A Report by Joseph P. Simrany
President, Tea Association of the U.S.A., Inc.
Forecasting the future is always a tricky process; just when you think you understand the trends some random event occurs which turns the forecaster into the fool. Also, as the investment world is so fond of reminding us, even past performance is no guarantee of future results. Nevertheless, forecasting future trends remains an important activity and is broadly practiced by virtually every industry. After all there is no shortage of experts or would be experts willing to share their "expertise." Given this caveat here comes one more forecast for your consideration, this one focused on the tea industry.
Before we start to interpret the tea leaves, it is important to note that some industries are less difficult to forecast than others. Our task is made relatively easy in the tea industry because of the multiplicity of trends that all appear to be feeding the demand for tea. Even if one or more of these trends were to reverse their long-term direction, the remaining forces are still powerful enough to continue to propel tea forward.
Lets step back a moment and analyze the tea industry from the perspective of an outsider. Imagine yourself to be considering an acquisition in the tea industry to add to your corporate holdings. To assist you in the process you have commissioned a consultant to assess the relative strength of the industry and to determine annual growth rates and long range profit potential. His report includes not only their company's opinion but also the views of several other industry experts who were interviewed as part of their investigations. To this report you need only add your own expertise and experience to form your own personalized forecast.
Any analysis of an industry needs to first consider supply of the raw material. Those industries that are dependent upon only a limited number of sources for their raw materials are much more vulnerable to wide fluctuations in price and/or availability of the material. Since tea is commercially (and competitively) grown in over three dozen countries spread across the entire globe, the likelihood of shortages of supply is extremely small.
Despite the great number of countries producing tea, shortages may very well occur relative to specific origins, such is the case with Kenya this year. This could result in increased costs to packers of tea who are dependent upon those origins to maintain their flavor profiles. Shortages of specialty tea, which many experts already consider to be in very limited supply, may also occur. However, it is a very safe assumption that as the market for these high quality teas expands so will the supply -- as producers switch from growing lower profitability mass marketed tea to higher profitability specialty tea. Also, contributing to favorable supply conditions is the fact that, with minor exceptions, there are no import tariffs applied to tea or other regulatory hindrances. This all contributes to our first forecast that tea should remain in excellent supply over the next three to five years. Also, demand should remain in relative sync with supply. Prices should stabilize for mass market tea but will increase moderately for higher quality specialty tea.
The tea industry within the United States is segmented into four broad categories; supermarkets, ready-to-drink, food service, and specialty. While some of the trends effecting consumption cross over segment boundaries, others are segment specific. Included amongst the broad based forces effecting demand are the following:
Here comes forecast number two; the macro-demand forces have been in place for many years and several major ones are responsible for the creation of a gigantic new industry -- healthy foods. This trend, by nature, is long term and will likely accelerate as more knowledge surfaces about the role foods and beverages play in maintaining health. Forecast number two is that the demand for tea will be strong over the next decade driven by ever more compelling evidence concerning its contributions to health.
- Pursuit of a healthy lifestyle and acknowledgment of a greater responsibility for the quality of one's own health
- Improved knowledge about nutrition and better dissemination of this information to the mass market
- Increasing disposition to de-stress and simplify one's life.
- Greater reliance on natural homeopathic remedies to prevent disease as opposed to invasive procedures to treat disease
- Continuing appeal of natural products
- Concern for the environment prompts buying decisions' compatible with that concern.
- Preference for quality products offering true value
- Acquisition of affordable luxuries
- Desire for products that go beyond satisfying basic needs of satiating hunger and thirst.
- Increasing sense of adventure and appreciation for foreign customs and cuisine
- A return to simple pleasures associated with family and home.
- A continuing desire for convenience foods and food on the go which is specifically driving the market for R-T-D tea.
- Increased demand for both organically grown and "biodynamically" grown products.
In addition to the broad market forces effecting tea there are also segment specific or micro-forces at play as well. Unlike the macro forces that were almost universally positive, some of the micro forces point to areas which need to be addressed to ensure optimal growth of the category.
A review of some of these forces follows by segment:
- Infinite demand for a finite amount of space causing supermarket management to assess the contribution of every product category
- Supermarkets long term share decline to other types of outlets such as wholesale clubs, mass merchandisers, drug stores and, eventually, the internet
- Increasing appeal of smaller sized higher retail valued packages of high turnover products
- Blurring of brand identities caused by an increasing number of branded and generic tea products
- Relatively slow consumption rate particularly with large sized packages that take consumers out of the market place for long periods of time. This factor combines with frequent price promotions that encourages multiple package purchases and exasperates a packer's ability to register a clear brand message.
- Heavy reliance on trade versus consumer marketing
- Expanding number of tea SKU's, particularly in nontraditional packaging formats such as R-T-D, Dairy Case, and Deli sections
- Increased consumer demand stemming from heightened awareness of possible health benefits
- Concern of cannibalization as new package formats displace sales of traditional formats
Forecast number three should not be particularly surprising to anyone in the industry. Simply stated it suggests that industry growth will be the slowest in the "supermarket segment" if past and current levels of marketing support remain unchanged. Pound growth will occur but will likely not exceed 1 or 2% annually with only 10-20% total increase likely over the next decade. However, like the line from Charles Dickens -- A Christmas Carol, "Are these shadows of things that will occur or just shadows of things that might occur..." the tea industry has the ability to infuse new life into this segment with the right kinds of marketing support or new product/packaging configurations.
Forecast number four suggests R-T-D tea will continue to grow at 12 - 15% rates over the next several years and might even exceed those expectations with increased marketing investment.
- Demand for convenience will continue to drive the market for R-T-D teas.
- Relative ease of entering this market and success of brands such as Snapple, Arizona, and Mystic will continue to attract other companies and contribute to continued growth of the segment.
- Compatibility of tea with a great many flavors and spices will trigger many new entries including the development of sub-categories such as chai and "fortified" teas.
- R-T-D tea represents only a tiny percentage of overall consumer consumption of beverages, especially soft drinks with which the category is most closely compared. With increased marketing effort, R-T-D tea is likely to pick up significant share from soft drink consumers, particularly with that segment concerned with health issues.
- As the market for foods consumed away from home continues to grow, R-T-D teas will continue to benefit from this trend.
- While the entire R-T-D tea category is still in its infancy, there is much room for growth for higher quality specialty brands as opposed to value based products. Evidence for this assumption is seen in the premium prices' consumers are willing to spend for branded water products. Of course this necessitates that the branded products are supported by consumer marketing activities.
- Consumers are eating more meals away from home because many of them feel that they have less time available to cook.
- When consumers eat out, they bring with them their concerns for nutrition that bodes well for the tea industry -- in both fast food establishments as well as white table cloth restaurants.
- The number of restaurants serving gourmet or specialty tea has been increasing for a number of years and will increase further as consumer awareness of specialty tea increases.
- The number of coffee houses also serving gourmet or specialty tea has been increasing steadily.
- Interest in stand-alone tea salons has also been increasing for the last several years.
- Hotels serving Afternoon Tea are now commonly found in most major metropolitan areas.
- Tea has always been one of the most profitable food or beverage items available to food service operators and as consumer demand goes up, there will be a corresponding increase in operator demand for tea and ways to merchandise tea.
- An increasing number of operators are moving to develop signature teas as a means to increase profitability and gain competitive advantage. It is likely that this trend will increase driven by aggressive vendors and consumer appeal.
Foodservice sales of tea have been growing at about 3-5% a year for the last several years. Our fifth forecast is that this rate of growth will continue over the next five years and perhaps even accelerate as operators begin to pay more attention to the proper storage, brewing, and merchandising of both iced and hot tea. The need for operator education remains critical to the continued vitality of this segment.
- There has been a tremendous upsurge in interest on the part of operators, hoteliers, entrepreneurs, and consumers for specialty tea. This interest is strongest in the Pacific Northwest but there is much evidence that it is spreading to the rest of the States as well.
- The trend to specialty tea is following on the heels of a similar expansion in the coffee industry. Today, specialty coffee accounts for a third of total coffee sales and an even larger percentage of the profits.
- Consumer awareness of specialty tea is receiving a big boost from the exposure it is getting in coffee houses as well as free standing tea salons, retailers and catalog distributors.
- Several other categories provide evidence that specialty tea will continue to grow to be a much more important segment then it currently is. In addition to coffee, there is bottled water, premium juice blends, imported beers, and micro-brewery beers and ciders. Other examples are found in the foods segment and include premium imported vinegar and olive oils, ice creams and even in the move towards fine cigars.
- The move to specialty tea is triggered in part by the lure of high profits, but is also in response to perceived renewed consumer interest in the entire tea category.
- Interest in specialty tea will also benefit from renewed marketing support on the part of producing countries interested in increasing the revenues and profits that they derive from this segment.
Our sixth and final forecast of this report suggests that specialty tea will represent the second fastest growing segment of the tea industry over the next decade. This segment has the capability of doubling its volume over the next five years and may grow at an even faster pace with the right support from industry.
All told, the tea leaves appear to paint a very rosy picture for the tea industry over the next 5 to 10 years. The forces in place are time proven and significant and should continue to positively effect growth for the future. However, as the saying goes, the only things guaranteed in life are taxes and death. Consequently nothing should be taken for granted and the tea leaves will remain only so much debris in the bottom of a tea cup unless the industry aggressively pursues the growth opportunities before it. On the basis of the growth realized over the last five years, it is safe to predict that the only hot water the tea industry will encounter will be used to make the world's favorite brew.