Conformity to Quality Standards in International Tea Markets
The Case of South Indian tea
Marianne Nylandsted Larsen
Department of Geography & Geology
Introduction
• Market concentration high (OECD countries) – few players
(large branded tea manufacturers) such as Unilever, Tata
Tetley, Twinings
• Slow growth in tea consumption in traditional importing
countries in Europe – quality differentiation a key strategy
in order to stimulate demand and maintain market
position
• Product differentiation and chain restructuring in European
markets fairly well-known, but little is know about product
and quality requirements in emerging markets in Asia, the
Middle East, CIS countries.
• Asia is currently the largest importer, followed by Europe,
Africa and Russia
Department of Geography & Geology
Introduction (cont.)
1) The ‘tea market’ is highly segmented
- Quality requirements and reward structures
- Tea products are almost always in blended form (or
defined by geographical indicators, single origin)
- ‘Quality by design’ (a blend contains different grades
(with different ‘quality attributes’); processing methods)
2) A tendency to move away from spot market transactions to
other forms of vertical coordination between producers and
processors – quality management
3) Improvement in quality management practices by small tea
growers constrained by high labour supervision and
monitoring costs
Department of Geography & Geology
Outline of presentation
• Explore how three groups of stakeholders in the
South Indian industry meet (changing) quality
requirements in new and existing markets
• Exporters – export destinations, quality
requirements and sourcing strategies
• Bought leaf factories – product differentiation
and sourcing strategies
• Small tea growers’ conformity to quality
requirements
Department of Geography & Geology
Background - the south Indian tea sector
• Approximately 50% of India’s tea exports come from
South India.
• Approximately 65,000 small tea growers contribute
to around 50% of South Indian tea production.
• 60-80% of Nilgiris’ production was exported to the
Soviet bloc from the mid-1970s to the mid-1990s
• Demand: low-quality bulk teas, but relatively high
returns for these sales.
• 1990s: Expansion of tea production by small growers
and rapid growth of Bought Leaf Factories
• 1998/99 – a sharp decline in exports to Russia and
CIS countries combined with declining global tea
prices affected the sector detrimentally
Department of Geography & Geology
Production of tea in South India
Production of tea in South India, CTC and Orthodox, 1961-2006
250
Million kg
200
150
CTC
Orthodox
100
50
0
61
19
81
19
92
19
94
19
96
19
98
19
Year
00
20
02
20
04
20
06
20
Department of Geography & Geology
Export companies
• Tea estates
• Bulk tea and between 70 and 100% exported directly to
buyers in Europe (branded tea manufacturers)
• The quality of green leaf itself and method of processing
are significant to the branded tea manufacturers
• Selective plucking methods implemented
• Orthodox tea production (converted or increased
production)
• Third-party certification (ISO 9000 series of quality
management and compliance to food safety HACCP
procedures)
Department of Geography & Geology
Export companies (cont.)
• Group of blending companies:
• Main export countries: Russia, Ukraine (CIS),
Kazakhstan, Poland (60-70%)
• Export of Orthodox and CTC teas (bulk, blended form)
• Packing facilities in consuming countries, several
entered the packed tea market
• Secondary export countries: Australia, EU, USA, Japan –
bulk, blended form (30-40%)
• Third-part certification (ISO 9000 series of quality
management and compliance to food safety HACCP
procedures)
• Group of blending companies:
• Main export countries: Iraq, Pakistan, Kenya, Russia
• Bulk export - CTC blends (low unit price)
• None certified against e.g. ISO 9000
Department of Geography & Geology
Sourcing strategies
• Blenders exporting to higher quality segments (including
packed tea segments) in Russia, CIS, Europe, Japan,
Australia: 50-60% from auction centres while 40-50%
purchased directly from few tea estates (orthodox tea)
• Blenders exporting to lower quality segments in the Middle
East, West Asia, Africa (Kenya): 70-80% from auction centres,
30-20% procured directly from tea estates (orthodox and CTC)
and BLFs (CTC)
• Import of tea for re-export: Vietnam, Kenya, Nepal, Indonesia
• Average unit import price: 50 Rs/kg (34.23 Rs/kg Vietnamese
tea) – Average unit price, auction centres: price 66 Rs per kg
Department of Geography & Geology
Quality differentiation and sourcing strategies by BLF
• Dual processing lines (coarse and fine leaf) - 1 to 4 different
qualities
• BLFs with own tea gardens – supplement with green leaf
sourced from small tea growers
• Price differential at the auction centre between very fine quality
and standard quality of 20-30 Rs/kg ($0,66)
• Sourcing strategy:
• Re-definition of quality standard (two/three leaves and a bud)
and price incentives
• Scaled down purchasing through agents, focus on fewer
growers and purchase from Quality Tea procurement and
Service Centres run by women’s self help groups
• However, most of the BLFs focused on volume, not quality
Department of Geography & Geology
Small tea growers’ conformity to quality requirements?
• Tea production highly labour-intensive:
• Fine leaf standard (two leaves and a bud) –
plucking rounds should be maintained at around
10 days  requires more labour at the same time
as the cost of labour increases during the peak
season
• Lack of sufficient price premium attached to higher
quality leaf:
• Fine leaf: 20-25 kg per day
• Sub-standard/standard leaf: 40 kg per day
• Return - fine leaf: 200-250 Rs per working day
Return on standard: 320 Rs per working day
• Green leaf prices are characterised by intraseasonal variations
 Focus on quantity instead of quality during peak
season
Department of Geography & Geology
Concluding remarks
1)
A tendency to move away from spot market transactions to
other forms of vertical coordination between producers and
processors in order to ensure a sufficient supply of high(er)
quality teas (branded tea manufacturers, tea estates, blenders
and the interface between BLFs and small growers) – quality
requirements in different markets
2) The ‘tea market’ is highly segmented. Differences in unit prices
between markets and market segments, but there is always a
market – even for poor quality tea
3) Improvement in quality management practices by small tea
growers is of great importance
• Major constraints: high labour supervision and monitoring
costs and a market system which rewards quantity of
output and tolerates deficiencies in output quality
Department of Geography & Geology
Critical issues that require further analysis:
• Emerging markets in Asia and the Middle East may
introduce new export opportunities - but it is
uncertain whether these markets offer higher returns
compared with existing markets (small tea growers
and BLFs)
 reward structures of conforming to different
quality requirements in different markets need to be
analysed.
• Farm-level costs and benefits of conforming to
different quality grades and how these relate to farm
scale and marketing channel need to be invested
 based on an analysis of the small tea grower
survey
Countries
Other countries
Australia
Pakistan
Japan
Kenya
Sri Lanka
Singapore
Afghanistan
Turkey
ARE
Saudi Arabia
Iraq
Iran
UAE
Canada
USA
Poland
Ireland
Germany
Netherlands
United Kingdom
Other CIS
Uzbekistan
Ukraine
Kazakhstan
Russia
Rs per kg
Department of Geography & Geology
Unit export prices (selected countries), 2006
Unit export prices (Rs per kg), 2006
300
250
200
150
100
50
0
Countries
Other countries
Australia
Pakistan
Japan
Kenya
Sri Lanka
Singapore
Afghanistan
Turkey
ARE
Saudi Arabia
Iraq
Iran
UAE
Canada
USA
Poland
Ireland
Germany
Netherlands
United Kingdom
Other CIS
Uzbekistan
Ukraine
Kazakhstan
Russia
Million kg
Department of Geography & Geology
Export of Tea, 2006
Export of tea from India (million kg), 2006
45
40
35
30
25
20
15
10
5
0
Department of Geography & Geology
Department of Geography & Geology
Department of Geography & Geology
Department of Geography & Geology
Department of Geography & Geology
Institutional – regulatory framework
Tea board of India:
• Launched ‘Quality Upgradation Programme’ (2000) –
subsidies
• CTC / Orthodox tea
• Upgrading of processing methods (BLFs)
• Improvement in husbandry practices
• Tea Marketing Control Order (2001) – sale of tea through
any marketing channel
• Liberalisation – duty free import of tea (re-export)
Department of Geography & Geology
Auction prices, 1995-2006
Auction prices (US cents/kg), 1995-2006
250
US cents/kg
200
South India
150
North India
100
Sri Lanka
Kenya
50
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Year
Department of Geography & Geology
Department of Geography & Geology
Quality of tea and quality standards (cont.)
• Tea available at the consumer levels in blended form or
defined by geographical indicator (pure Assam, Darjeeling)
• Private quality standards set by blending companies / tea
manufacturers (though compliance to (voluntary and
mandatory) quality and food safety procedures is
important
• Blending according to specific domestic/regional
preferences ‘quality by design’ and information on quality
embedded in brands (OECD countries)
• A blend consist of different grades, quality attributes and
methods of processing
• High degree of inter-substitution and flexibility in
blending formulas
Department of Geography & Geology
What defines the quality of tea and quality standards
• The quality of tea is made in the field and only
preserved in the factory (two leaves and a bud)
• Quality differentiated according to grade, processing
methods and quality attributes
• Auction and private sale: Tea is sold on the garden
mark and grade – prices vary considerably between
grades.
‘
Department of Geography & Geology
Main objectives of the project
How quality standards in different end-markets affect
terms and conditions for market access for
developing countries’ tea products.
• To examine the scope and nature of salient quality
standards in European and Developing Asian markets
and how quality is financial rewarded in these
markets
• To analyse the distributional effects of conformity to
quality standards amongst developing countries and
different groups of actors within a country
• To identify what national and local institutional
conditions are important in achieving improved
conformity with quality standards
Department of Geography & Geology
Exporting countries
Major tea exporting countries
400
350
Sri Lanka
300
Kenya
Million kg
China
250
India
200
Vietnam
Indonesia
150
Argentina
100
Malawi
Tanzania
50
Zimbabwe
0
2000
2001
2002
2003
Year
2004
2005
2006
Others
Department of Geography & Geology
Import – major regions
Import of tea (regions)
2500
EU
2000
Other West Europe
Million kg
East Europe
1500
America
West Asia
Asia other than West
1000
North Africa
Africa other than North
500
Oceania
0
2000
2001
2002
2003
Year
2004
2005
Department of Geography & Geology
CTC and Orthodox tea – average unit prices
60
50
Rs/kg
40
CTC
30
Orthodox
20
10
0
2001
2002
2004
2003
Year
2005
2006
Department of Geography & Geology
Intra-seasonal variation in prices
Green leaf prices (BLF)
10
9
8
Rs per kg
7
6
Standard leaf
5
Fine leaf
4
3
2
1
0
Jan
Feb March April
May
June
July
Months
Aug
Sept
Oct
Nov
Dec
Department of Geography & Geology
Total quantity sold at auctions and total production (million kgs) in
South India, 1991-2006
250
Cochin
Coonoor
150
Coimbatore
100
Total quantity sold at
auctions
50
Total production, South India
Year
20
05
20
03
20
01
19
99
19
97
19
95
19
93
0
19
91
Million kgs
200