces simplistic commodity economics: short supply, plant more tea — higher prices, plant more tea. Ironically, the opposite situation has the same effect: lower prices, increase production and sell more tea at a lower margin by piling on more fertilizer.

“Long term, this is the very last response that the tea industry should have. Market salvation will come only from producing less tea and selling at higher prices. The industry must move away from conventional low-quality, high-volume commodity tea to a sustainable production system,” writes Melican. Central to that shift is “educating consumers that they must pay more for their tea to survive.”

• Tea production exceeded 6 billion kilos in 2018 and remained well above consumption. The EIU estimates a harvest of 6.3 billion kilos in 2020, with China producing 2.9 billion kilos. Consumption is estimated at 6.2 billion, leaving a 106-million kilo surplus. In 2019 the excess was 121 million kilos, according to the United Nations Food and Agriculture Organization.

• Tea prices averaged $2.35 per kilo during the first three months of the year, the weakest quarterly results in 11 years. Prices remain well below the long-term average of $2.85 per kilo. The EIU expects tea prices to average $2.48 per kilo in 2020. EIU estimates are based on average prices at tea auctions in Mombasa, Kenya, Colombo, Sri Lanka, and Kolkata, India. Prices in China and Japan are significantly higher.

• Overproduction and declining prices discourage investment. Economies in emerging markets, many of which produce tea, are least able to respond to the crisis, according to International Monetary Fund managing director Kristalina Georgieva. “We are particularly concerned about low-income countries in debt distress” after experiencing significant outward capital flows, she said.

Supply chain vulnerabilities

The logistics of delivering tea to market are exceedingly difficult right now. Shipping containers filled with tea are stacked high at ports. Tea processing factories and warehouses at origin are bulging since truckers are not allowed on the road. The cost of airfreight tripled.

Restrictions on air travel profoundly impact the tea supply chain, as sales representatives sit in quarantine on arrival, and fearful buyers refuse to venture to origin.

The exception is containers leaving China now that the logjam at that nation’s ports has cleared. Recessions in Russia, Europe, Japan, and North America have dim prospects for a profitable return for tea exporters. Sales have declined in value by an average of 12.8% since 2015. The declared value of global tea exports depreciated 18.8% year-over-year in 2019.

According to analyst Daniel Workman at World’s Top Exports, sales from tea exports totaled only $6.4 billion in 2019. Tea shipments worldwide were valued at $7.3 billion five years ago. China, at $2 billion in sales, remains the leading tea exporter, accounting for 31.8% of total exports by value, up 13.5% compared to 2018.

Russia and the surrounding Commonwealth of Independent States (CIS) imported considerably more tea than the U.S. in 2019, but value declined by 8% according to the International Trade Center. Compared to the same period in 2019, tea imports fell 9% by volume through March and 6% by value, according to the US Customs Bureau trade data. US importers paid $488 million for 118,007 metric tons of tea last year, compared to $426 million spent by the Russian Federation to import 150,320 metric tons of tea. The United Kingdom ranked third in tea imports by value. Pakistan, usually one of the top importers by volume, ranked No. 47 globally, spending $21 million on tea, a decline of 96.4% in value in the aftermath of hostilities with India.

• Tea auctions in India and Africa quickly transitioned from outcry to digital bidding. The 127-year-old Colombo Tea Auction switched to an e-commerce platform in 45 days. The country’s first three electronic auctions in April resulted in sales of 16.5 million kilos of tea. Efforts to switch from outcry to electronic bidding span 20 years. “Changing the mindset of some players is not an easy task,” said Jayantha Karunaratne, chairman of the Colombo Tea Traders’ Association, adding, “Our vision is to go online because it provides advantages such as lower cost, greater efficiency, and more transparency,” Karunaratne told reporters.

• The epidemic increases the desirability of tracing food from tea garden to cup. Expect renewed interest in blockchain technology by traders, including blockchain-based payment solutions for remittances and secure clearance by central banks.

• One of the more vexing aspects of curtailed travel are mandatory 14-day quarantines for sales representatives and buyers traveling to origin. Many countries refuse to issue visas, and those that do require medical documents. Direct buys of specialty tea from new suppliers is much less likely under these conditions.

In January, Unilever announced its tea portfolio was under review due to persistent sluggish growth.

“For 10 years, we have been trying to ignite growth into our tea business unsuccessfully,” c.e.o. Alan Jupe explained to investors. The “harsh reality” is that declining black tea sales in developing countries, compounded by slowing growth in India, China, and Latin America, is too great a drag on profits, he said.

Acquiring fabled brands Lipton, Brooke Bond, and PG Tips, along with TAZO and Pukka Tea presented a tempting opportunity during a period of beverage industry consolidation.

A sale seems unlikely now as these persistent “underperformers” will look like champions during the coming economic downturn after reliably contributing $3 billion in annual sales during the next “great recession”.