Tea Shipping: An Inside View
The main areas of innovation in tea have long been at the front and back end of the logistics chain from bush to cup: growing, harvesting and processing, and marketing and selling. The middle links are now being recognized as a high payoff target of opportunity: auctioning, reduction of time, intermediaries and costs in the supply chain, and improving freshness in shortening the delivery cycle.
That makes shipping a critical element in service to the customer and profitability to the seller. For the many online smaller tea players, this cost that can be one of the major blockages to pricing, margins, and customer service.
The main issues are small versus bulk shipment, sea versus air, self-management of customs and delivery service versus agents, including Amazon and Alibaba, and free versus fee to customers.
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A starting point for handling shipping has to be to get a reliable grasp of the numbers, the fixed/variable components, especially in international handling, and benchmarks for assessing management options. Here are two detailed cost breakdowns that give a sense of the issues and scale. They are from a small specialty vendor and track his purchases of a Thai oolong and Yunnan black gold from China:
Reducing purchase cost by 20% has only half the impact on gross margin as cutting shipping expenses by the same fraction. Increasing price by 20% — and surely losing business — has the same effect as the shipping cost improvement.
The analysis is complemented by general figures from an importer. He is not at all an enthusiast of the alternate shipping strategies for China teas that buy from registered brokerage firms. These agents purchase product from large factory farms and not from small farmers who cannot obtain the export licenses that are a major blockage to getting the very best teas to foreign markets.) Quality of the bulk teas is variable but they cost much less than do Vendor A’s – and this importer’s -- direct links to producers and on the ground agents. The explanation is simple: bulk shipping by sea is much, much cheaper than small package air freight. Though it comes at the addition of delays and loss of freshness, centralized warehouse storage adds economies of scale.
The importer provides ranges of costs for the full shipping cycle, including following FDA rules for the goods to be handled for safety and sanitary practices by a business that has a food manufacturer’s license and getting package from the shipper to the seller. These total around $0.90 an ounce of tea – close to $3 for 100 ounces. This is cheaper than Vendor A’s cost structure, but still a high fraction of the cost of a tea that sells for $5-7 an ounce.
The price/margin/profit equations are compounded by how to charge customers for delivery: free shipment, subsidized price per order, etc. In any instance, the seller pays the cost. Shipping is a central management problem that has to be viewed as strategic, not administrative.
- By Peter Keen