Frank words on tea from Merrill J. Fernando :

Dilmah invests Rs 10b to promote Ceylon tea

MJF Group Chairman Merrill J Fernando owners of the world renowned, single origin pure Ceylon tea brand Dilmah, spoke about prospects for Ceylon tea.

Fernando commented that although there had been a slowdown due to recession and turmoil globally, he expects demand and prices to grow in 2012.

He was optimistic that the proposed private sector led $10 million Ceylon tea global promotion campaign, if effectively implemented, will boost demand for Ceylon tea by recreating awareness of the quality image Ceylon tea once enjoyed. The campaign will also target unscrupulous packers overseas who pass other teas off as “Ceylon tea” and damage its image and impact demand.

Fernando said that the Tea Board has not advertised Ceylon tea for the last decade or more. Dilmah, he said has spent Rs. 10 billion during this period to promote Ceylon tea and this investment benefits all exporters who should ideally have followed a similar premium strategy. Most chose to ride on the awareness Dilmah re-created but sell at low cost. It is this “sell cheaper” strategy that has led to the current predicament where the country has few genuinely value-added tea brands and a focus on trading as opposed to marketing and brand building.

If the national average export price matches Dilmah’s, Sri Lanka’s earnings from tea would grow from $1.5 billion annually to $3 billion. There in, Fernando said lies the best and logical opportunity to grow the industry.

Fernando stressed the need for investment in replanting tea fields to bring costs down and improve quality. Past high interest rates and high labour costs have deterred replanting amongst companies and smallholders alike. For this, he said, it is critical that the government offers a long- term funding package such as in India, bearing in mind the socio-economic importance of the sector and the inability to fund such a long-term programme with internal funds or borrowing at commercial rates. He also stressed the need to remove present obstacles to commercial forestry.

To support increased demand for Dilmah tea, the group has planned significant investment in tea packaging machinery and facilitates at its Peliyagoda facility. Merrill J. Fernando’s Dilmah Tea is unique in its unwavering commitment to quality Ceylon Tea. In its efforts at educating a new generation of tea drinkers on quality and tradition in tea, Dilmah pioneered the Dilmah School of Tea, a Colombo based initiative that has affiliations in Lyon (France), Prague and shortly also Warsaw.

Fernando believes that the logical way to market a high cost, high quality product like Ceylon tea is to position it as a luxury item and not price-led trading and supplying under foreign traders; brand names which, sooner or later, become major competitors of Pure Ceylon tea, as history would reveal quite clearly.

It is this inappropriate strategy for Ceylon tea, according to Fernando, which has led to some exporters lobbying for imports of cheaper tea to Sri Lanka, to service foreign owned brands and local brands that trade on price. This is in essence a value reduction strategy and not value added.

Foreign brands packed here create very unfair competition for Ceylon tea in the longer-term. They exploit the positive perception of Ceylon tea among consumers long after they cease using Ceylon tea. These brands build their quality image by initially relying on Ceylon tea but move to multi origin blends eventually to save cost. It is usually at this point that local packers lobby to allow cheap tea imports, citing the risk of losing of yet another “important foreign brand” who wants to leave due to regulatory hurdles. These regulations have been put in place to protect the local tea industry. Most traders disregard the impact on Ceylon tea producers and the 12.5% of the population that survive on it.

If Sri Lankan exporters do not champion and market Ceylon tea as a premium product, who would? Emulating the multi-origin, cheap tea strategies of highly efficient, volume driven global brands is disastrous and out of alignment with the unique, artisanal, high cost tea that we grow. They must now realign their strategy with the overall interests of the tea industry and work together to regain past glories of Ceylon tea.

When the French wine industry was faced with the growing popularity of cheaper new world wines, did they lobby to allow cheap foreign grapes to blend? Asks Fernando No, instead they refocused on premium strategy and promoted in a less tradition-bound, modern style to new affluent consumers,whilst protecting the mystique and consumer perception of their wines.

Ceylon tea lost a series of markets from the UK and traditional “empire” markets, then Egypt, Pakistan, now Russia and the CIS, largely as Sri Lanka supplied bulk tea or foreign brands and are unable to control the contents of a pack of tea. The country now left with a handful of markets, which will also be lost in time. Clearly, local exporters have been unable to do justice to the growers of Ceylon tea.

Dubai can choose to be a tea hub, as they grow no tea, just as Sri Lanka chose to be an apparel hub, allowing duty free imports of buttons to fabric to hangers since the country did not have existing producers. Even then, apparel manufacturers who took a lowest cost approach have failed and those who adopted a specialized, premium positioning have thrived. But even they have had to open plants in other lower cost countries. Indeed those tea exporters wanting to pursue a multi-origin, low cost strategy without hanging on the coat-tails of Ceylon tea, the only point of difference available to them, should be encouraged to set up plants in Dubai.

Investment on machinery, often second hand, is moderate and employment low in automated plants. The “loss” to Sri Lanka from a setting up a plant overseas is negligible in comparison to the protection of the image of Ceylon tea and the improved focus on the correct, premium strategy for what the country grows. Exporters should first prove with overseas plants that selling cheap could be successful before jeopardizing Ceylon tea producers. In Fernando’s view there is someone always cheaper – multinationals do that best. Once there is consumer awareness that Sri Lanka exports not only Ceylon tea but also that of many origins, that suspicion of genuineness and “what’s in my pack of tea” cannot be reversed if and when the experiment fails.

In tea Sri Lanka has a world-class product. Exporters, whose investment in assets and people is dwarfed by that of the tea-growing sector, need to align their strategies with the national interest. This is more practical than to ask the growers to align with the exporters interest, said Fernando. Concluding, Fernando said that Dilmah was established on a unique philosophy that envisages business as a matter of human service. Recalling the lessons he learned from his parents, Merrill J. Fernando established his business on family values, underlined by integrity, caring and sharing. The MJF Charitable Foundation was established to utilize earnings from the sale of Dilmah Tea around the world to benefit the marginalized and underprivileged. Dilmah Conservation subsequently extended that principle to include the environment. Both organizations fulfill the pledge that Fernando made as a young man in his twenties, to make business a matter of human service.