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Why Tea Producers’ Margins Will Remain Under Pressure

While tea has since turned cheaper, it’s still costlier than a year ago.

Workers harvest tea leaves in Cachar, Assam, India. (Photographer: Nicolo Filippo Rosso/Bloomberg)
Workers harvest tea leaves in Cachar, Assam, India. (Photographer: Nicolo Filippo Rosso/Bloomberg)

Raw tea prices have fallen off their peak seen earlier this year. Yet, margins of producers in the world’s second-biggest market for the commodity may remain under pressure.

Prices of raw tea rose between June and September after a decline in output as there weren’t enough pickers to pluck tea leaves as India announced one of the world’s strictest Covid-19 lockdowns. Floods in key producing states of Assam and West Bengal also caused a shortage, fueling the price rise.

While tea has since turned cheaper, it’s still costlier than a year ago. And producers are also saddled with inventory purchased when prices were high. Moreover, companies haven’t been able to increase selling prices to cover the full spike, thus resorting to cost cuts to manage margins.

Assam tea is usually harvested in three flushes—mid-March to June-end, July-September and October-December. This year, the first flush was severely impacted by pandemic-related restrictions and floods.

Production fell by nearly a sixth over a year ago to 1,000 million kilograms in mainstay northern India so far this year, according to PK Bezbaruah, chairman of Tea Board India and Tea Research Association, while it remained unchanged in the south.

“Due to the government-mandated lockdown, we couldn’t attend to our bushes resulting in a huge crop shortfall because of which tea prices went up from an average of Rs 150 per kg last year to Rs 270 per kg this year,” Bezbaruah told BloombergQuint over the phone.

Tata Consumer Products Ltd., the world’s second-biggest maker of branded tea, increased prices by 15-20% between May and September, according to a report by Motilal Oswal.

To manage the unprecedented inflation in raw tea prices, Tata Consumer passed on a part of the price increases to consumers and also “leveraged other levers of efficiency and cost management”, the company's spokesperson said in an emailed response.

Earlier, in an investor call after the first-quarter earnings, Sunil D’Souza, managing director and chief executive officer at Tata Consumer, had said rising tea prices may impact margins in the short term.

Wagh Bakri didn’t specify the extent of its hikes. India’s largest consumer goods maker Hindustan Unilever Ltd., the maker of Taj Mahal and Brooke Bond, too didn’t give details of price hikes.

Tea prices have now started to decline to an average of Rs 221 per kg and are expected to fall further, said Bezbaruah. Yet, they are much higher than last year’s average of Rs 150 per kg. Motilal Oswal, citing unnamed industry executives, said it expects prices to stabilise around Rs 170 per kg—up 23% from a year ago.

Also, tea marketing companies keep six months of inventory. So, they still will have high-cost inventory, putting pressure on margins.

Gross margin pressure can be expected in the segment from the second half of the ongoing financial year, Motilal Oswal said in a report on Tata Consumer Products.

While gross profit per kg is likely to be maintained, gross margin should be lower in the third and fourth quarters of the ongoing fiscal on a higher base due to price increase, the brokerage said. The company, according to Motilal Oswal, has removed layers in its distribution, besides price hikes, to cushion margins.

Srinivas Phatak, chief financial officer of Hindustan Unilever, told investors in the second-quarter earnings conference call that the company hiked prices “dynamically” by “leveraging our balance sheet strength”. Even if the company takes a hit in gross margin in the short term, he said, it’s comfortable doing so as it gives them the opportunity to gain market share.