An Economic Analysis of Tata Tea in India PDF

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Analysis of Tata Tea in India as per economic point of view...

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AN ECONOMIC ANALYSIS OF TEA

COMMODITY’S GENESIS: Tea was introduced to India within the 19th century by the British, to beat the monopoly of Chinese production. British cultivated and consumed tea in India in enormous quantities from the first 1800s to 1947. Indian-grown tea proved extremely popular in Britain due to its greater strength and as a patriotic product of the empire. Tea is consumed for its medicinal properties, aiding digestion and treating nervous disorders. 76% of all tea produced was black and thus the remaining 24% was green. India was the foremost important producer, accounting for 28% of world production, followed by China, Sri Lanka, and Kenya. Tea was grown in 30 countries, with 2.4 million hectares of land under cultivation the worldwide supply of tea was limited as there was little additional land available that was suitable for cultivation. Tea had been a high-status drink when first introduced but later had a steady fall in price and thus its popularity among the labourers increased. In the year 1998, India produced 870 million kgs of tea and offered a wider variety compared to other countries. The Indian tea industry has grown to own many global tea brands and has evolved into one of the foremost technologically equipped tea industries within the world. The consumption volume of tea in India was approximately one billion kilograms during the year 2020. The first tea estate was established within the state of Assam. Assam and West Bengal are the major tea producers in India. Among the southern states of the country, Tamil Nadu has the highest tea production, most of which was grown within the hills of the Nilgiris district within the southern Western Ghats.

COMMODITY’S BACKEND PATHWAY (MANUFACTURING): The foremost input to produce tea includes Camellia sinensis. These Green Leaves can be purchased directly from the suppliers or through auctions. The process for manufacturing various types of teas is given below-

The four main factors of production in tea are land, labour, capital and entrepreneur. Entrepreneur purchases land to grow tea plants. They also need a land for a factory and need to invest significantly in sufficient capital – machines and tools to mix the raw ingredients into the finished food product. For mass production, they build a large factory to benefit from economies of scale. Technological advances have taken place over the years and according to the LongTerm Law of Production (Ref. Fig No.1) there has been increased output of crops within the same acreage. India's current tea production (1,256 million kgs in 2020) has increased approx. fivefold from 1947(255 million kgs). Tea processing firms outsource transport management services from third parties outside the organization to reduce costs, increase efficiency and to concentrate on their core competencies.

Fig No. 1

In the production phase, high initial capital investment and continuous flow of working capital is required. It is learnt that loans provided to tea gardens for tea planting and its maintenance is insufficient. The financial institutions have not been able to construct well designed procedures for loan sanctions and disbursement as tea was placed as a priority sector lending item with reduced interest rate. The basic infrastructure required to produce tea is land for plantations and for production, machinery, power supply and good roads with connectivity. The tea industry employs approx. 3½ million people. The labour force, especially female labour force is the backbone of the industry. This industry also helps provide employment in other sectors such as road construction, transportation, warehouses, manufacture of plywood, tea chest, paper, card board, aluminium foil, fertilizers, insecticides, pesticides, etc indirectly. High market penetration of the beverage industry across socio-economic classes is the driving force of the tea industry in India. The economic growth and the rise in middle-class population who now tend to move towards premium brands due to increase in disposable income and growth in health awareness that led to the introduction of healthy ingredients in tea by different market players have played an important role in the industry’s growth in India. The major Indian companies that produce tea are Tata Global Beverages, Brooke Bond, Society Tea, Hindustan Unilever, Goodricke Group and Gujarat Tea Processors & Packers Ltd (Wagh Bakri brand).

The major foreign companies that produce tea are Nestle, Associated British Foods, ITO EN INC and Barry’s Tea. Tea is one of the most competitive and challenging market in terms of product and competition. In terms of product classification, tea is usually divided into black and green tea primarily and internationally there are some variants such as fruit/herbal tea, instant tea, etc. which has negligible market penetration in India. With increasing awareness on product differentiation (aroma, taste etc.), the standard tea is allowing room for premium variants and flavors. This has resulted in consumption of premium segments and also given a push to the unit consumption price point/kg. Large companies come up with competitive strategies viz. product differentiation, niche marketing, branding and customer focus, fair trade, cost leadership, strategic partnerships, outreach, market diversification and quick delivery for protecting their monopoly in the tea business. These strategies ensure that the companies can always access tea at affordable prices keeping their competitors at bay.

Although the tea industry in India is under the private sector, it is regulated by the Ministry of Commerce since 1933 under various enactments in the Tea Act, 1953. The Tea Board was established under this Act. The government has often provided international support to the Tea industry by persuading the WTO and passed resolutions to provide domestic support to it. The Tea (Marketing) Control Order, 1984, says that no person can carry out manufacturing activities except under valid registration form the Tea Board for a unit controlled and operated by them. For newcomers, a permission for the planting of tea is issued by the Licensing Branch, along with the recording of any change in ownership of the tea estate.

COMMODITY’S FRONTEND PATHWAY (MARKETING): After the commodity is manufactured and packed it follows a chain of ManufacturerWholesaler/Distributer-Retailer-Consumer. Main Outlets where Tea reaches to the consumers are the retail outlets which are Grocery stores, supermarkets, Malls, E Tailers, Specialist tea shops, Department stores, Brand outlets. There is concentration

in the distribution channel in cases where larger quantities are required where the retailer directly purchases from the manufacturer and gains additional margins. The Sales

Price of

the commodity

is

the

Manufacturers

Sales

Price

+Wholeseller/Distributer Margin+Retailers Margin.The Distributer’s margin in this type of commodity is around 3-10% and the retailer margin is around 8-40%. Tea considered an evergreen commodity, does not require to be pushed in the market to be sold. However,the competitiveness among the Brands due to monopolistic competition makes the companies to purchase shelf space and push their brand in the market. Tea comes under Monopolistic Competition along with manufacturing cost, they also include a huge amount of selling cost like advertisements, packaging, etc. Unlike manufacturing costs which are related to the supply of the product these costs are directly related to the demand of the product(Fig No.1). The promotional expenses play a huge role in the sales of this commodity. Hence, the brands have to take high promotional efforts to be relevant in the market(Fig No.2).w

Fig No.1 Average Total Cost

Fig No.2 Promotional Effect On Demand

Indian tea producers are hit by challenges on the production and supply fronts because of various world crises. E-commerce, particularly for the domestic market, has helped many tea companies survive through the online mode. A packet of tea was often bought at the near retail store or supermarkets for most families, however, currently, tea is out there even on online platforms as companies are adapting to the new changes. Companies have a bonus since tea packets are offered online through their website and they have gained a loyal customer for themselves. New entrants like

Teabox and Tea Trunk are aggressive since the conservative Indian tea businesses are turning to e-commerce. In February 2000, to ensure the availability of tea, a required system of certifying the genuineness of exported tea was included in the 1953 Tea Act. This system makes it mandatory for all the tea dealers to get into a license agreement with the Tea Board of India after payment of an annual fee after which Certificates of Origin are provided for export shipments under the Tea (Marketing and Distribution Control) Order, 2000, with the Tea Act, 1953. The customs authorities in India have been instructed all custom checkpoints to examine for the certificates of origin and not to allow the export of any tea in the absence this certificate. Tea is sold out domestically in retail shops and has a fixed placement for itself in supermarkets. Due to the demand for tea, globally, several cafes have introduced their brands and sell their tea packets on window displays that create a visually appealing style that represents the commodity. Tata Starbucks Pvt. Ltd, the joint venture between UK Starbucks and Tata Global Beverages, has introduced Starbucks’ tea, Teavana, providing eighteen distinct kinds of tea at its stores to cater to tea lovers in India. Tea played a leading role during globalization, as it is observed in the case of China, tea and the opium trade had the largest impact. Due to Britain’s growing demand for tea, Anglo-Chinese trade became a dominant trade that Britain had in the East. The impact of trade liberalization on the tea business in India created a large impact on the tea cultivation space, production of tea, and import and export of tea. India exported 240 million kilos of tea with total earnings of USD 765 million (approximately) in 2019-20. Major consumers were Russia, Iran, China and the UAE.

5. ANALYSING A TYPICAL COMPANY THAT DEALS WITH THIS COMMODITY: (15 marks; length: 40 % of the full essay) The company we have chosen for this assignment is TATA Consumer Products Limited- focus being on their brand Tata tea. TCPL was founded in the year 1962 and the company has been producing tea since its establishment. The 1st brand of Tata tea

was introduced in 1983. The company’s operations extend to all the continents of the world. Its other brands are Tetley, Vitax, Good Earth and Jemca. The company has heavily invested in innovation and packaging on products. As technology is getting advanced, new machinery had been introduced regularly due to which there has been a tremendous increase in production. They have also introduced the comic vending machine. The company has taken the benefit of economies of scale and also have raised their output according to the long-term law of production. With an annual production of around 40 million kgs, TATA is the second largest tea producer in India. The annual turnover of the company is Rs. 11,600 cr with its domestic and international operations. Tata tea manufactures more than 70 million kg of tea in India and controls over 54 tea estates in Assam, West Bengal and Kerala. It has increased its production by 10% to increase its products in the market, the result is increase in the market share of Tata tea. Tata tea has a market share of around 30%. Tata tea has suffered in the period 2000-03 due to slowdown in the Indian Tea Industry. However, Tata tea came back strong in 2004 while other companies were still fighting to hold on. The company brought in new varieties to fulfil customer needs. It brought Agni, an economy segment product in the market. It also realised that labour costs need to be reduced and the savings should be used in raw materials cost to expand its market. Since then, Tata tea has seen continuous increase in sales. TCPL has a very aggressive promotional strategy with a multi-channel approach spread across both older channels like Television, newspapers, radio, etc. and also with innovative campaigns on the ground and online via their social media handles like Facebook, Twitter, etc. Their renowned campaigns such as ‘Jaago re’, ‘Power of 49’, ‘Gaon chalo’, etc. brilliantly portray both the ads and issues faced by common people. Its social campaigns increased focus on rural markets. Blogging about tea, its benefits, and their products is also used by Tata tea. Promotions such as free gifts and offers are used to stimulate their customers. The advertisement of the Tata tea brand formed various feelings and judgement of the consumers towards the brand which ultimately led to the success of the brand in the market. Tata tea encounters different policies such as remuneration policy, appointment and Removal of Directors policy, Corporate Social Responsibility policy, Policy on

determination of materiality on closure, Policy on determining material subsidiaries, Supplier code of conduct, Anti-bribery policy, Document retention policy and Tata code of conduct 2015. Its Sustainability and Corporate Social Responsibility policy focus on climate change, water management, sustainable sourcing, community development and waste management. Tata tea’s policies regarding their value chain providers is to select their suppliers and service providers fairly and transparently. Their suppliers represent the company only with duly authorised written permission from the company. Tata tea intends to continue working on its “Jaago Re” campaign. Its target is the rural markets where there is large scope of growth as none of the brands have high market penetration in the rural areas. Tata tea is also working on its cost control and so far and has also succeeded to some extent. Furthermore, it is planning to integrate its coffee and bottling business with tea business to achieve economies of scale. The focus of the Tata Consumers Product Limited has been shifting to health and wellness, and they plan to complement its tea business with an increasing focus on health and wellness beverages including non-carbonated drinks, mineral water, decaffeinated products, energy drinks among others. Even though the price of tea has been hiked, there has still been a shift from loose to packaged products. Given the pandemic situation, the essentials categories would continue to see strong growth in future even as tea prices remain elevated. Tata tea coming under Monopolistic competition earns super-normal profits which means that the revenues of the firm are greater than the cost (Ref Fig 1). Tata tea’s market capitalization is in excess of US $1 billion and its consolidated revenues are over US $700 million. Owing to immense competition in the market, TCPL’s profit has seen an increase and decrease over the period of years. Please find the table below-

Fig No.1

Profit After Tax 900 800 700 600 500 400 300 200 100 0

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

Table No.1 Profits After Tax

Tata tea has acquired land for tea plantations. The basic infrastructure used in Tata tea for production is machinery, labour, power supply and good roads with connectivity. (Factors of production)

Tata tea has evolved through various innovations to keep a competitive edge. Creating innovative products that delight their consumers is their passion. Introduction of healthy ingredients in tea by different market players and increase in the disposable income are some other factors that drove the growth of the market and evolution of tea as a commodity. Tata tea was the first brand to offer garden fresh tea in a polypack format in 1985 improving freshness and quality. In 1989, they re-defined the market by launching the round teabag. Later was the drawstring ‘no drip, no mess’ teabag. According to our survey, out of the 107 respondents who drink tea, 106 are satisfied with the brand that they use. People easily switch between brands when it comes to FMCG products like tea. Hence, it’s very important to improvise your processes to provide better products to the consumers at a reasonable price. Also, for most of the respondents the reason for consuming a particular tea brand is taste, followed by quality and brand. The firm should focus on these three areas to retain their existing customers/attract new customers. Tata tea has 4 national and 3 regional brands keeping in mind the diverse preferences of its consumers, offering a varied range of flavours and tastes in its portfolio. For Example- Tata tea Masala is a unique blend of black tea and the flavour of five spices that caters to the Indian consumers who prefer adding spices to their tea. The competition in the tea industry is based on product differentiation. The Herfindahl index of Indian tea industry is 0.07 which exhibits a highly competitive monopolistic competitive market. Tata tea and many other companies tries to differentiate its product to cater different customers. Tata tea’s major competitor brand is HUL (Lipton & Brooke Bond). There is a tough competition between Tata tea and HUL over market leadership. Tata tea has introduced new varieties of tea under its flagship brand, Tata tea to compete with HUL. Its other competitor brands are Bombay Burmah and Assam Company. The global competitors of Tata tea are Associated British Foods and Nestle. Tata tea’s vision is to be India’s foremost tea based Beverage Company. Its mission is to achieve market and thought leadership for branded tea in India. Tata Consumer Products Limited expects their suppliers to conduct their business with honesty and integrity including a global zero tolerance policy towards bribery and corruption.

Such a policy will ensure full compliance with the UK Bribery and Corruption Act, the US Foreign Corrupt Practices Act, the Indian Prevention of Corruption Act, 1988, as amended 2018, and such other anti-bribery and corruption legislation as in force, or maybe implemented in the countries in which Tata Consumers Products Limited or the supplier operates....