TEA INDUSTRY IN PAKISTAN

A SUPPLY CHAIN REVIEW

SaudZafarUsmani
MS(ManufacturingEngineering&Management) PakistanNavyEngineeringCollege, NationalUniversityofSciences&TechnologyPakistan Email:saudzafar@hotmail.com

This review details on tea industry supply chain in Pakistan. A thorough review has been carried out fromrawmaterialimport,suppliernetworkdesign,enhancingvaluedeliverystrategyetc.Comparisons have been discussed on tea sales and distribution strategies adopted by major players in the market. Majorsupplychainissuesarediscussedandfewrecommendationsaremade.

Tea Industry in Pakistan - A Supply Chain Review

Saud Zafar Usmani

Table of Contents
Introduction...................................................................................................................................................3 Supply Chain Diagram..................................................................................................................................4 Tea Plant Growers ........................................................................................................................................4 . Suppliers.......................................................................................................................................................5 Tea Importers................................................................................................................................................5 Tea Manufacturing / Processing...................................................................................................................6 Issues.............................................................................................................................................................7 Global tea market trends...............................................................................................................................7 Encircling vs. Gorilla Strategy - Tea Competitors Strategy Analysis ..........................................................8 . Distribution Strategy and Distribution Network Design...............................................................................9 Distribution & Sales - Tapal.....................................................................................................................9 Distribution & Sales - Lipton Yellow Label.............................................................................................9 Tapal Tea..................................................................................................................................................9 Distributors.........................................................................................................................................11 Value Delivery Network.........................................................................................................................12 Wholesalers............................................................................................................................................12 Retailers..................................................................................................................................................12 Consumers..............................................................................................................................................12 Recommendation - Enhancing Value Delivery Network of Tea................................................................13 References...................................................................................................................................................14

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Tea Indu ustry in Pak kistan - A Su upply Chain Review n

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TeaIn T ndustryin Paki istan

ASu upplyChainReview w
Introdu uction
Tea is on of the hig ne ghly consumed beverage in the wor It is obta es rld. ained from C Camellia Sin nensis plant, wh hich is an ev vergreen pla that grow mainly in tropical an sub-tropic climates. Tea ant ws n nd cal plants are propagated from seed or by cutting it takes ap e d g; pproximately 4 to 12 yea for a tea plant y ars to bear seed, and abo 3 years b out before a new plant is re w eady for harv vesting. Tea plants requ at uire least 127 cm of rain 7 nfall a year a prefer acidic soils. T and Traditional C Chinese Tea Cultivation and a n Studies b believe that high-quality tea plants a cultivated at elevatio of up to 1,500 meter At h y are d ons rs. these heights, the pla grow mo slowly an acquire a better flavo ants ore nd or. ply f dustry starts The supp chain of the tea ind from the consumer to the green f o fields of tea plantation Many cou n. untries have their own e tea planta ation due to the conduci climatic ive condition of those areas for cultivation. ns However in Pakistan most o the tea r, of consumed is import ted from te growing ea countries like Sri Lanka, China, Kenya and s Malaysia etc. a Today, t the total tea market o Pakistan of comprise of 100 million kil es lograms of legally im mported tea plus 45 mil llion kilogra of illega smuggle tea, thus g ams ally ed giving an ov verall market o 145 millio kilogram The per capita consu of on ms. umption of tea in Pakis stan is about one kilogram At present there are tw kinds of tea availabl in the mar m. t wo le rket: brande and unbra ed anded (loose) te Therefore the impor ea. e, rters are also of two type though bo import te from the same o es, oth ea countries Bulk impo s. orters sell te to retailer in loose f ea rs form, while the second category of bulk f importers sell packag tea unde brand nam s ged er mes. Presently Pakistan is meeting its entire tea requirement through im y s ts mports. Pak kistan is the third largest te importer after Russia and Britai The importers buy b ea a in. black tea fro 17 coun om ntries, including Bangladesh, Burundi, China, Con g ngo, India, In ndonesia, K Kenya, Malaw Mozamb wi, bique, Madagas scar, Rwanda Sri Lanka, Uganda, Za and Zim a, aire mbabwe. Till recen ntly, Pakista has been importing e an enormous qu uantities of t each yea footing a huge tea ar bill in ha ard-earned fo oreign excha ange. Pakista imports a an around 80 pe cent of its tea requirem er ments at a cost of about US S$250 millio a year. Be on esides the ab bove legal im mports, sizea able quantiti of ies

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Tea Industry in Pakistan - A Supply Chain Review

Saud Zafar Usmani

tea are also being smuggled to supplement the supplies to satisfy the ever-growing demand. According to a moderate estimate about 50,000 to 65,000 tonnes of tea are making inroads into Pakistan each year.

Supply Chain Diagram

The supply chain of the tea industry has two major sources, one is the tea growers and the other is the tea importers. In Pakistan the tea supply chain relies on the tea importers, because Pakistan does not have sufficient tea plantation. The Supply Chain diagram is as follows.

Fig: 2 Supply Chain Diagram of Tea

Tea Plant Growers

After picking fresh tea leaves, tea growers have two options: selling the leaves directly or selling selfprocessed tea. As processed tea is more expensive than fresh leaves, to get more profit, skilled tea growers tend to process tea themselves and sell the remaining fresh leaves to primary processing factory and brand tea factory. There are mainly three distribution channels that turn fresh leaves picked by tea growers into finished tea. 1. Tea growers sell fine tea leaves they handpicked to brand tea factories which process the leaves into tea and then sell it to dealers. Through wholesale and retail the tea is sold to tea store, teahouse, supermarket and other stores, and finally to consumers. 2. Tea growers sell both leaves and buds to processing factories for massproducing tea. After the processing factories have turned them into crude tea, the refineries will buy it and reprocess it into finished tea after sorting and selection. Refineries mainly engage in tea mass production, and tea mass produced, after entering the distribution channel, is

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Tea Industry in Pakistan - A Supply Chain Review

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sold in the market mainly through wholesale. Such tea is mainly supplied to places such as hotels and restaurants that provide free tea. 3. Tea growers process fresh leaves into tea and sell it themselves. On the one hand, tea growers sell their roughly processed tea to refineries, brand tea factories and businessmen that come to their place to buy tea. On the other hand, tea growers further process crude tea into highend tea and sell it in the township or countylevel retail market. In the genuine tea areas, as the tea available is limited but expensive, dealers and consumers will also go to the tea growing households to buy tea directly. There is another different distribution channel, which consists of tea growers, brand owners and consumers. The brand owners here refer to comprehensive tea companies that engage in production, supply and marketing. Such companies usually have their own production bases and processing factories, and place orders to tea growers for fresh leaves and have their own tea chain stores directly selling tea products to consumers.

Suppliers
Tea industry is very much dependant on suppliers. Suppliers are considered to be the heart of the Tea Industry. All the companies like Tapal, Unilever and Tetley keep good terms with their supplier since the shortages might be harmful for the company. These companies have various suppliers and are not dependant on any single supplier but still the supply chain needs to be very strong in order to be in this competitive business.

Tea Importers
Various trade associations and traders import various types and grades of tea from various tea growing countries. These traders then sell the tea to the companies which further process and package tea. The major buyer of such importers is the multinationals like Unilever for their various brands like Lipton, Brooke Bond etc. Local tea companies like Tapal also purchase from these importers and sometimes they themselves have their links in the tea growing countries.

NationalUniversityofSciences&TechnologyPakistan

Tea Industry in Pakistan - A Supply Chain Review

Saud Zafar Usmani

Tea Manufacturing / Processing

Till 1971 Pakistan had surplus tea because of production of this commodity in the Eastern Wing (then known as East Pakistan) in great volumes. Consequently on the loss of the Eastern Wing, it had no alternative other than importing tea. It thus turned into an importing country from an exporting one. This table-turned situation proved a blessing in disguise. In order to reduce its dependence on imports, Pakistan planned to produce its own tea and started to actually produce it on an experimental basis in 1980 in Mansehra district of NWFP, which has a favourable climatic and soil condition for tea production. The tea processing mainly constitutes three types as shown in figure below.

Fig 3 Types of Tea Processing The tea processing basically constitutes operations like blending of raw imported tea into different blends depending upon the brand and then packaging into different packages and different blends as offered by the company. Tapal a major player in the tea industry of Pakistan has following flow diagram.

Fig4 Flow Diagram of Tapal

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Tea Industry in Pakistan - A Supply Chain Review

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Tapal has two production units one in North and the other in south. In the facility, blending of tea and then its packaging is carried out. Tapal has state of the art production units, with most modern production control techniques. Some statistics of the Tapal production units is as under: Cycle time to produce a product: 1 Minute -120 Sachets 1 Minute - 55 to 60 soft pack hard pack 1 Minute - 18 to 20 pouch After production / blending of tea packaging is carried out into different packets, boxes and sachets etc. Packaging material for Tapal teal is procured from following sources: Gadun Amazai Rehman Packages Best Packages Packages Ltd. Fazli Sons MNF

Issues
The major issue in the tea industry is the bad practice of hoarding in any of the links of the supply chain. The effect of such hoarding is that the prices rise. But going down the supply chain such artificial shortage compels the links down to look for alternate sources and when the sources are available the bubble burst effect comes into play which damages the whole supply chain of the tea industry. Another issue faced by Pakistan is that Pakistan is not a tea growing country and due to the constant devaluation of Rupee, Pakistan has to spend more in foreign exchange to obtain raw tea from the tea growing countries. The Government policies are also lacking interest and motivation to encourage local entrepreneurs to start tea farming.

Global tea market trends

Black tea supply has grown as production rose in the main producing countries. Between 19801990, worldwide production increased by 40 percent. India, China, Sri Lanka, Kenya and other countries are continuously trying to increase their production levels. The main tea countries are expanding their planted area. Several of the countries which produce tea (and depend on it for their export earnings) are sufficiently large to prevent the establishment of a clear monopolistic leader. This allows for fierce competition. While research & development is leading to increasing yields, plantations are being improved; the improvements are directed at planting material, water management, fertilization and integrated pest management at the production

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Tea Industry in Pakistan - A Supply Chain Review

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level, as well as plucking methods and improvement in processing and automation of factories. The increasing production of tea does not necessarily mean that the quality of tea is improving.

Fig 5 World production and consumption of tea [tea production - tea consumption] Source: VNKT, 2004 Although supply exceeds demand, no further decline of international tea prices took place in 2003. The international tea market price may have passed its low, according to the VNKT. This is partly explained by promising expectations of improving exports to Iraq and higher local demand in India.

Encircling vs. Gorilla Strategy - Tea Competitors Strategy Analysis

The major players in the tea industry of Pakistan are Unilever and Tapal. Unilever brands include Lipton and Brooke Bond. Lipton has been one of the oldest tea trading companies, and is well established. Lipton was initially an independent company, so is Brooke Bond. Both these brands merged with Unilever. Unilever target high end markets. And has distribution centers and retailers present accordingly. Lipton has very strong roots and pretty well established among its customers. Tapal tea is a perfect example of a gorilla brand becoming a market leader through consistently improving themselves through different Encircling strategies and creating value addition. When they started off in Pakistan they were doing retail and whole sale business with shop in Jodia Bazar. With foresight Tapal evolved formidable two prone strategy maintaining and continuously improving blending quality and dynamically pursuing brand building exercises and penetrating their distribution into high end market. So in this way they shifted from a well

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Tea Industry in Pakistan - A Supply Chain Review

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planned Gorilla attacks to a frontal attack which Brooke Bond and Lipton were unable to defend because of being engage in fighting for their market share with each other, and under estimating a brand which was few years ago a shop in Jodia bazaar. Now Tapal is playing defensive strategies against Brook Bond who are imitating their supply chain strategies and they are attacking Lipton which has reached a saturation point and that presents opportunities for Tapal to gain control of that territory the Lipton has been able to manage.

Distribution Strategy and Distribution Network Design

Distribution & Sales - Tapal
The success of tea industry to a great extent lies in the hand of distributors. Tapal, Supreme, Brooke Bond & Tetley share a very much similar policies with the distributor. Unilever has the same distributors for most of their product. The main distributors of Unilever are M.Saya and Gizri Corporation. Tapal in Karachi has a very big distribution network; it deals with ten different distributors for the sale of its tea some of the distributors are Qiji Enterprise and Sales Promoter. Tetley main distributors are Consumer Channel & Express.

Distribution & Sales - Lipton Yellow Label

Lipton Yellow Label has a distribution network spread across Pakistan. The popularity of the brand is so much making it the No.1 National Tea company in Pakistan. Lipton Yellow Label caters to its customers by providing Lipton Yellow Label to more than 150000 outlets in Pakistan, which includes super stores, general stores, grocery stores and discount stores and all departmental stores. Lipton has its headquarter in Karachi and 650 distribution offices all over Pakistan.

Tapal Tea
The distribution objective of Tapal is to maximize its market coverage. To accomplish this Tapal has a wide distribution network of 410 distributors across Pakistan. Tapal has a wider distribution coverage in the South where as Unilever has better distribution in the North. Therefore, Tapals main objective is to increase their sales in the North. It ensures that it places

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Tea Indu ustry in Pak kistan - A Su upply Chain Review n

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its tea in the same outlets as its competitors in order to maximize availability. The distrib n o s o bution coverage of Tapal is as follows: e

Source:Li iptonReport Karachi 14% K Lahore 34% L Is slamabad 18% % Su ukkur 22% Hyderabad 12% H % NationalUn niversityofSc ciences&Tec chnologyPakistan

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Tea Industry in Pakistan - A Supply Chain Review

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Distributors Tapal deals only with distributors on contract basis with no other intermediaries involved. They do not extend credits to their primary customers and all their sales are mainly cash based. The contract comprises of a specification of a complete volume of the market, Tapals share in the market, the profit margin of the distributor, the sales that will be made by the distributor, as well as the complete route plan of the distribution network. Tapal chooses their distributors after analyzing their complete financial background and Public Relations. They provide the distributors with a detailed description of the distribution network; all the costs and expenses involved and when the distributor agrees the contract is signed. This contract involves the condition that the distributor has to be brand loyal, pro-active and cannot deal with other tea companies otherwise the contract will be terminated. The contract includes a clause that describes its termination process. Either of the two parties: Tapal and the distributor, can terminate the contract on one month basis.

Company

Distributor

Wholesellers

Retailers

Universities

Restaurants/ Institutions

Offices

Households

ENDUSERS/APPLICATIONSOFPRODUCTS

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Tea Industry in Pakistan - A Supply Chain Review

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Value Delivery Network

Tapal imports its raw materials like tea leaves from Kenya. These raw materials reach the Karachi port from where they are taken to the factory. They are also growing tea leaves locally. The raw materials are then used to manufacture the actual product: Tapal Family Mixture, Tapal Danedar, Tapal Tez Dum, Tapal Safari Chai, Mezban Premier Dust, Chenak Dust and Tapal Jasmine Green Tea, Tapal Safari Kenya leaf. Most of the raw materials are imported, and of course the packaging for the product is done in Pakistan.
Rawmaterialsimported Kenyaandgrownlocally

Production of the tea (Factory)

Wholesalers

Retailers

Consumers
After the product is made, it is taken by the distributors who distribute the final product all over Pakistan. The wholesalers take the products in large bulks from the factory on a fixed profit margin and then sell it to other channels like retailers of general store, super stores, beauty shops etc. who then sell the product to final consumers. These distributors are not permanent but when the product is about to enter the market, they are informed about it and they themselves buy it in any quantity they want (usually a fixed volume set by the company). As for the retailers, it is also their wish in how much volume they would buy the product because sometimes they already have large inventory and sometimes they have small volume to serve consumer demands. The profit margin between the retailers and distributors is decided amongst themselves because usually retailers can sell the product up to 15-20% profit margin, So some of the profit has to be shared with the distributors also.

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Tea Industry in Pakistan - A Supply Chain Review

Saud Zafar Usmani

Recommendation - Enhancing Value Delivery Network of Tea

Tapal imports its raw materials from Kenya that could prove to be very risky as in case of economic crisis or natural calamity. Such situations can cause the orders for raw materials not to be completed on time, or may have problems in completing the orders at all. Tapal should try to build such relations that would assist in delivering the raw materials even if there is a crisis in the suppliers country (they must not back out in such times) or be able to help when there is excess demand in the market and companys stock is low. Tapal can also think of making its own raw materials in Pakistan the long term it can help ponds reduce its costs, so on the same time reduce its price which can bring it closer to the competitors and in the long-run they can even export it to other countries which is going to be strategically very crucial in future times. Tapal, with its strategy of importing the raw materials has to bear the shipping costs and the taxes. Though this plan, if implemented needs a lot of investment but the returns would be high. Raw materials would be available on short period notices; foreign exchange would be saved which is spent on paying taxes, shipping costs and to importers. Basically, the company would be able to look after the quality of raw materials and closely monitor its costs because fluctuating exchange rates and inability to check on raw materials sometimes creates problems. Although Tapal is available in more places like in villages etc easily than other brands but it should make its distribution stronger. It should hire its own distributors and give them incentives by not allowing them to sell the competitors tea products. Permanent distributors would always stay loyal because presently Tapal and Lipton dominate the market but arrival of any another good tea brand may compel distributors to buy more of that product if they are given good incentives like greater profit margin. Distributors chosen should also be such that run their channels on large and wide scale; selling and making the product available even in remote areas. Making the distributors part of the company is necessary and keeping positive relations is essential part. Therefore, any break in the value delivery chain would prove to be harmful not only for company but for the consumers also. Consumers not getting the product on time would compel them to ask for the competitors product and the company would lose out its profits and customers. In between, other channels would encounter the same problems. So these actions are necessary in order to strengthen the value deliver chain network.

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Tea Industry in Pakistan - A Supply Chain Review

Saud Zafar Usmani

References
Lipton Report Supply Chain Report Tapal Tea Marketing Report Tapal Official Website of Tapal Tea & Lipton Pak Tea House Economic Survey of Pakistan

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