Sri Lanka’s tea is in a death row due to high cost of production: Industrialist

Oct 26, 2014 (LBO) – Sri Lanka’s “Ceylon Tea” is in its death row due to higher cost of production and wages, needs more value addition, marketing and branding to uplift the industry to its glories era, Industrialist said.

“Sri Lankan tea is in a death row,” Malik Fernando, who is a director of MJF group, founded by his father, Merrill J Fernando said.
“Ceylon tea still has its position for quality but it is under severe stress,”

“Cost of tea production in Sri Lanka is doubled than any other competing country,”

“Our wages are doubled than the other tea growing countries.”

Fernando was speaking at a forum organized by Charted Institute of Management Accountants (CIMA) yesterday (29) 2014 at Colombo.

Tea in Sri Lanka, the largest foreign exchange export earnings plantation crop which was introduced by James Taylor, a British citizen.

Today about 25 percent of tea in Sri Lanka produced by so called plantation companies and 75 percent produced by small holders Fernando said.

The island’s has 206104 hectares of tea plantations of which 70 percent are small holdings that are cultivated by 397223 small holders who produce 1.5 million kilos of tea, statistics showed.

Sri Lanka’s tea consumption per person per year is 1.3 kilo grams.

However tea is not recognized as a very profitable business in the island due to rising cost of production, lack of labour and high wage rates of labour.

According to statistics of the publication of “The Long-term Profitability & Productivity of SL’s RPCs” by Dr Ramani Gunatilaka, Sri Lanka tea industry has about four dollars of cost of production for a single kilogram of tea which is highest in global.

Daily plucking average of around 18 kilogram of a local worker is less than half of that of a Kenyan worker who plucks 48 kilogram per day and is only two thirds of that of a South Indian worker (27 kg), she said.

At approximately 5.3 dollars of daily wage of a Sri Lankan plucker is almost double that of a Kenyan plucker ($ 2.6) and more than double that of a plucker from South India ($ 2.1).
Apart from the higher wages, the plantation companies in Sri Lanka provides accommodation, healthcare facilities and education for the workers and their families. Higher consumption of alcohol in both women and men is a common issue on most plantations.

Fernando said, if the industry uses proper branding and marketing, the earning would be somewhat resolve.

“We are producing tea at a higher cost,” Fernando said.

“Our Sales prices are about 20 percent higher because of the premium positioning of Ceylon Tea and orthodox manufacturing tea. But we are not marketing,”

“Yield has been half compare to other tea growing counties, because there has been no investment in tea industry due to nationalization in 1970, which created lot of problems,”

“It’s highly unpopular to grow tea in Sri Lanka,”

“Wages are going up, Cost keep increasing, Margins are shrinking,”

“But how do you get out of this is, through improving marketing and branding,” “We are not doing that.”

Fernando said Sri Lanka should diversified and discover new markets to export tea rather than concentration on exporting in to only Middle East and gulf regions.

“If we export branded, value added (tea bags) to sophisticated western like UK, Singapore, Hong Kong, Malaysia, UAE, Western Europe, North America, South America and Canada rather than exporting to few countries who consolidated have six percent of global PPP or Purchasing power parity, we can thrive,” Fernando said. “Countries that we are targeting are not very wealthy,”

“So the outlook is grim. There is lot more to be done.”

Speaking about his own experience with Dilmah tea, Malik Fernando said that proper packaging is very crucial in marketing and branding Ceylon Tea globally.

MJF Group owned Dilmah tea - available in over 100 countries - is one of island's most visible international brands.

“Packaging is very critical,”

“We invested a lot in this, to attract younger audience to drink tea since the coffee culture is the trend nowadays,”

“We also have single origin tea where some global names has 30 to 40 origins in their tea,”

“We de-commodities tea, we make it trendy. We got tea bars and tea lounges around the world. We have competitions that cooking from tea with top chefs around the world,”

“Everything we do in Dilmah is positioning Ceylon Tea.”

He said the other brands also should try new ways of packaging quality tea and brand it to market globally.

Tea exports shrinked 2.8 percent to 138.9 million US dollars in September 2014. The Tea Board has a vision to reach earnings of $ 2.1 billion by 2016. Sri Lanka’s value added tea exports account for nearly 45 percent of the total export volume.

http://www.lankabusinessonline.com/news/sri-lanka%E2%80%99s-tea-is-in-a-death-row-due-to-high-cost-of-production:-industrialist/77266590

* A 2 kg increase in daily plucking average of tea can provide win-win solution

A marginal increase of at least 2 kg in the daily plucking average of each tea plucker can significantly boost Sri Lanka’s entire plantation industry and benefit all stakeholders by bringing down the skyrocketing unit cost of production of tea by nearly 7%, the Planters’ Association of Ceylon reveals, reiterating that the sustainability of the sector and the livelihoods of the plantation communities are in the hands of the workers and the unions.

Noting that at approximately Rs. 460 per kilogram, Sri Lanka’s unit production cost of tea is the highest in the world and the country’s unit labour cost in itself is higher than the total unit cost of production of some of its competitors, the Planters’ Association estimates that a 2 kg increase in the daily plucking average of tea of each worker can bring down unit cost of production by Rs. 30 or 6.5%. Such a development can boost the Regional Plantation Companies’ (RPCs) total revenue and mitigate the unsustainably high costs they are grappling with at present.

The RPC estates are compelled to offer 300 days of work per annum, irrespective of the daily output levels of the workers or the reduced cropping conditions in the fields as a result of erratic and changing weather conditions that are not uniform throughout the year. During the lean cropping months, the RPC estates have paid full daily wages to the workers although their averages are about 50% of the expected averages and during high cropping periods, workers are paid extra for any output harvested above the norm, the Planters’ Association notes.

The RPCs have unfailingly ploughed back earnings to the plantation sector, making substantial capital investments since privatisation. They are investing significantly in further improving free healthcare, accommodation and other facilities provided to workers in addition to wages. “Productivity improvements that increase the viability and sustainability of the estates, which provide livelihoods and employment for the workers would thus be a win-win situation, enabling workers themselves to reap substantial dividends,” the Association emphasises. Productivity improvements also serve a dire need, especially following the unprecedented fall in the global rubber prices to record lows below even the cost of production, resulting in tea – which too is facing turmoil in major export markets – being the only major source of income for most plantation companies, the Association cautions.

Since labour costs excluding salaries of managers, administrative staff on the estates etc. account for between 67% to 70% of the total cost of production of local plantation companies and as the country has the lowest output per plucker in comparison with its competitors India and Kenya, an incremental increase is highly achievable even after making allowance for lower land productivity, the Planters’ Association reasons.

This is especially true in the case of male pluckers (who represent around 20% of the workforce engaged in harvesting) whose productivity is woefully low – at the maximum 60% to 70% of that of their female counterparts. This is in stark contrast to competitor countries like Kenya in which the plucking average of male workers is substantially greater than that of females, the Association points out.

According to statistics, (The Long-term Profitability & Productivity of SL’s RPCs by Dr. Ramani Gunatilaka) at present the daily plucking average of around 18 kg of a local worker is less than half of that of a Kenyan worker (48 kg) and is only two thirds of that of a South Indian worker (27 kg). Largely due to the significantly higher unit labour cost and lower productivity, at approximately $ 4, the cost of production of a single kilogram of tea is highest globally in Sri Lanka.

While Ceylon Tea commands a premium at $ 3.6 a kilogram ($ 1.4 more than tea from Kenya and $ 1.5 more than tea from India) (according to Tea Market Report – June 2014) this is far more than negated by the substantially higher cost of labour and lower productivity resulting in a loss of approximately $ 0.4 per kilogram. At approximately $ 5.3, the daily wage of a Sri Lankan plucker is almost double that of a Kenyan plucker ($ 2.6) and more than double that of a plucker from South India ($ 2.1). When compared with a counterpart from Kenya and South India respectively, the wage premium commanded by a Sri Lankan worker stands at approximately $ 2.7 and $ 3.2.

In addition to higher wages, local Regional Plantation Companies also incur substantial amounts in providing far more comprehensive accommodation, healthcare facilities and traditional and established benefits and amenities to their workers and families than those enjoyed by workers in competitor nations.
“We readily acknowledge that it is unrealistic to expect the plucking average of a Sri Lankan worker to equal that of a Kenyan worker because of many inherent factors prevailing in the local tea sector and neither is that the request of the Regional Plantation Companies,” Planters’ Association Chairman Roshan Rajadurai explained. “What we request for is an extremely reasonable incremental increase of at least 2 kg in the daily plucking average per worker, which is highly feasible but would nevertheless go a long way in assisting the companies to break even.”

“There is ample evidence to prove that workers can actually pluck far more than 2 kg extra, if they really set their minds to do it,” he pointed out. “They must realise that any improvement in productivity will cushion the impact of the very high cost of production in Sri Lanka and eventually will help to sustain the tea industry, through cost reduction and improved competitiveness in the global marketplace. If the industry collapses, it will be the workers who will face the brunt of such a disaster.

“Already, we have heard reports that some rubber small holders have stopped tapping rubber because it is unviable and they have alternate sources of employment. However this will not be the case for the approximately one million plantation community resident in the plantations, who are enjoying all the benefits provided since they’re employed in the estates.”

“Especially following the substantial decline in rubber prices, the workers and the unions are at a crucial juncture and can decide to cooperate with the plantation companies to benefit mutually and put the industry on a sounder footing or can decide not to cooperate, which will at some point inevitably lead to the local plantation sector becoming financially unviable,” he said further.

The request by the Planters’ Association comes in the backdrop of volatility in the prime markets for Ceylon Tea – the Middle East, Russia and Ukraine – contributing 70% of total value and a massive crash in rubber prices to one of the lowest levels in recent history.

http://www.ft.lk/2014/10/30/planters-association-says-sustainability-of-tea-industry-in-hands-of-workers/

Thanks FG for sharing these, +

If a Govt wants they can change the situation. The structure/eco-system is about 150 years old and changes are done here and there only...and that will not work.

Benefits should be given for value added teas, research, efficiency improvement and optimize the structure.

Hats off for Dilmah, Melsna and some Companies that has built their Brands with difficulties. Recently i have seen Basilur Tea coming up with a super range and winning the SLIM Brand Excellence New Entrant category-Gold about 2 years back. Hope it would enter the share market soon !