Merrill Fernando, Founder and Chairman, Dilmah Tea: Interview

Interview: Merrill Fernando

What benefits does the country retain by prohibiting multi-origin blending?

MERRILL FERNANDO: Sri Lanka produces approximately 325m kgs of tea, and sells all of it at the world’s highest prices. Sri Lanka is the only major tea-producing nation to have a national brand – Ceylon Tea – as well as the increasingly important attributes of clean and safe teas, based on a history of conservative agricultural practice. These circumstances create a situation where aligning marketing strategy with the industry’s inherent strength will produce a considerably greater benefit than an alignment with price through multi-origin blending – a situation that would be catastrophic for Sri Lanka’s tea industry.

Current regulations permit the importation of specialty, high-quality tea for re-export, therefore, there are no restrictions on the import of tea for value addition. However, allowing imports of just any tea will encourage traders to import cheap tea, all of which will be below the cost of production of Ceylon tea and well below the prices prevailing at the tea auctions.

We hear the cries of a few traders who want to make Sri Lanka a tea hub and who want to replicate international blending centres, which purchase Ceylon tea to add “sparkle” to their blends and reduce prices to compete with pure Ceylon tea brands. This constitutes unfair use and exploitation of Ceylon tea equity. Undoubtedly, auction prices of Ceylon tea will decline and the tea industry will become unviable. The industry now supports around 4m people, making it the single largest employer in the country.

How can Sri Lankan companies best position themselves in the global tea trade?

FERNANDO: The simple answer is by taking advantage of the image and perception of Ceylon tea throughout the world. That can be achieved only by marketing high-quality pure Ceylon tea under Sri Lankan brand names, at premium price levels which include margins for research and development. Currently, our tea goes to far too few countries, and our price is the primary marketing tool. Packing private-label teas for foreign brands that have no allegiance to Ceylon tea has been detrimental.

In what ways can Sri Lankan plantations better manage the costs of production?

FERNANDO: The cost of production of Ceylon tea is the highest in the world. The labour cost of a kg of tea is nearly 70% of the total, in contrast to 25-30% elsewhere. Productivity has declined steadily over the years, while wages have increased every two years. Trade unions, which dominate the industry, should be made to realise that their intransigence has been harmful to the industry. A meaningful way to relate wages to productivity is the only answer that can salvage the industry from its present plight.

The urgent priority in the tea industry is yield increase, which can be achieved by the government and growers working together on a rigidly monitored programme of cooperation for the rehabilitation of plantations. Institutions such as the Asian Development Bank and the World Bank could make an large contribution towards making the industry profitable once again by providing long-term loans for replanting at favourable rates tied to performance.

The good news is that 75% of Ceylon tea is produced by smallholders working on plots of one acre or less. This is a healthy model, because they are entrepreneurs, their families pick the fields and their supply goes to company-owned factories.

Given that Ceylon tea has a high cost of production, it can only be marketed at a premium price in keeping with its quality. Traders who are unable to do so clamour to be allowed to import lower-cost teas on the pretext that consumers demand “multi-origin” teas, but should not be heeded. Instead, premium marketers of pure Ceylon tea should be further encouraged.