China Consumer

All the tea in China

Why Lipton outsells China’s 70,000 local teas

All the tea in China

Top seller, top profits

Legend has it that the Chinese have been sipping tea (pronounced as cha in Mandarin) since 2737 BC.

Tea was traditionally regarded as one of the seven essentials of life, along with firewood, rice, oil, salt, soy sauce and vinegar.

Despite China’s tea-drinking tradition, for many Westerners “Chinese tea” means little more than the jasmine-scented brew offered in Chinese restaurants. Finer Chinese teas can be a lot more difficult to come by.

This has surprised the Chinese themselves, especially as the country has been the world’s largest tea producer since 2006.

Last year tea output hit 1.24 million tonnes, says the China Tea Marketing Association (CTMA), but only 30% of that was exported.

The country also has many well-known brands at home, such as West Lake Longjing, Anxi Tieguanyin and Dongting Biluochun. Yet few are known further afield.

“China’s tea exports rank third in the world, following Kenya and Sri Lanka,” CTMA Vice President Wang Qing told Global magazine. “Nevertheless, China’s influence in the tea industry is not equal to its export status – China has no say in terms of tea in the world market.”

Chinese tea has struggled to make a breakthrough in its export quantity, partly due to its lack of established global brands, Wang says.

The problem? Market fragmentation. Currently, China has about 70,000 tea manufacturers dotted around the country’s tea growing regions.

With that many manufacturers, quality control is a real challenge, as few companies are large enough to invest in their product.

This feeds through into pricing. On average, Chinese leaves sell for just $2 per kilogram on international markets, 40% and 60% lower than Indian and Sri Lankan varieties, respectively.

Market observers believe that greater consolidation of plantations and tea processing factories is critical to improving quality.

However, consolidation is stymied by the country’s land laws, which prevents farmers from owning, or selling, their land to larger plantations.

In Zhejiang – one of the tea-growing provinces – there are over 1 million smallholdings alone, each averaging less than 0.2 hectares.

Furthermore, China’s tea-drinking habit varies by region. Northerners prefer flower teas while Southerners favour black tea like Oolong.

With teas sold by type and place of origin, it can be much harder to build brand loyalty. “The retail market here is very fragmented, divided into many small pieces. Meanwhile, demand is driven by regional consumption habits. This limits the economies of scale,” says Wu Xiduan, secretary-general of the Tea Marketing Association.

Even at home, Chinese tea struggles to compete with foreign competitors.

Lipton, for instance, has an annual sales volume of $2.8 billion, while China’s top 100 tea producers sold only $2.4 billion worth of the stuff in total last year.

But the British label has the power of the Unilever branding machine behind it. So it sources cheap tea from independent producers, packages it into teabags, and markets its “Yellow Label” brew at a substantial mark-up, says the Financial Times.

Domestic producers are eager to catch up. Longrun Tea Group, a Yunnan tea manufacturer, is expanding its footprint by opening new stores and acquiring companies in tea producing provinces like Fujiang, Zhejiang, Hunan and Yunnan, says the China Daily.

The Hong Kong-listed company, which is partly owned by Rocket Capital, has an annual capacity of over 10,000 tonnes. Its tea sales reached Rmb110 million ($16 million) in 2008, and the firm made about Rmb35 million in post-tax profits.

Kenneth Huang, the controlling shareholder of Rocket Capital (see WiC 29), wants to help the company become one of the top brands in China in the next five years.

“Based on my experiences, a brand is vital,” says Huang.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.