Tea Sector in Sri Lanka

Competitive Context of the Sri Lanka Tea Industry

Food writers who participated in the Spice Tour of Sri Lanka visiting the Dilmah factory, in a cross cluster activity	Malik Fernando of Dilmah Teas during a visit from the food writers participating in the Spice Tour of Sri Lanka

Sri Lanka is a world leader in tea exports and is especially strong in the market for traditional teas in the Middle East and CIS. However, international tea marketers have historically positioned Sri Lanka, like other tea producing countries, as a supplier of bulk teas to the world. In the global tea trade, multinational companies tend to dominate in taking the product from producer to consumer. Therefore the Sri Lankan tea industry has an underdeveloped capacity to monitor consumer trends and add value to its product locally. Overall, the industry has been slow to innovate, upgrade, add value, and move closer to consumers with only a few notable exceptions of Sri Lankan-owned brands capturing and sustaining substantial market share overseas.

Sri Lanka enjoys excellent basic factor conditions for tea production. The variety in weather and soil gives rise to six major (Nuwara Eliya, Uda Pussellawa, Uva, Dimbulla, Ruhuna, Kandy) and many minor agro-climatic zones, where tea is grown. Plantations in Sri Lanka have easy access to Colombo via a network of all-weather roads. Colombo also enjoys an advantageous geographical position, given its proximity to other producer and consumer markets, making it a potential transshipment point. Moreover the tea industry in Sri Lanka has a long established range of supporting organizations, such as the Ceylon Tea Promotions Bureau and Tea Research Institute of Sri Lanka, which assist in specialized research and promotional activities.

Most Sri Lankan exporters focus on bulk teas operating as ‘contract packers’ and compete on the basis of price. Competition is not on the basis of product development, innovation, or specialization. Even where exporters own a brand, there is heavy reliance on distributors in overseas markets. Public sector participation in the tea industry has not always promoted international competitiveness and the plantation sector is still recovering from an era of nationalization. Although supportive of industry growth and development, government policy has sometimes been politically motivated, especially when dealing with smallholders and plantation employees.

The challenge for Sri Lanka’s tea industry is to minimize the impact of price swings on its profit margins by differentiating and adding value to the product locally so as to command more stable world market pricing.

Current Status of the Tea Industry

In 2003, tea accounted 13% of percent of Sri Lanka’s merchandise exports and earned US $683 million. Up until the 1980s when it was surpassed in net contribution by the Apparel sector, Tea was Sri Lanka’s leading export. Tea is also the third largest agricultural industry in Sri Lanka and represents 2.3% of overall GDP. The Tea industry directly and indirectly employs 1 million people in Sri Lanka. Currently 8% of Sri Lanka’s tea export value is in the form of tea bags or instant tea products. Of total value added exports, approximately 10-12% is exported under local brand names. However since 59% of tea exports are still in bulk form, the value of Sri Lanka’s tea exports is still subject to commodity-based price swings.

Average yields of green leaf in Sri Lanka, while improving, are significantly less than those of competitors. The smallholder sector, which accounts for roughly 40% share of land under tea cultivation, continues to be more productive than the more traditional plantation sector and produces approximately 60% of tea grown in the country.

Global Position

Sri Lanka is the world’s largest tea exporter with a 21 percent global export market share. Kenya, which produces mainly cut, tear, and curl (CTC) tea—used primarily in tea bags—has a similar market share. Total world production in 2001 was 3.1 million tons with Sri Lanka’s share being 10%. About 44% of world production is CTC tea and 31% Orthodox tea, with green tea making up the balance. Sri Lanka competes mainly in the orthodox tea market where it has a 32% market share and is the leading producer.

Sri Lanka receives a price premium for tea relative to most other exporting countries. Comparing the average FOB prices that prevailed between 1995 and 2000, it is evident that Sri Lanka received a higher price for its tea exports compared to India, Kenya and Indonesia. This was because Sri Lanka adds comparatively more value post-auction than other tea-producing countries (i.e. exporting tea in bags/packets instead of in bulk form).

In recent times, Sri Lanka’s position as a leading supplier of quality orthodox teas fetching relatively higher prices has created a new segment of competitors offering similar but cheaper teas. New entrants such as Vietnam, enjoying factor advantages, are seeking to increase their tea exports by consciously emulating the Sri Lanka model. As more and more producers are attracted by the premium prices paid for orthodox Ceylon teas, Sri Lankan margins will be under threat.

Industry Growth Potential

The Sri Lanka tea industry has tremendous potential for future growth and employment generation with an industry strategy aimed at enhancing productivity at the plantation level and value addition by converting more bulk tea exports to differentiated specialized products.

Tea Industry Export Statistics (2003)

The Tea Cluster

The Tea Cluster was originally formed in May 2000 with the assistance of The Competitiveness Initiative (a United States Agency for International Development funded project) to create a unified and holistic approach towards enhancing industry competitiveness. The cluster is comprises of top-level management in the exporter, producer and broker segments of the industry as well as representatives from key industry associations. On September 26th 2003 the Tea Cluster, re-organized itself within the administrative umbrella of the Colombo Tea Traders’ Association (CTTA), a key industry association. The re-constituted Tea Cluster has six members representing the six associations of the tea industry—Planters Association of Ceylon, Colombo Tea Traders Association, Colombo Brokers Association, Tea Exporters Association, Private Tea Factory Owners Association and the Federation of Tea Smallholders. Its management team is:

Mr. Bandula Jayasekere - Chairman
Mr. Anil Cooke - Vice Chairman
Mr. Mahen Dayananda
Mr. Rohan Fernando
Mr. Amara Dissanayake
Mr. K. M. Opananda

Mission Statement

The Tea Cluster's mission is to act as an independent non-political and autonomous body focusing on the overall competitiveness of the tea industry.

Role

The Tea Cluster fills a void in the present structure of the Sri Lankan tea industry by creating a broad based forum representing all components of the industry value chain. Relevant and supporting industries are also invited by the Cluster to participate as and when needed. In keeping to its mandate of promoting industry competitiveness, the Tea Cluster will continue to represent a forum where stakeholders could meet and facilitate debate and analyses in the long term interest of the industry.

Key Strategic Initiatives

The Tea Cluster is currently implementing it’s competitiveness strategy through the following initiatives:

	Promotion, Brand ownership and Strategic alliances
	Increasing capacity for research, market intelligence and new product development
	Technology upgrading
	Supply Chain Integration

Contact Information

Offices:
CTTA Secretariat
C/o The Ceylon Chamber of Commerce
50 Navam Mawatha
Colombo 2.
Telephone: 94-11-421745 / 6
Fax: 94-11- 449352
Email: jansze@chamber.lk

Contact:
Mr. David Jansze
CTTA Secretariat
C/o The Ceylon Chamber of Commerce