Tea Value Chain Analysis

With greater share of growth and value accruing outside the traditional tea chain, there is question as to where the power in the tea value chain will lie in future. The traditional tea value chain is getting challenged by the emergence of ready to drink tea and other value-added tea segments led by players like AriZona and Teavana. For traditional tea companies, the average revenue yield of tea is extremely low compared to the beverages. This has created tremendous pressure in the supply chain as costs have increased significantly. On the other hand, tea is racing ahead in acquiring greater share of throat, as ready to drink bottled tea, as convenient home brew in K-Cups, and as premium drinking experience in emerging specialty tea shops

Typically, therefore, there is a big gap of margin distribution along the value chain. Consequent to strong economic growth in the past decade, tea consumption in producing countries have grown ahead of production, reducing supplies to the export market. On the other hand, consumption growth in non-traditional markets offers opportunity for traditional tea companies to improve per liter revenue from tea.
This presents an interesting conundrum for the tea sector. Growth in traditional market is led by tea companies but remains at the lower end of the value scale whilst higher revenue accruing growth by valorisation in non-traditional market is being led by non pure-play tea companies. The consequences of this is creation of parallel chains of supply and differing strategies aimed at securing own supply and increasing power in the value

According to International Tea Committee (ITC), the volume of tea available for exports fell below 38% of the global crop in 2013, from 47% in 2004.
Further, in a sign of emerging change in tea value chain, whilst the share of auction sales remained approximately constant between 2007-2012, its share in the key markets of India and Africa declined. In Africa, the share of auction sales of production declined from 71% to 65% (2007-2012). India also saw the share of auction sales in production decline. This was more or less made up by Sri Lanka, which saw it auction sales volumes increase by 82 million kgs to 318.6 mln kg between 2007 and 2012. However scope for further increase is limited as auction sales now comprise 98% of the total production in Sri Lanka.
3.2 Increase in number of long term supply contracts
There are couple of key factors driving interest towards long term supply contracts. Firstly, driven by strong growth of cold tea and focus on health & wellness, players like The Coca-Cola Company, PepsiCo, and Starbucks are improving tea product portfolio and distribution. Given that none of the new entrants have direct access to tea estates and decline in tea available for exports, as well as, auction share of production, we can expect more long term supply contracts in