The Third Largest Tea Producer

Published Date: 02 Nov 2017

Kenya According to the International Tea Committee (2009) is the third largest tea producer in the world, having produced 314 million kilograms in 2009. The world’s leading tea producer is China followed by India, the two countries having produced 1,359 and 979 million kilograms respectively in 2009.

Kenya is however the world’s leading exporter of tea. ITC (2009) shows that in 2009, Kenya contributed 22% of the world’s total tea exports. The country was followed by China and Sri Lanka, which contributed 19% and 18% of the world’s tea exports respectively. Between 2000 and 2009, Kenya has had an increased dominance in the world’s tea export market, rising from 16% in the year 2000 to the 22% in 2009. China and India, despite their high levels of tea production, have low export volumes since most of their tea is consumed locally by their large populations. Since independence, Kenya’s economy has also largely depended on agriculture. Kenya National Bureau of Statistics (2008) shows that in 2007, Kenya’s gross domestic product stood at Ksh.1.6 trillion with the agricultural sector having contributed Ksh.394 billion of this. The contribution by the agricultural sector translated into 24.63% of the G.D.P., ranking top amongst all economic sectors in Kenya

Kenya continues earning low returns from her tea exports compared to other tea exporting countries in spite of its Export leadership position worldwide. ITC (2010) shows that in 2009, Sri Lanka exported 279,839 metric tons of tea and made $1.145 billion while Kenya exported more tea (342,482 metric tons) but made less money ($0.9 billion).

The purposes of this study therefore is to evaluate the business strategies currently being used by Kenyan tea exporters to enable give a recommendation on the best strategies that can be adapted to help improve tea earning.

The Strategic Options

Creating a defendable position in the market place and coping successfully with the five competitive forces should define Kenya’s competitive strategy in the global tea industry. A combination of three generic strategies, at the broadest level, could help it create this defendable position and outperform its competitors in the long-run (Porter 1980). These are: Overall cost leadership; Differentiation and Focus.

The two main sources of competitive advantage in any industry are low cost and differentiation. A combination of these two sources of competitive advantage with the scope of the target market served (narrow or broad) yields four generic strategies, namely cost leadership, product differentiation, cost focus, and focused differentiation. These strategies are internally consistent and can be used either singly or in combination. The Industry has to decide on the type of competitive advantage it seeks, based on cost or differentiation, and the market scope, that is the size and extent of the market it seeks (Porter 1985). These decisions are helped by an analysis of the industry's competitive strength and the market opportunities offered in the long-run.

Broad Market Strategies

Overall Cost Leadership

This strategy is useful when an industry is able to establish itself as a low-cost producer for serving a broadly defined market. In general, to implement this strategy the industry must construct the most efficient facilities (in terms of scale or technology), vigorously pursue cost reductions from experience, impose tight cost and overhead control, and obtain the largest share of the market to achieve the lowest cost per unit of production. These advantages push the industry up the experience curve which then leads to more refinement of the entire process of production, delivery, service, and further lowering of cost. A low-cost position also provides defence against powerful buyers who drive down prices to the level of the next most efficient competitor. It provides substantial entry barriers and makes the industry strong enough to combat substitute products from competitive industries. A low-cost strategy, therefore, protects the industry against all five competitive forces that affect the industry. Cost leadership eventually becomes the basis of lower prices and more value offered to customers in the later, more competitive stage of the product life cycle. But it is only sustainable if sufficient barriers exist to prevent competitors from achieving the same low cost. Rapid technology development through R&D is one means of achieving this end.

Obtaining low overall costs may require a high relative market share and other conditions like higher productivity and a lower factor cost per unit of production. It may even require a wider product line to spread cost and the servicing of major customer groups to build volume. Implementing the strategy require major investment in a state-of-the art processing system, aggressive pricing, and start-up losses to build market share. The cost structure of Kenya's tea industry does not lend itself to the adoption of the cost-leadership strategy easily. This country has relatively high costs in the global tea industry created by low productivity. The low productivity arises from a lack of investment in agricultural inputs, a lack of replacement of aging growing stocks and factories, absence of proper R&D, and low worker motivation. Unless each of these problems are addressed, it is difficult for the country to adopt the overall cost-leadership strategy. However, there may be market niches where Kenya producers would be able to realize cost advantages relative to competition.

Differentiation

The second generic strategy is to differentiate the industry offerings and create a line of products that are perceived industry-wide as unique products. The strategy could be extremely powerful in coping with the environmental forces in a different way than the cost leadership strategy. It provides insulation against competitive rivalry because of customers' brand loyalty and resulting lower sensitivity to price (Porter, 1980). It automatically generates entry barriers because competitors have to overcome the uniqueness of the product to gain consumer preference. Differentiation yields higher margins with which the industry could deal with suppliers' power. Buyers' power is also diminished by an absence of substitute products to satisfy consumers' desire. The threat of substitute products is diminished as a natural sequel to differentiation unmatched by rivals in the industry.

To build differentiation, the Tea industry in Kenya has to match its natural advantages and strengths to the characteristics of the market that allows differentiation. The challenge could be met in many different ways: through technology that would create the desired product, quality, brand image, and features that consumers crave, and develop a marketing network. Kenya is strong in the production of Black tea. Even though it is a major player in the global market, Kenya is less well known as a source of tea in the United States. Most of the tea produced in Kenya is bulk black tea used in blends. However, Kenya's specialty tea industry has been blossoming in recent years, and there are now green teas and white teas being produced in Kenya, including novel styles of tea such as white matcha. Kenya is also the site of development of new varietals of the tea plant, including purple tea, a tea plant rich in purple-colored anthocyanins, the same pigments in blueberries and raspberries (Karanja, 2009). This could provide the differentiation needed to fulfill the needs of the quality-convenience niche. The image of kenya’s tea is fairly strong in the world market. There has been little effort, however, to enhance this image and to extend it to a larger portion of the tea drinking population. This image needs to be advanced, beyond the gourmet tea segment, with forceful and creative marketing, something which Columbia's coffee industry has been able to do very well in the past.

Narrow Market Strategies

Cost Focus and Focused Differentiation

A narrow focus strategy, which targets a narrowly defined market, has the ability to create more customer value from a better understanding of customers' needs and wants. The entire focus strategy is built to serve a particular target very well and has a distinct advantage if the competitors are working in much broader markets. Benefits of both differentiation and lower cost are possible with this strategy since concentrating on providing products to serve a particular segment's needs is a form of differentiation and it is possible to achieve lower cost with specialization. It must be noted though that the low cost is not from the perspective of the whole market but within the narrow market target.

The focus strategy imposes a limit on the overall market share achievable because it involves a trade-off between profitability and sales volume. A narrow focus strategy can be combined with either cost-leadership or differentiation strategy. The first results in a cost-focus strategy where the industry pursues a narrow target market with a low-cost strategy, offering the market lower prices than the competition. The second yields a focused-differentiation strategy that offers a narrow market the perception of product uniqueness at a premium price. As indicated above, cost leadership is a sustainable source of competitive advantage only if there are enough barriers to prevent competitors from achieving the same low costs. Sustained differentiation depends on continued perceived value and the absence of imitation by competitors (Porter, 1980). Several factors determine whether focus could be sustained as a source of competitive advantage. First, a cost focus is sustainable if the competitors are defining their target markets more broadly. Second, a differentiation focus is sustainable only if competitors cannot define the market even more narrowly. Third, focus can be sustained only if competitors cannot overcome barriers that prevent imitation of the focus strategy and if consumers in the target segment do not change over to other segments that the focuser does not serve.

The global tea market holds numerous opportunities for Kenya to follow both cost focus and focused differentiation strategies. The main action necessary is to select the right target markets and to concentrate on them. For black tea main markets segments there are many ways in which these segments could be further refined. For example, secondary segments could be defined in terms of consumers' needs and desires, usage rate, values and lifestyles, etc. Many sophisticated marketing tools and techniques (such as conjoint analysis) are available for formation and profiling of segments based on these factors. However, detailed consumer research data are necessary to do this scientifically. A few tentative market segments that could be defined with available secondary data are:

Benefit Segments

Benefits sought by consumers who drink tea varies widely from region to region and country to country. For example, most consumers in Europe look to tea as a light substitute for soft drinks and other non-alcoholic beverages. Demand for lighter Sri Lankan tea such as the Uvas, the Nuwara Eliyas, Udapussellawas, and other high grown tea is strong in Germany, the Netherlands, France, and other European countries. Herbal tea and flavored tea are popular in the United States and Europe where the consumers are willing to pay a lot more for these varieties (Peel 1996). In the Middle and Southern European markets, herbal tea plays a much greater role than plain black tea (Spethmann 1994). The benefit seen in herbal tea is largely medicinal. Flavored tea, particularly with the essence of tropical fruits, is extremely popular in Europe and America and is expected to grow in market share in future years (Sturdivant 1996). The leafy low-grown teas of Sri Lanka have a good market in the Middle East because buyers there prefer the stronger body and taste. The emerging markets are mostly in Asia, Europe, and Africa. Kenyan tea has had growth although their quantities remain lower than the traditional outlets, the percentage growth is encouraging. The industry has seen increased exports to newly-emerging markets due to shifting preferences from orthodox to Kenyan CTC black tea bag market segment and enhanced promotion

The focus strategy imposes a limit on the overall market share achievable because it involves a trade-off between profitability and sales volume. A narrow focus strategy can be combined with either cost-leadership or differentiation strategy. The first results in a cost-focus strategy where the industry pursues a narrow target market with a low-cost strategy, offering the market lower prices than the competition. The second yields a focused-differentiation strategy that offers a narrow market the perception of product uniqueness at a premium price. As indicated above, cost leadership is a sustainable source of competitive advantage only if there are enough barriers to prevent competitors from achieving the same low costs. Sustained differentiation depends on continued perceived value and the absence of imitation by competitors (Porter, 1980). Several factors determine whether focus could be sustained as a source of competitive advantage. First, a cost focus is sustainable if the competitors are defining their target markets more broadly. Second, a differentiation focus is sustainable only if competitors cannot define the market even more narrowly. Third, focus can be sustained only if competitors cannot overcome barriers that prevent imitation of the focus strategy and if consumers in the target segment do not change over to other segments that the focuser does not serve.

The global tea market holds numerous opportunities for Kenya to follow both cost focus and focused differentiation strategies. The main action necessary is to select the right target markets and to concentrate on them. Earlier on we had analyzed the principal market segments for black tea. There are many ways in which these segments could be further refined. For example, secondary segments could be defined in terms of consumers' needs and desires, usage rate, values and lifestyles, etc. Many sophisticated marketing tools and techniques (such as conjoint analysis) are available for formation and profiling of segments based on these factors. However, detailed consumer research data are necessary to do this scientifically. A few tentative market segments that could be defined with available secondary data are:

Values and Lifestyle Segments

There is a strong influence of values and lifestyles on the consumption of tea in developed countries. This allows for the creation of segments known as values and lifestyle segments (VALS) for marketing. Some of the important VALS profiles and how these affect tea consumption are:

Nutritionally concerned people: These make up 46 percent of the over-50 population in developed countries. This group believes that what one eats and drinks affects how one feels (Sandor, 1994). Tea as a natural beverage whose nutritional values are recently coming to consumers' attention could be a very appealing beverage for these people.

Fast and health conscious individuals: They are also concerned about health and nutrition, but are more interested in convenience. They tend to cook only when the family is together and rely heavily on time saving devices like the microwave oven. Even though this group may believe in the health benefits of tea, the inconvenience of preparation may turn them away. To attract this segment and get them hooked on tea, it is necessary to develop new product formulations that will provide the convenience of preparation. Instant tea is one such product offering. Tea bags are another. Microwavable tea packages may again be an alternative for the future.

The convenient drink seekers: These are mostly people on the go who desire their beverages in convenient ready to drink form such as canned cold drinks, available in convenient locations such as supermarkets, vending machines, candy stands, etc. Soft drinks are the most preferred beverage for these individuals. Iced tea, packed and sold like soft drinks, have made considerable inroads into this market lately and could grow tremendously with proper marketing. The most important consideration for Kenyan producers who want to tap this segment is to differentiate their products from the existing line of iced teas sold in Europe and America. The mass producers of iced tea in these markets are marketing them with very little tea content and very large promotional contents for mass consumption. The teas of Kenya have a natural advantage for preparation of ready to drink teas that also have good flavour and taste. This opens up a favourable niche in the market for iced tea that could be addressed very effectively with a focused-differentiation strategy. By concentrating on the high-value seeking iced tea drinkers in Europe and America and by providing a highly differentiated product made with its teas, the Kenyan industry could capture a chunk of the premium-priced ready-to-drink tea segment in these countries.

Behavioral Segment

The most common behaviour used to define this segment is the consumption rate. Consumers differ in the rate of their consumption and for most consumer goods about 20 percent of the segment population consumes 80 percent of the product. Thus, the market could be divided into a heavy-consumer end and a light-consumer end. Naturally, heavy consumers are of the greatest interest to marketers who try to understand their characteristics in order to influence their desire for more of the product. Identification of countries where per-capita consumption of tea is the highest is necessary. In this category are the UAE, Jordan, the United Kingdom, and Ireland. However, if we divide the market in terms of absolute level of consumption by combining per-capita consumption and population, other countries join the rank such as the CIS countries, Pakistan, the United States, and Egypt. Among these countries, Pakistan is a big consumer of CTC tea. However some difficulty may initially be encountered to prevent the current segment population to switch to CTC, which provides larger cuppage for the same amount of tea used. This could be prevented if Kenya is able to retain the segment's loyalty through aggressive low pricing. This means that Kenyan producers may have to accept lower profitability goals initially in price sensitive markets such as Pakistan and Egypt to maximize long-term gains.

The industry must also recognize those export markets where the absolute level of consumption is not high but the intake is growing at a high rate. These markets provide the best opportunity for cost-focus strategy or focused-differentiation strategy. Prominent countries in this class are China, France, Poland, Chile, Syria, UAE, and Jordan. Investing to develop a loyal consumer base in these countries today will help ward off competition there in the long run.

Options for Kenya

Considering all the possible generic strategies discussed above, which set of strategies should the tea industry in Kenya adopt? This decision depends upon the nature of the specific market served by the industry. The direction policy matrix shown provides guidelines for implementing strategies in different markets. This matrix relates the competitive position of the industry with the market's attractiveness. Multiple factor indices may be used to quantitatively define both dimensions of this matrix.

From an assessment of the overall strength of Kenya's tea industry and the attractiveness of the potential markets of CIS, Egypt, Pakistan and USA, the use of three basic strategies could be suggested. But additionally, each market needs to be targeted with one or more of the three generic competitive strategies, i.e., cost leadership, differentiation, and focus.

The CIS market is extremely attractive for Kenya and given the tea industry's medium strength in that market, the best strategy to follow would be:

Challenge the leaders with differentiated products for meeting the demand of quality-conscious buyers.

Segment the market and identify niches for cost focus and focused differentiation.

The Egyptian market is gradually moving towards CTC tea. Given the high level of market attractiveness and medium competitive strength of Sri Kenya in Egypt, the best strategy would be to:

Overcome weaknesses that are providing edge to the major competitors, such as increasing production of CTC tea.

Analyze the other tea segment of this country to determine what changes are taking place in consumers' preferences and develop new products to meet these needs.

The U.S. market is very strong for ready-to-drink and convenient packed tea. Presently, it holds medium attractiveness for Kenya and the industry's competitive strength is low because it does not possess the capability of producing a diversified line of tea and its marketing strength is low. Some of the recommended strategies for this market would therefore be:

Address some of the critical weaknesses that are preventing a major entry into this market. Form joint venture enterprises both for producing packaged ready-to-drink mixes and marketing them in the United States.

Segment the market for instant tea and iced tea and develop a well differentiated product line to fill the niche for high quality, good flavored tea where competition is non-existent at this time.

Sustaining Competitive Advantage Via Strategic Intent

The three generic strategies presented in this paper are alternative, viable means of addressing competitive forces in the tea industry world-wide. Firms or industries that fail to develop their strategy in at least one of these three directions are likely to lose out to competition. These organizations will lack market share, investment returns, the resolve to become efficient low cost producers and effective marketing skills that provide well-differentiated products with value in the eye of their customers. These organizations almost guarantee low profitability, losing either the high-volume customers who demand low prices or giving up profits to grab business from low-cost competitors. They also lose high-margin businesses the cream to firms who have focused efficiently on high margin target markets with highly differentiated products.

Sustaining competitive advantage is yet another dimension of the competitive game that the Kenyan tea industry must understand well if it expects to be strong in the future. Competitiveness is a function of the pace at which an organization implants new advantages deep within itself. Thus, there has to be a strategic intent, growing out of ambition and an obsession for winning. Few competitive advantages are long lasting and keeping scores of old advantages is not the same as building new advantages (Hamel and Prahalad 1989). Success lies in creating tomorrow's competitive advantage faster than the competitors' ability to mimic what one has today. For Kenyan tea producers and exporters, the effort should be to build a wide portfolio of advantages by stacking layers of advantage on top of one another. For example, one layer of advantage could be through diversification into high-value forms of tea. Then a second layer of quality and reliability could be added by building plants large enough to serve world markets. The third layer could be built with efficient marketing channels and brand names to gain recognition. Yet another layer could be added by building a global brand franchise or a global customer base. This process of building layers demonstrates how the organization could move along the value chain to keep strengthening its competitive advantage.

Recommendations for Kenya

As part of their evolutionary process, industries pass from periods of rapid growth to more modest growth upon reaching a period commonly called industry maturity. The global tea industry reached this maturity over a decade ago. It is now in a critical period during which fundamental changes are taking place in the competitive environment requiring difficult strategic response. The slowing of growth is creating more competition for market share. When this share is not realized through expansion of the market itself, companies turn to attack the shares of others. Outbreak of price wars, discounted service, and promotional warfare may develop in the industry to shake out weak players. The transition to maturity also provokes firms to concentrate on their core markets and defend their position vigorously. Another characteristic of a mature industry is the shift of the more competitive firms towards greater cost economy and service commitment. This may require higher investment in the most modern facilities and equipment. However, in the case of Kenya, one finds the contrary to have happened, mainly because the industry was far too long under public control. There is a slowdown of capacity creation in mature industries as the market evens out, otherwise overcapacity would develop. This has not happened in the tea industry, as more and more producers are relentlessly adding more and more production capacity. One important thing that Kenya’s tea producers need to do, however, is to change is to change its marketing and distribution methods to capture the essence of the market. Mass marketing through auctions definitely is not the best method of meeting consumers' needs nor is it good for all the strategies involving differentiation and focus that we have discussed earlier. It is time for the industry to make a realistic assessment about the future and decide what strategies and methods they want to pursue to take them out of the rat race for survival. Winning the game would require new thinking, new orientation, and intelligent moves because the competitors are equally powerful. Sustaining competitive advantage does not only depend upon exploiting the national environment. Individual firms in the industry must work actively to improve their home base by upgrading the national ''diamond". First, they must draw on their own home-based resources to extend and upgrade their own competitive advantage (e.g., factor pools, local demand, etc.). Achieving this requires that the company understand how each part of the "diamond" best contributes to competitive advantage. It also requires a long-term investment perspective. Some of the firms in the industry already have taken this outlook and are channeling investment in the plantations for productivity increase. In many studies of successful firms and industries it has been seen that to do so the leading firms took explicit steps to create factors and to ensure that institutions were established, because factors are created and not inherited (Porter 1980, op.cit.). While the government has an important and constructive role in creating factors, this responsibility cannot be the governments alone. The firms in the tea industry have to influence government in shaping policy and must put their support behind constructive government programs. They should stay clear of quick fixes that in the long run undermine their competitive ability (for example, asking for subsidies). They may also look for alliances for exploiting the benefits of national advantage in other nations. Again, some Kenyan companies have already taken this step by forging alliances with experienced companies outside Kenya to provide management and technical know-how. The government should encourage and not obstruct this.

The government's role is also quite important in international competition. The central role of the government is to develop critical resources (like manpower and capital) for high levels of productivity. It should assist innovation and improvement within the industry and create an environment in which firms can upgrade their competitive advantage. A few of the essential steps that government must take are deregulation of the labour market, removal of unnecessary controls of the industry (such as control over marketing of tea), and development of the financial market without which companies cannot find investment capital. Other things that are also necessary are overseas promotion of the industry, collection of marketing intelligence, tax reforms, infrastructure development (particularly the power infrastructure), expansion of investment in tea research, and the improvement of education for plantation workers. There are a few important premises that hopefully could guide future government policy towards the sector (Porter, 1980):

Firms compete in industries, not nations.

A nation's competitive advantage in an industry is only relative.

Dynamism leads to competitive advantage, not short-term cost advantage.

Pursuit of competitive advantage demands that industries upgrade.

Competitive advantage takes decades to develop, not a few years of a business cycle.

Nations gain competitive advantage because of differences, not similarities.