HIGH TEA
How a 'boutique' tea producer and its CFO are reinventing the rules for promoting Asian brands.
By Mindee Hansen

"Green Gold" helped keep Sri Lanka afloat through nearly three decades of civil war. Amid the bloody cultural divide that fueled the conflict, tea offered Sri Lanka a reason to be proud of its heritage. The tea is still known as "Ceylon", the old name given by the British to the island nation, and it has kept its cachet, and price premium, regardless of the political situation.

Dilhan Fernando, son of the founder of Dilmah Teas, Merrill Fernando, wants to keep building on that fame. The Fernando family company, Dilmah Teas, built its brand for pure Ceylon tea amid civil conflict, competition from low-cost upstarts, and increasingly powerful multinational corporations. Now, amid a subcontinent of brewing high-tech wunderkind brand names, Dilmah's owners and its CFO Minetta Perera are vying for recognition on the global stage. It's all the more remarkable because the effort is based on the ancient business of offering thirsty wanderers a glorious, aromatic cup of tea.

"Many tea producers are impressed by Dilmah and are a little envious of what they have been able to do," says Glenn A. John, publisher of Tea and Coffee Asia, a trade magazine covering the industry. "Their tea has a personal character, and that has helped it become a success."

The company had sales of US$18 million last year and employs about 1,600 people - not counting the tea pickers who work on the estates - in two units, one public and one private. Ceylon Tea Services (CTS) was the first tea company to list on the Colombo Stock Exchange and now ranks thirty-ninth in terms of market capitalization. The private company, MJF Exports, is a bulk tea exporting company selling its tea to be used by other companies in their private label brands. Both businesses have a rich cashflow. Perera, who has been on the job for two years, has been able to extract terms that demand cash before delivery from risky markets from Russia to Uzbekistan - which account for 40 percent of Dilmah's sales. Tough payment terms with the other 60 percent - customers in Australia, Europe, and Middle East - have helped keep the company's larder of cash sufficiently stocked.

Fernando' strategy could be summed up in the phrase 'small is beautiful.' Going against conventional wisdom, which advises that companies concentrate on core activities and cede control of peripheral businesses along the supply chain, Fernando has sought, wherever feasible, to own Dilmah's supply chain. As for marketing, Dilmah's executives run everything from Colombo. The thinking is that word-of-mouth, clever market entry, and strategic dips into brand advertising here and there can work wonders for boutique brands, in the way that some coffee purveyors have gained global recognition. It seems to be working.

The first step, in 2000, was to create a holding company, called MJF Holdings, for Dilmah's investments. That same year, the company bought 70 percent of Forbes & Walker, one of the oldest and best-known tea brokerages in Colombo, where the world's biggest tea auctions are held. Tea brokers are a critical link in the tea chain because they buy, sell, and grade tea. The company then bought shares in three plantation management companies in 2002, shortly after they were handed over to private management by the Sri Lankan government. These strategic alliances allow Dilmah's quality-control experts to consult with the plantation managers about methods in growing the tea, as well as the type and variety of the crop.

"These plantations are not what you would call money-spinners for us - they are long-term investments," says Perera. "Mr. Fernando wants certain teas grown and the plantation owners want to tap into his knowledge about what tea buyers around the world want," says Perera.

In an economy long wracked by war, Sri Lankan tea is notorious for languishing amid shipping delays. Unlike fine wine, tea doesn't improve with age. In trying to sell a premium tea, having the green stuff grow stale on ships or in warehouses was a major problem. Dilmah decided that it was safer to produce its own packaging, and purchased a small company in Sri Lanka, introducing methods of vacuum packing and temperature control that are now sought after by other tea producers. Dilmah runs its packaging operation on a just-in-time basis, in an effort to lower inventory costs, shorten the working capital cycle and lower the cost of managing stock.

"Our materials have to be the highest quality, and they must be attractive," says Perera, adding that the strategic alliance in the packing equipment gave Dilmah Teas more control and lower costs. "Before we made the investments, Sri Lanka simply did not have the packing facilities we needed for our brand." Dilmah doesn't have its own distribution network, but maintains close ties with them via associated offices in its primary markets. To convince distributors that Sri Lankan tea is worth the premium, the company held a six-day meeting with them this year, including three days in the field, explaining how Ceylon tea is grown."

Small, Sweet and Global

Dilmah's methods have so far been well suited to its owners' ambition of building global brand awareness. Dilmah Teas is now one of the top three tea brands in Australia, where it holds 12 percent of the market share, and New Zealand, where it holds 21 percent. It's made headway in Russia, where it holds a 3.4 percent market share. Unilever's Lipton brand, by comparison, has 11.8 percent.

Ironically, Sri Lanka's turbulent decades of war have actually given the nation's producers a helping hand. To survive, the producers modernized and increased their global competitiveness by sharing information and collaborating in planting and harvesting methods to insure that Ceylon tea retained its premium reputation. "We share secrets other companies wouldn't share with competitors," says Fernando.

In contrast, after the collapse of the former Soviet states, where Indian producers sold much of their tea, Indian tea fell into a cycle of declining productivity and quality. Government labor policies put added pressure on the producers' cost base. Today, it costs US$1.50 to produce 2.2 pounds of Indian tea, which sells for about US$1. Plantations are closing, accompanied by occasional outbursts of violence.

Premium tea, with its associations with polite society, would seem a refined arena in a world swooning with trade wars. But Fernando sees peril here, too. "If we fail," he says, "globalization will dictate that there will be no hope for the Sri Lankan tea industry." But for now, being a small and canny runner around the behemoths has its satisfactions.

Mindee Hansen is a freelance writer based in Hong Kong