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ASIC 2014


Time for Tea Production Cost Control

BY RANDY ALTMAN

Tea producers and wholesalers from every region suffer from low prices. After years of poor income, tea executives are now focusing on cost reduction. Lowering costs further is a necessity. If tea prices do rise next season, then profit margins will increase even more with lower production costs. However, tea prices may not rise. Reducing business-operating cost remains the best hope for avoiding bankruptcy or forced sale.

The cost of production involves both quantifiable and unquantifiable factors, with labor as the biggest problem. Corporate tea producers, especially in India and Sri Lanka, function as public welfare agencies, providing housing, medical care, fuel allotments and education - even college scholarships. Most non-wage benefits are not required by government regulations. The companies provide services their governments cannot. These benefits for workers can aid productivity and improve community living conditions. However, the big problem is that “workers” receive benefits and wages when underperforming, or even completely idle.

Tea companies’ quasi-governmental role as welfare provider becomes a huge added cost (a cost under-appreciated by both workers and governments). In the succinct words a Darjeeling plantation owner told me recently, “no one can get sacked.” Thus, a huge production cost component loses flexibility. In the U.S., non-productive labor is terminated, reducing cost. On plantation payroll, some workers never perform a useful service.

The historical cause of “featherbedding” is labor unions. As unions decline, like in the U.S., featherbedding lessens. On the tea estates themselves, the women usually do most of the fieldwork, with men hired who do nothing but stand around and watch the women. These men are not in management, but have the title “supervisor.” The supervisors are in turn watched over by other men, who hold the lowest rung of non-professional management, like a foreman. The supervisors are rarely in direct line-of-sight of most pluckers, blocked by the terrain of ridges and valleys.

Inside the factory, tea manufacturing is generally inefficient. Some impressive mechanization occurs, especially with the new generation of computerized processing, tea-bagging, blending and monitoring equipment. Computerization yields benefits beyond rapidity, defined as bags-per-minute with bagging. The new machinery runs self-diagnostics, with constant display of quality status. However, the typical manufacturing establishment still retains poor economy-of-scale. Companies lacking feasible plans for modernization will likely lose competitive edge.

Manufacturing, bulk packing and blending equipment routinely lie idle, even when prices are high for the output. Prices have been low and governments frequently worsen the problem by levying excise tax, a taxation unrelated to marketplace reality. Excise tax is disconnected to sale price. Bureaucratic governmental agencies promote excise tax, although damaging to industry. Revenue is raised for the government without regard to long-term detriment to tea business. Excise taxes punish tea companies for the production process itself, and actually add to inefficiency by requiring extra paperwork.

Cost-effective production is essential for business expansion. One new expansion is HVA Lanka’s push into the RTD ice tea segment. This Sri Lanka company now operationally links with facilities in Denmark, producing tetra pack product. Excess production capability in one facility is now utilized efficiently to make ice tea for HVA Lanka. In the United States alone, millions of middle-class consumers drink ice tea, a market historically under-targeted by Asian producers, with sales instead going to South America and Turkey.

Rohan Fernando, chairman and managing director of HVA Group, HVA Foods Ltd and HVA Lanka Exports Ltd, expects his RTD tea to sell in the airline market. This in-flight wholesale market is an ideal niche for brand development among the affluent. Another RTD format, PET bottle, is also under exploration by HVA Lanka. Fernando’s strategic planning involves marketing trials in several nations, with flavoring extracts derived naturally from fruit. To proceed to the next production stage’s better economy-of-scale, HVA may buy extraction equipment and then install in current factory space.

Tea production often suffers from suboptimal use of equipment and factory space. The final manufactured product is routinely underutilized because of complex regulations little known in the West. The complexity involves the definition of “tea” and the end-stage product sometimes called “tea residue.” Regulatory bureaucracies rule “residue” illegal for sale as tea, impeding further use of the leaf byproduct. At this final point in the manufacturing cycle, whatever exists is a leftover not labeled for tea sale.

Harsh legal penalties are, in theory, assessed for redirection of leftovers to the retail tea marketplace. Few outside the production business realize that, under pain of law, manufacturers must collect, bag, seal, measure and store tea residue. I recall my profound ambivalence, physically climbing a small mountain of these sealed bags. The mighty pile of residue commanded space in a high-quality factory, waiting for the inspector. Regarding this governmental enforcement personnel, my international legal advisor employs the phrase, “susceptible to bribery.”

Appropriate uses do exist for tea byproduct, which can provide efficiency and income. But complex government regulations, unfortunately, encourage unmonitored illegal “divertment” of tea production leftovers. Selling the residue as regular tea leaf for direct consumption by the public is harmful to the trade and should be banned. While tea byproduct is sometimes used as compost, a reportedly remunerative practice is making caffeine tablets. Caffeine pills are big business, selling in countless thousands of pharmacies, supermarkets and convenience stores to millions of people. A more sophisticated use for the residue is beverage. HVA Lanka plans to legally employ tea residue in its factory as an eventual source of tea extract for use in tetra pack or PET.


Continued on next page...

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