The Problem With Tradition

Can conservatism be risky? In the nineties, the upheavals in several Indian industries from consumer durables to automobiles and services have shown that it can. In each of them, companies suffered erosions in market shares as competition was unleashed. Adversity is now forcing many of them to break out of their protectionist thinking and fight back. But not all industries have learned the lessons of competition quickly.

One industry that has suffered the consequences of innate traditionalism is tea. The dominant player in global markets from the sixties to the mid-eighties, the tea industry today has been marginalised. From 24 per cent in 1983, the industry's share in world markets had dropped to 14 per cent in 1996. The drop has been as dramatic in volume terms as well. Over a ten-year time frame (1987-1997) Indian exports dropped from 203 to 154 million kg.

 

Today, the industry is revelling in an export-led upturn that has less to do with strategic manoeuvring and more to do with a windfall gain crop failures in Kenya and Sri Lanka, the feisty younger rivals that overtook India from the late eighties to dominate global tea markets today. The good news, however, comes after a five-year slump that caused an unprecedented stock build up at home in 1996 and exposed the weaknesses of this centuries-old industry. In fact, the tea industry's predicament in the early and mid nineties highlights the dangers of operating in markets with high comfort levels.

Essentially, India became a peripheral player because of the way it viewed its markets. The domestic market was growing at 3 to 4 per cent, a shade faster than the growth in population. So growing domestic consumption meant that it could afford to treat exports as a residual industry. That was, however, only part of the problem. More than half India's exports went to the Soviet Union, which had emerged as a steady and assured market.

So as long as the USSR bought Indian tea, the industry was a prosperous one, which thrived on a routine domestic shortfall that kept prices and realisations high. The huge volumes that the Soviet Union absorbed also made the industry disinclined to nurture other, often more value-conscious, markets like the UK or look at newer markets such as the US. Evidence: in 1970, India was exporting as much as 93.4 million kg to the UK. By 1980, UK-bound volumes had almost halved to 45.5 million kg.

Till 1993, this high comfort level also meant that the Indian industry felt little encouragement to combat the inroads that Sri Lanka and Kenya were making in global markets or to cope with the shift in the price-value equation towards cheaper (and to an extent inferior) quality and value added tea in the form of instant tea and tea-bags.

All that changed dramatically when the Soviet Union collapsed. With that, the market for Indian tea vanished almost overnight. From 1992 onwards, the industry had to face an unprecedented glut in the market in 1994 the cumulative carry-forward stock rose to 38 million kg, the highest in decades. Worse, India was unable to recoup its losses in the newly-formed CIS countries as Sri Lanka rode the burgeoning demand for cheaper tea and muscled in with teas that were roughly Rs 10 per kg less than Indian tea.

Like the textile industry in the past, the tea industry's major flaw was the manner in which it chose to view itself. Shifts in global consumption patterns clearly showed that tea companies increasingly needed to think like marketers of fast-moving consumer goods rather than as executives in an agri-based industry that operated on the rules of a commodity business.

Tellingly, therefore, there were few innovations either in marketing or production-enhancing research. Productivity increases that could have helped make India cost competitive were crucial to an industry in which tough land laws made major expansions near impossible and replanting old bushes could entail losses. Yet the industry's last major technological breakthrough, for instance, occured in the 1930s with the CTC (crush, tear and curl) method that helped improve cuppage three times compared with the orthodox method of producing tea.

In marketing, the progress was almost as slow. Producers continued to rely mostly on the 137-year-old auction system, the principal trading mechanism for bulk tea. (This, in fact, was reinforced by a government order that made the bulk of a company's tea production to be routed through the auctions.)

In a way, the industry had collectively developed marketing myopia: few realised that rapidly changing consumer habits meant that tea was increasingly becoming one of the options before a consumer in a larger beverages market. Thus, till the mid-nineties' crunch prompted the big producers in the industry to start looking at its customers more closely, the only major marketing innovation dated back to 1986. That was when Tata Tea, one of the few producer companies to spot changing trends early, introduced the polypack, a radical departure from the traditional cardboard pack in which tea was sold for decades. Although Tata Tea was later overtaken by Lipton's offering Taaza a few years later, it was the polybag that stormed the value-conscious markets of Gujarat and Maharashtra in a major way.

Adversity has, however, prompted the industry to turn more market savvy. Traditional producers like Williamson Magor and Assam Company, mainly bulk sellers of high quality (ie high priced) tea in the past, launched value for money packaged offerings for the domestic market. Some producers are now looking at packaged offerings even for overseas markets.

The industry as a whole has started turning its attention to new markets with high growth potential like Pakistan and paying greater attention to the needs of emerging markets like Iran.

An industry-wide effort to promote Indian branded tea in Russia is one example of this. The project, called Nargis and the product of a two-year collaboration between five major producers, has had limited success, but industry officials like to measure it success differently. It marks, they point out, a radical shift away from the industry's earlier mindset.

It is estimated that the industry is likely to enjoy good times for at least the next five years before Kenya and Sri Lanka recover their crop losses. In the long run, however, it could slow the process of reform in an industry that had only just begun to learn the lessons of competition.