For All the Tea in India--Prices Heating Up

Shankar Bhanji sells as many as 400 glasses of sweet, milky tea a day from his dark little wooden stand in Mumbai’s Nariman Point business district. The problem is, the kilo of tea he uses every day costs 20% more than it did a year ago, and he’s still charging only 3 rupees a glass, or 8 cents.

“I can’t raise the price all by myself,” he says. “I’ve got 300 competitors in this neighborhood.”

Indian tea prices took off last year after a drought in Kenya, the world’s largest tea exporter, cut into tea production there.

India was once the biggest exporter, but its expensive teas have been getting squeezed out of global markets by cheaper teas from Kenya and Sri Lanka.

In the past three months, though, as tea prices rise all over the world and Indian tea gets competitive again, the stocks of Indian companies have soared, with Tata Tea Ltd., Goodricke Group Ltd. and Jayshree Tea & Industries Ltd. all up by 70% or more.

“It’s good news for them--while it lasts,” said Moneesh Narula, senior analyst at Credit Rating Information Services of India Ltd.

The British brought the tea business to India more than a century ago, building plantations in the hills of Darjeeling and Assam, home to some of the world’s finest teas. Tea is still India’s national drink. Indians often down a cup of strong sweet “chai”--the source of the British slang word for tea, “char”--five times a day.

Until seven years ago, India’s biggest customer was the former Soviet Union. The Soviets agreed to buy most of India’s exports to keep the strategically placed, non-aligned country to its south friendly.

Indian tea companies unwisely put all their eggs in that basket. The market collapsed when the Soviet Union disintegrated in 1991. The Russians turned to cheaper teas and the artificial market created by the Cold War dwindled.

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Tea companies’ earnings tumbled, since the home market wasn’t growing quickly enough to replace the lost exports. India was the world’s biggest supplier of tea in 1992, when it exported 210 million kilograms of tea, or 95 million pounds. Last year it exported only 152 million kilograms. It’s now the world’s fourth-largest tea producer behind Kenya, Sri Lanka and China.

Indian companies couldn’t compete because they pay more for labor and in higher taxes. What’s more, Indian plantations get less tea per bush because their plants are older. The average bush in India is about 50 years old--not much competition for fecund, 25-year-old Sri Lankan bushes.

Profits at India’s top tea companies have fallen every year for the last five.

This year, droughts in Kenya and Sri Lanka have given Indian tea companies a chance to get back some of their market share. Kenyan tea production fell almost one-third in the first five months of the year, while Indian output rose 6%. Average prices for Kenyan tea also rose by a third, as Sri Lankan prices jumped more than 40% and Indian tea prices rose 20%.

“There will be a gap in the market that we’re trying to replace with Indian tea,” said a director of Tata Tea, the world’s largest company that both produces and markets tea, with 7 billion rupees ($196 million) in sales.

And now that the United Nations has loosened its international trade embargo on Iraq, a big tea-drinking country, Indian tea makers expect to make new sales and profits there.

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They also hope to win back their customers in the former Soviet Union by joining forces to market Indian teas under a single brand name, Nargis. Most Indian tea companies have failed to create memorable brands, which successful companies use to attract and retain customers even if the branded product’s price is higher.

“Because they’re just commodity producers, they compounded their problems,” said Sandeep Bhatia, senior research analyst at UBS Securities in Mumbai.

Tea-producing countries hope to promote tea as a health drink. It helps prevent heart disease, they say, and doesn’t have the calories and chemicals of most soft drinks.

“Aided by its demonstrable health benefits, it is making a strong bid to be the chosen mass beverage of the 21st century,” Tata Tea Chairman R.N. Tata said in the company’s annual report.

Tata Tea profits will rise by almost a third in the fiscal year ending in March, analysts say, and profits at Goodricke and Jayshree will probably rise as much.