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Author Topic: SL tea - must be used for nation branding!  (Read 1579 times)
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« on: March 23, 2010, 04:19:38 AM »

SL tea - must be used for nation branding!
by Rohantha Athukorala

Crosses the $1bn dollar mark again beating all the challenges
Must invest $30 million on the demand side of the business
SL the only country to be awarded ‘ozone-friendly tea’ positioning
Supply chain issues in the tea industry must be addressed
IMF should have given the third trench to support the SL’s growth trajectory

It is a fact that there is much to be done for the development of Sri Lanka’s tea industry. But let us accept it; Sri Lanka’s tea sector performance in 2009 was commendable, with a $1 billion plus performance under severe challenges. Some of them being a devastating drought, budget cuts in the promotional spend, global economic down turn, work go-slows due to the wage issue, policies not been changed to meet market changes and to cap it all the most ruthlessly fought out elections. Yet, the industry performed and kept the home fires burning. But, we need to keep in mind that at one time this resiliency will snap and policy makers must be mindful of it.

We as a nation must commend the performance of this noble industry that includes the Sri Lanka Tea board that works under severe restrictions in the political economy at play currently. I sit on the Tea Board Promotional Committee and was also on the President appointed Committee on evaluating the privatized tea plantations hence I am privy to the inner workings of this industry. It’s a tough challenging environment that this industry works in. However, performance has happened against all odds not only in 2009 but in the past five years that I have been associated closely with this industry. It’s time that Sri Lanka be proud of its performance when it’s rightfully due.

Nation Branding and tea
Given that Sri Lankan economy recorded a 6% GDP growth in the last quarter of 2009 from the 4.2% recorded in the third quarter, it is a fact that we are poised to hit the 7% mark in 2010. Even though sharper fiscal management is required, with kind of growth trajectory I strongly feel the IMF should have given Sri Lanka the 3rd trance to support an economy that is just un-leashing its true potential, after being battered by a war for the last thirty years which sure would have had a positive rub off on this industry.

Anyway be that it may, given that Sri Lanka Tea reaches over 31 countries across the world and touches millions of people by way of taste, smell, touch and visual elements of Ceylon Tea what better product can build brand Sri Lanka Inc. We have to use Sri Lanka-branded tea just like how Japan used Sony or Toyota to build Japan Inc.

Some can argue that tourism can do this task better for Sri Lanka. In fact it can, with campaigns such as ‘Visit Sri Lanka" that is being run on CNN or the up and coming tag line ‘One Island and a thousand treasures’ but fact of the matter is that the DNA of tea ideally fits the brand foot print of Sri Lanka. Also, in terms of geographical spread and the experience that one can get by way of touch, taste and visuals I strongly believe that ‘Tea’ will be a better proposition to build the Sri Lanka brand in the global market. There after, some of the other elements of Nation Branding can be used such as sports, politicians, diaspora and tourism. However, we must note that this will take time. Research reveals that it’s a slow consistant approach that is most effective than a strong burst.

How Nation Branding works
Simon Anolt who conceptualized the principle of Nation Branding said that there are 8 basic ways by which a brand proposition can be built globally. If we take Sri Lanka in 2010 we can drive this initiative from two fronts. Namely Tourism and Tea. When the Garment without Guild label is ready may be we can use the Apparel industry too for this initiative of building Brand Sri Lanka.

To use tea as a Nation branding tool, we should ideally select the top 10-12 markets and invest 30-40 million dollars on brand promotional work. Currently the investment is around $17 million with approximately a one million coming from the state. Since the war is over if we can invest a $15 million or so from the government end then we can not only build Brand Sri Lanka but also build the Tea industry of Sri Lanka.

This can be by way of thematic advertising on the proposition ‘Ethically Manufactured Ozone Friendly Tea from the Tea Nation of the World" and then a sampling drive at all key cities around the world in the identified 10-12 countries. This can be supplemented by participating in the many different trade exhibitions and sport events that Sri Lanka takes parts in. May be this weeks Brand Forum can flesh this idea in detail and subsequently a model be developed for the Sri Lanka Tea Board to execute in the years to come.

Getting the home in order
Whilst we focus our energy on the demand side of the business in the lines that was discussed we must also use this ‘Priority’ status by the policy makers to get our house in order. Meaning, correct the supply chain issues of the tea industry. The reason being the challenges faced in the supply side of this industry is un manageable. Let me address a few of them namely in the corporate tea sector, just to highlight the work that has to be done in the total value chain if we are to be actually competitive globally.

1. Senility of bushes
If we analyze the finding of the President-appointed committee to evaluate the performance of the Regional Plantation Companies (RPCs) it revealed that from 142 million kilograms in 2005, in 2002 the volumes had declined to 124 million kilograms of tea which is a drop of almost 12.6%. If we look at the overall national out put too, we see that from a 317 million kilograms of Tea the overall volumes has declined to almost 289 million kilograms in 2009. This needs to be carefully analyzed so that a clear identification is made to determine the loss of volume due to externals issues such the droughts etc as against im proper agricultural practices.

There is one such study done by the Sri Lanka Tea Research Institute (TRI) which has analyzed the drop in production from 142 million kilograms to 124 million kilos in a three year period and linked it to the Senility of the Tea bushes. The (TRI) states that the extent of low producing Old Seedling Tea (OST) in Sri Lanka almost 75% of it is in the corporate sector, which endorses the hypothesis that the senility of the bushes can be a key reason for the declining production and lower production numbers of the RPCs. The alarming factor is that if Replanting is not done within the next seven years, the TRI estimates that production volumes can further decline to a level as low as 80 million kilograms.

This means a drop of almost 45 million kilograms of tea from the 2002 output of the RPCs. This drop in value terms is equal to 12 billion rupees which is colossal value given that this segment accounts for approximately a Rs.41billion per annum.

One can argue that replanting must be done by the RPC’s at a rate of 2-3% a year as per TRI guidelines because the state will invest on the demand side of the business as proposed by way of concepts like Nation Branding but the reality is that to replant one Hectare acre of tea will costs over 2 million rupees. With a gestation period of seven years and the Internal Rate of Return (IRR) being 13.7% as per TRI calculations, this makes this investment non viable. In fact it is a cost that a RPC cannot practically absorbed.

This is only one such case in point that tells us the strategic development initiatives that is required in this industry but it also tells you how much backward we are in the development agenda as against the other developed nations in the world of Tea. Some can even argue that first to correct the supply side of the business before going for complex initiatives like using tea for Nation branding which I must agree has some validilty.

2. Wage increases
The second burning issue that needs to be discussed is that in the corporate sector the inconsistency by which wage increases takes place due to political economy at play is mind boggling. For instance in February 1992, the total package of the plantation worker was around Rs. 60. In the first collective agreement in February 1998, it was revised to Rs. 101. Today the wage stands at Rs.410 odd. This results in an increase of over 500% which has not been tied in statute to any productivity norms which explains the pressure on the industry. Over the years, the RPCs has impressed upon the Unions the need to link wages to productivity. However, wage revisions have been imposed on RPC’s due to the political pressure that makes the business model non viable. This leads to the cost of production (COP) being a component that the RPCs having no control on. The COP which was around Rs.157 in 2004 rose to Rs. 224 in 2007 which was a staggering increase by 43% was the highest among global producers. This gives one an idea on the urgent policy reforms that are required to actually make this pivotal industry competitive in the global market place.

3. Tough financial performance
The third issue that is worth discussing is that even though the stock market in 2008 was dominated by the RPCs where we saw the plantation stocks out performed the market by a staggering 96%, the reality is that the average price of a kilo in

January was at Rs.330/- and in July it peaked to Rs.342/- per kg and then, with the global commodity price bursts the prices crashed by end of year to below Rs.200/- where the world saw a direct correlation between tea and oil prices. In 2009, the average price stabilized at $3.64 per killo but it must be noted that this is mainly due to a supply chain issue faced globally where there was a shortfall of almost a 125 million kilograms that pushed demand price up. If not the reality would have been that the selling prices would have been very much lower. In fact it would have converged with the cost of production(COP).

The Industry Return on Equity (ROE) as per the annual report of 2007/8 was 27% at the best prices of Tea that Sri Lanka has seen, While in 2004/5 the Industry recorded a low ROE of 9.30% which gives us an indication of the reality of the financial issues that the industry is challenged with.

As per the published annual reports a point to note is that in 2007/8 the RPCs revenue earnings was Rs.41 billion with the Gross Profit recording a 18.6% and Net Profits of 10.3%. Hence, it is very evident that unless a re modeling is done of the industry in the corporate sector the use of Tea for Nation Branding the country globally will not be sustainable in the long term.

4. Long Term Investment-Low
As the last point, let me highlight how the overall financial pressure has an impact on the cost of replanting almost impossible. The current performance by the RPCs for replanting is around 0.7% as against the 2% that is stipulated by the TRI. Based on the estimate of the TRI, the corporate sector has to replant 21,835 Ha of tea in the short and medium term in order to have the right kind of mix of tea stock. This means that on average 2350 ha of tea will have to be replanted so that within nine years the right bush stock mix can be achieved. The alarming point to note is that if this is not implemented with urgency the volumes will drop from the current 125 million kilograms to around 80 million kilos which will be collateral damage to the RPCs and the country. Once again, based on the workings of the TRI the requirement for 2350 ha to be replanted will cost around Rs. 1.5 billion which makes this proposition not viable. Hence, there will have be a creative way around this problem with support from a global organization like FAO or the ADB.

Economic impacts owing to revision urea subsidy

Way Forward
Hence we see that while Sri Lanka can use Sri Lanka Tea as a vehicle for Nation Branding, from the supply side of the business there has to be some quick decision making to sort out the key issues that was discussed above.

Firstly, the lease period from the current 53 years (16 years have already lapsed) has to be extended to a lease period to 66 years so that to a some extent the financial viability of replanting becomes attractive. Secondly, in the short to medium term itimportant to build in an operating structure where a quarterly review is done between the private and the government sector so that replanting rate issues can be discussed and agreed mutually by the state and the private sector based on the reality than on statistics. If outside funding is required by the RPCs it will have to mutually agreed between the private sector and the relevant line ministry so that productivity levels can be increased for the benefit of the industry.

From a more long term perspective it is important to develop a new business model to operate the RPCs that are required. Not only from an economics point but from a social side too. The good news is that some companies are already on to this new strategy but requires strong policy reforms that can support this hard line approach. This model includes a highly diversified RPC that has business lines in commercial forestry, gemming, Mini hydro, Eco-tourism, Palm oil, mineral water bottling, Dairy farming and vegetable/fruit cultivation for the export market and other entrepreneurial ventures based on the needs of the market place. We also have to face reality that one must have sea change in the attitude of running the RPCs and move towards a very lean operating structure which is highly diversified.

Another option will be to develop an export arm or for the RPCs to buy a successful export company which has a synergy on the type of teas required by the global customer and the type of tea that the RPCs manufacture so that the moneys earned by the exporter will come into the P&L of the RPC. This will make an RPC to own the total value chain from production to warehousing and logistics to global marketing just like the agency house days. This will require competencies in many areas which can take some time to implement though but we have to look out of the box if we are to make this industry competitive.

Conclusion
We need to note that these strategic changes cannot be successfully implemented unless serious policy changes do not come in to effect. It is also very evident that just by driving concepts like Nation Branding using the tea industry will be useless unless a more strategic changes are done in the total supply chain. Now that the fizz is over on the war, I feel its time that Sri Lanka gets serious to economic development. The challenge is if the political hierarchy is ready to make those serious decisions just like South Korea and Japan did after the war.

Source: TheIsland.lk http://www.island.lk/2010/03/22/business8.html
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Huzefa Asgarally
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« Reply #1 on: March 30, 2010, 04:46:38 PM »

Serendipity, an acrostic poem on PEACE returning to our small tropical Island of Sri Lanka;

Serendipity,

 
S erendipity thy nature,
   has returned to our Isle,
E nduring the rapture,
   of victroy's rile,
R elentless is thy mystery,
   of those finds,
E ach corner has a sanctuary
   of peace for its minds,
N estling thy neighbours,
   with peace and tranquility,
D istancing the vendors,
   of hatred and instability,
I n you our Isle of paradise,
   one now finds,
P eace, sans terror's vice,
  and love of all kinds,
I n you our Isle of serendipity,
   one finds in each corner,
T ales of yesteryears tragedy,
   in hearts of their mother,
Y et thy return to our Isle,
   brings to all of us but a smile.

By Huzefa Asgarally AbdulHussain.
25th August 2009.
 
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