AA GGLLOOBBAALL SSTTUUDDYY RREEPPOORRTT OONN ‘‘RReevviittaalliizziinngg IInnddiiaann TTeeaa EExxppoorrtt IInn RRuussssiiaa’’ Submitted to: Gujarat Technological University

IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF THE AWARD FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION

Under the guidance of: Dr. Viral Bhatt Principal SAL Institute of Management, Ahmedabad.

Submitted By: SSttuuddeennttss oofff MMaarrkkeettiiinngg,,, SSEEMM::: IIVV,,, MMBBAA::: 22001100--1122,,, SSAALL IInnssttiiittuuttee oofff MMaannaaggeemmeenntt...

SAL INSTITUTE OF MANAGEMENT MBA PROGRAMME Affiliated to Gujarat Technological University, Ahmedabad. March, 2012.

Certificate

This is to certify that this Comprehensive Project Report title,

‘‘RReevviittaalliizziinngg IInnddiiaann TTeeaa EExxppoorrtt IInn RRuussssiiaa’’ is the bonafide work of SSttuuddeennttss ooff MMaarrkkeettiiinngg,,, SSEEMM::: IIVV,,, MMBBAA::: 22001100--1122,,, SSaalll IInnssttiiittuuttee ooff MMaannaaggeemmeenntt who carried out the research under my supervision. I also certify further, that to the best of my knowledge the work reported herein does not form part of any other project report or dissertation on the basis of which a degree or award was conferred on an earlier occasion on this or any other candidate.

Project Guide:

Dr. Viral Bhatt Principal, SAL Institute of Management, A’bad.

Sign: ______

SAL INSTITUTE OF MANAGEMENT Affiliated to Gujarat Technological University, Ahmedabad.

We, SSttuuddeennttss ooff MMaarrkkeettiiinngg,,, SSEEMM::: IIVV,,, MMBBAA::: 22001100--1122,,, SSAALL IInnssttiiittuuttee ooff MMaannaaggeemmeenntt, hereby declare that the Global Study Project entitled ‘‘RReevviittaalliizziinngg IInnddiiaann TTeeaa EExxppoorrtt IInn RRuussssiiaa’’ is a result of our own work and our indebtedness to other work publications, references, if any, have been duly acknowledged.

Date: 22/03/2012 Sign, Place: Ahmedabad SStttuuddeenntttss oofff MMaarrkkeetttiiinngg,,, SSEEMM::: IIIVV,,, MMBBAA::: 22001100---1122,,, SSAALL IIInnsstttiiitttuutttee oofff MMaannaaggeemmeennttt...

I

“Experience is the best teacher’’ This saying has played a guiding role in including GSR as a part of the curriculum of the M.B.A. programme of the Gujarat Technological University. This study Report allows students to do practical work and to study real global business environment which develops a feeling about the difficulties and challenges in the business world.

In this direction, we have tried our best to present a project report. This project report will help the readers to know in-depth about global tea business environment and major reasons for poor performance of Indian tea export in Russia during last few years along with measures to revitalize Indian tea export in Russia.

The preparation of this project is based on facts and findings noted and information collected from various secondary sources such as internet, Books, News Papers, Magazines and written and published documents.

In spite of our best efforts, there may be omission and commissions which may please be excused..!

II

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We are extremely thankful to Dr.Viral Bhatt for his valuable guidance and helpline that was provided to us throughout completion of this project. He was always there to lend a helping hand & directed us towards proper attitude to develop the project. He has always welcomed our queries and doubts regarding the project work. Without his help and right guidance the completion of the project would have been very difficult.

The level of knowledge he possess has covered entire aspects of the management expertise in different fields, particularly in market research and marketing management. We are also really indebted to those all people who heartily helped us throughout completion of this project.

We are also thankful to our institute SAL Institute of Management and GTU for offering us such a great subject that bind all the knowledge we have gained throughout our study And last but not the least we would like to thank all our friends who have provided their thoughts and help directly or indirectly about our project during development and for the further enhancement.

With Thanks…

SSttuuddeennttss ooff MMaarrkkeettiiinngg,,, SSEEMM::: IIVV,,, MMBBAA::: 22001100--1122,,, SSAALL IInnssttiiittuuttee ooff MMaannaaggeemmeenntt...

III

Revitalizing Indian tea export in Russia

Table of contents

Sr. No. Particulars Page No.

Chapter-1 Introduction 2

Chapter-2 Problem statement 7

Chapter-3 Research Methodology 28

Chapter-4 India: Tea sector analysis 32

Chapter-5 Russia: Tea Market & consumption Pattern 62

Chapter-6 Competitive analysis of Tea Exporters 87

Chapter-7 Findings 111

Chapter-8 Suggestions / Recommendations 128

Chapter-9 Conclusion 134

Chapter-10 Bibliography/ References 137

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Chapter 1 Introduction

Revitalizing Indian tea export in Russia

Introduction:

Tea is the oldest and the most widely consumed beverage in the world after water. It is estimated that there are over 2,000 different types of tea. Though several varieties of tea such as green tea and herbal tea are now becoming popular, by far the most important tea to international trade is black tea. In the global tea market, China, India, Kenya, and Sri Lanka are the major producers and also play a major role as exporters of tea, while Russia, U.K., U.S., Pakistan, and Japan form the major markets for these exports. Consumer awareness of the health benefits of tea and premium have been the growth drivers of the tea market recently.

The global tea industry is largely dominated by India, the second largest producer and one of the largest consumers of tea. India is succeeded China and followed by Kenya Sri Lanka, Vietnam and Indonesia in the production hierarchy of countries.

The tea industry is peculiar, the soil characteristics, the climate and the rainfall determine the nature of the tea and its taste. Tea affects the taste buds; therefore, it is difficult to replace a particular variety with a substitute. This explains why certain types are favored by certain countries: for example, the CIS (commonwealth of independent states i.e. Russia) countries favor Indian and Sri Lankan teas. UK and Pakistan favor Kenyan teas.

India accounts for 23.6 per cent of world's production. While Sri Lanka, Kenya and Indonesia are the other leading producers; their combined production is lower than that of India. What makes India an interesting object of study is that its size is no millstone around its neck; its production growth between 1996 and

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1998at 5.63 per cent was way ahead of the increase in world production of one per cent only.

In 2008, world tea production reached over 4.73 million tones. Producing 1.16 billion kilos (2.56 billion pounds) of tea per year, China is the number one source for tea on the planet. At 980million kilos (2.16 billion pounds), India stands at number two. Kenya and Sri Lanka follow.

When it comes to exports, China ships out 297million kilos (654.78million pounds) of all types of tea whereas India, with primarily black tea, moves 203 million kilos (429.9 million pounds).

This ranking is fairly recent. Prior to the 1960s, India was the top producer and exporter. For example, in 1955, India shipped out 165 million kilos (363.77million pounds) of her total production of 301 million kilos (663.59 million pounds). The stern contention with Sri Lanka saw the two jockeying back and forth for top exporter position from the 1960s through the ’80s. Butin 1991, Sri Lanka surpassed India for good with 211 million kilos (465.12 million pounds).

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China caught up in 1993 with 201 million kilos (443.13 million pounds) to India’s 175 (385.81million pounds). Kenya’s exports exceeded India’s that same year with 188million kilos (414.47 million pounds). For total production, India has taken second place to China since 2006. (All figures come from respective countries' tea boards.)

Issues and Trends Affecting the Global Tea Market:

1. Rising Affluence: swift economic growth in a number of developing nations such as China, India, and Russia, has resulted in an increase in middle class consumers who have high disposable incomes. These consumers have exhibited premium purchasing behavior, upgrading their purchases from unpackaged tea to branded and specialty varieties.

2. Growing Health and Wellness Trend: The growing health and wellness trend has been a major driver for the value growth of tea in the global tea market. These consumers are keen to pay a premium price for the advertised health benefits of specialty tea varieties such as herbal/fruit tea and other tea.

3. Higher disposable incomes in many developing economies such as China, India, and Russia prompting a shift from unpackaged to branded and specialty tea varieties

Types of Tea:

All true tea comes from the Camellia sinensis plant. But the different types of tea stem from the processing. Main varieties: Black, Oolong, Green, White, Loose teas and Tea Bags.

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Black tea

It is rusty and fermented during processing, to give it its distinctive flavors’. Black tea has a full, rich taste. This particular variety of black tea is called Keemun.

Oolong Tea

It is tea that falls between a black and a green tea. It only undergoes a small amount of fermentation during processing. The variety of oolong tea in this photo is infused with jasmine.

Green tea

It has undergone less processing than black tea, and have a much lighter flavor. The health benefits of green tea are seemingly endless. Since the leaves are not fermented, the taste is pleasantly fresh and herbal.

White Tea

It comes from the Camellia sinensis plant. But the leaves are picked and harvested before the leaves open fully, when the buds are still covered by fine white hair. Hence the name, White tea is scarcer than the other traditional tea, and quite a bit more expensive. This variety of white tea is called Silver Needle. Loose tea

It is typically whole leaves or at least large pieces of leaves.

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A tea bag

It is a small, porous paper, silk or plastic sealed bag containing tea leaves for brewing tea

Statistics:

Major tea producers:

Rank Country Agriculture area Production (in HA in ‘000 Tones) (2009) 1 China 524321 1375780 2 India 179963 972700 3 Kenya 27350 314100 4 Sri Lanka 2610 290000 5 Turkey 38911 198601 6 Vietnam 10272 185700 7 Iran (Islamic Republic of) 48515 165717 8 Indonesia 53600 146440 9 Japan 4609 86000 10 Argentina 140500 71715

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Chapter 2 Problem Statement

Revitalizing Indian tea export in Russia

PROBLEM STATEMENT:

Politics, relations, affairs and deals between INDIA and RUSSIA:

After a long period of time joy and cheer was felt among Russians and Indians as the most awaited deal was finalised. It was 15th December, 2011 that has given a strong boost to the international relations between India and Russia when the Indian Prime Minister Dr. Manmohan Singh visited to Russia and signed MOU between India and Russia, for Nuclear power, business and trade. The India's bilateral cooperation with Russia is based on long-term interests, mutual trust, and friendship and shared interests, which encompass diverse sectors including nuclear energy, defense, space, science and technology, hydrocarbons, trade and investment and people-to-people exchanges.

Russian Prime Minister Vladimir Putin has played a key role in the development of the Strategic Partnership, and has been the architect of

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contemporary relationship, asserting that there is enormous mutual goodwill between both countries for each other, according to Dr. Singh “Both countries recognize the significant mutual benefit we derive from working together." This is in our national interest and in the interest of global peace and prosperity. This MOU facilitated the opportunities of trade, commerce and businesses and re-opened the huge avenues of Indian Traditional Exports. The strategic partnership is an enduring bond of friendship, which has strong historical roots. “Few countries have mattered more in our time than Russia, yet few remain as mysterious.” This is the land of Peter the Great, and Catherine; of Lenin, Stalin and Gorbachev. During that period India exported leather, rice, food grains and coffee. The past rooted relationship during the glorious past of Russia at the times of Gorbachev and, India at the times of Indira Gandhi seems to have given fruits with this deal.

India and Russia’s relation weakened due to the high instability prevailing in the government and political situation of both the countries. The main reason for the occurrence of the instability in India was felt after the assassination of Indira Gandhi. Apparently her successor Mr. Rajiv Gandhi took her charge. He was a very noble human being and was known for promoting technocracy and innovativeness in India. He was a very optimistic person and he dreamt to make India modern. Rather than doing malpractices as a ruined politician he was very generous human being. His kind-heartedness was smartly misused by other politicians.

This insecurity in the country was also for the reason that there were the consecutive changes in the prime ministers of our country. Mr. V.P. Singh was supported by two extremist opponent parties BJP and CPI and

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CPM, most of the time he spent to balance two different rivals ideology. Mr. V.P. Singh just had to manage only two rival parties while Mr. Devegauda was supported by 22 alliances. Similar kind of situation had been repeated with Mr. I.K. Gujaral and Mr. Chandrashekhar who was the leader of 40 parties but was supported by more than 200 parties.

Political instability even did not spare Russia. The reason for Russian instability was the partition of Russia with its states. There were continuous internal revolutions going on in Russia due the government inefficiency and the dominance of USA and Europe. The political instability also led to overall insecurity in the country.

While opinion polls generally rate Mr. Primakov as the nation's most trusted politician, that view was held by only a quarter of the population, reflecting the widespread antipathy many Russians feel toward their leaders. There were other contenders, too. They include Grigory A. Yavlinsky, the stubbornly independent leader of the liberal Yabloko party. Gennadi A. Zyuganov, the Communist leader who had a solid base of mostly older supporters. But few observers gave him a chance to win the presidency. Then there was Mr. Stepashin's successor as Prime Minister, Vladimir V. Putin, whom Mr. Yeltsin has publicly endorsed as his successor, and an array of governors, like Konstantin Titov of Samara, in the Volga River region. A new poll did not give Mr. Putin, a former intelligence official, much hope. Only 12 percent said they thought Mr. Yeltsin was sincere when he offered the endorsement.

Because of insecurity and instability in government of Russia, the trade policies and economic decision making were affected. The lack of

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public administration in Russia affected its business policies at international level. The uncertainty began from 1992 with the decontrol of 90% prices and the devaluation of the rubble (Russian currency) to the black market level. Moreover, there was reduction of the budget deficit from 31% of GDP in 1991 to 15% in 1992. The GDP growth rate was 1% in 1987 which had an unexpected fall to -19% in 1992.

In the year’s 2000 Mr. Atal Bihari Bajpai helped in enhancing infrastructure through his “India Shining” campaign. The sensex touched 11000 points from 8000 points. Moreover Dr. Manmohan Singh previously the finance minister of India and lately the Prime Minister created the stability in the Indian Economy by removing the licensing systems thereby removing hurdles in business. He led the growth rate to 8.5% in 2006-07 and the sensex jumped to 22000 points. Both Dr. Manmohan singh and Mr. Atal Bihari Bajpai helped to flourish the Indian Industries. It was them who made India to be the part of the most promising developing countries group i.e. BRIC countries.

BRIC AND ITS IMPACT:

The biggest, fastest-growing economies of the Third World are Brazil, Russia, India, and China. These Big Four, also known as BRICs, have attracted the most investor attention in recent years. They have been the buzz of billion-plus population markets, and their growth is impressive as their stocks, in most cases, can offer superior value. The four BRIC countries are distinguished from a host of other promising emerging markets by their demographic and economic potential to rank among the world’s largest and most influential economies in the 21st century and by having a

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reasonable chance of realizing that potential. Together, the four original BRIC countries comprise more than 2.8 billion people or 40 percent of the world’s population, cover more than a quarter of the world’s land area over three continents, and account for more than 25 percent of global GDP. For their development and growth plan BRICS countries are highly rely on World Bank which is dominated by USA and European countries. So that to reduce this dependency on World Bank and to faster the growth rate of BRICS countries, In the last summit of BRICS in the year 2012, it was decided to have a BRICS bank similar to World Bank. This bank will make an endeavor to provide platform for the development of the BRICS economy. South Africa has been included in the part of BRICS.

Key Indicators and Statistics:

BRICs Development Indicators Indicators Brazil Russia India China Population(2009) 194 M 142 M 1.15 B 1.33 B 1310 GDP (US$, 2009) 1573 B 1232 B 4985 B B GDP per Capita (PPP, current intl. $ $10,499 $14,913 $3,015 $67,778 2009) GDP Avg. Growth Rate (1990-2009) 2.5% 0.3% 6.3% 10.1% GDP Projected Avg. Growth Rate 4.2% 4.5% 8.1% 9.5% (2011-14, as of april,2011) Merchandise Exports (US$, 2009) 153 B 303 B 162 B 1201 B HDI % Change (1990-2010, for Brazil 7.6% 3.8% 33.3% 44.2% 2000-2010)

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Global Sherpa, 2011 (www.globalsherpa.org) Data sources: World data Bank, International Monetary Fund (IMF), UNDP Human Development Report (M=Million) (B=Billion) (US$=United States Dollar)

Economic Growth and Development of the BRICs:

From 2000 to 2008, the BRIC countries’ combined share of total world economic output rose from 16 to 22 percent. Together, the BRIC countries accounted for 30 percent of the increase in global output during the period. To date, the scale of China’s economy and pace of its development has out-distanced those of its BRIC peers. China alone contributed more than half of the BRIC countries’ share and greater than 15 percent of the growth in world economic output from 2000 to 2008. The chart above on key development indicators for the BRIC countries shows the sharp contrast in GDP, merchandise exports and the UNDP’s Human Development Index (HDI) between China and the other BRIC countries.

The BRIC countries, despite their differences, have to work together to have more say in international matters. "As the global economy evolves and works its way through the present global financial and economic crisis, the BRIC are a factor of stability and growth.

The Russian President Dimity Medvedev stresses the grouping's importance. In recent years BRIC contribution to the growth of the world economy exceeded 50%, and the four countries accounted for 14.6% of the world's economy. By strengthening the economic base of a multi-polar world, the BRIC countries are objectively helping to create conditions for the

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strengthening of global security. But it's obvious they don't have a common agenda and their interests diverge and are many times conflicting.

In some respects, the BRICs share a distinctive view of the world. They have large domestic markets with substantial numbers of poor people, so growth and anti-poverty programmes are higher up their list of concerns than in Western countries (this is even true in Russia, though to a lesser extent). They are trying to diversify their economies. They are innovating (though Russia is much better at producing guns than civilian goods) and challenging received notions about globalization. All have become far more entwined with the world economy. In the aftermath of the great recession, this mongrel position commands respect in other developing countries, which want to know how the BRICs did it? The BRICs have an Emerging Market Opportunities as it provides with High growth rates, increased foreign direct investments, huge investments in infrastructure, huge middle class boosting demand, Abundant supply of educated cheap workforce and High potential for outsourcing work Specially India. Thus, by considering these fast developing countries, India has immense opportunities for growth, development, trade, commerce and business.

WHY TEA?

Tea is the oldest and most consumed beverage after water in the world. For most of the people the Tea begins their day. Everyone thinks that tea is a source of refreshment, so most of the people have a sip in the morning while reading a news paper just to make the day complete. Tea has been around for more than 5,000 years and hopefully would be around for another 5,000 years. As tea forms a part of our day to day lives and is also

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beneficial for the good health. Tea is also the part and parcel of the traditions and cultures in many countries including India, Russia and Japan. In Russia tea drinking rituals are conducted in the workplace at certain times. Colleagues leave their desk area to have tea and chat in a designated space, in a kitchen or café. The people here offer tea to their guests as a part of welcoming drink. Tea is also considered as a means for long chats, conversations, breaking the boredom, relaxation breaks, business meeting and deal and so it is included in our day to day life. Many people are also highly addicted to tea and they can’t make out their day without a mouthful of it.

India is one of the growing and leading countries in most of the aspects like showbiz, technology, education and lot more. India ranks number one in most of the cultivating crops but we are here to know about tea produced by India. You will be astonished to know this that 23.6 of total tea of the world are produced by India. This is not the least in 2008 India has produced 805180 tons of tea.

Indian tea Data YEAR PRODUCTION (+)IMPORT (-)EXPORT = CONSUMPTION 2000 826000 7158 200868 632290 2001 847000 10275 177603 679672 2002 854000 23606 181617 695989 2003 846000 10661 174246 682415 2004 879000 31061 174728 735333 2005 907000 18716 159121 766595 2006 949000 23234 181326 790908

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2007 973000 19586 193459 799127 2008 987000 24882 203207 808675 2009 972700 34335 203863 803172 (SOURCE: www.fao.state.org)

The above table exemplifies that the production of tea in India is more than its consumption. Thus, the excess of produced quantity of tea can be sent to Russia and other countries to earn fine amount of foreign exchange.

The number of small tea growers in the country would be around 2.5 lakh, producing 257 million kg of tea annually, and accounting for more than 27 percent of the country's total tea production. The concentration of tea growers is largest in Assam, Darjeeling, Nilgiri and are tagged along by West Bengal, Tamil Nadu, Kerala, Tripura, Arunachal Pradesh, Himachal Pradesh, Mizoram, Meghalaya and Bihar. India being the 2nd largest producer of tea in the world has huge prospects for exporting tea to many countries over the world. Besides, the popular black tea, Assam also produces small quantities of white and green tea. The crest three tea producers in India are Godrej Tea Limited, Tata Tea Limited and Hindustan Unilever Limited.

The Average yield of Tea produced in different countries per hectare of land is shown in following chart:

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Yield in Kg per Hectare 2500 2175 2000 1614 1641 1500

1000 619 500

0 India Sri Lanka Kenya China

The Average yield of Tea produced in India is lower than Kenya and Sri Lanka.

The total turnover of the tea industry in India is likely to reach Rs. 33,000 crore by 2015 from the current level of about Rs. 19,500 crore. India’s tea production accounts for 31% of globe’s total tea production. India has emerged as the world leader in all aspects of tea growing, tea processing, tea consumption and tea export. Thus, in this project we have put in the efforts to discover the hidden opportunities to export tea.

Indian Export Glory:

India is the largest tea consumer and the second largest tea exporter after Sri Lanka, Kenya and China in the world. Tea drinking has 3,000 years history in India. However, commercial tea production in India didn’t begin in India until in the 1830's. The first shipment of Assam tea was sent to England in 1838. The tea

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production spread to other parts of India by the 1860'sgradually. Mass tea production occurred on big scale since then. India's current tea production has almost quadrupled from a level of 255 m kgs in 1947. Domestic tea consumption per capita has grown multifold since the early 1950's 200 grams to 700 grams today.

Three distinctly different tea growing regions produce three entirely different teas in terms of style, taste and flavour because of different climate and soil conditions. The three regions are: Darjeeling (North-Eastern India), Assam (far North-East India) and Nilgiri (South India). Tea is also produced in smaller volumes in many states: Himachal Pradesh, Karnataka, Uttaranchal, Tripura, Manipur, Sikkim, Nagaland, Meghalaya, Mizoram, Bihar and Orissa. A wide range of tea is offered by India: from the original Orthodox to CTC and green tea; from Darjeeling’s tasty tea to Assam and Nilgiri’s strong tea.

WHY RUSSIA?

Russia is the largest country in the world, covering more than one eighth of the Earth's inhabited land area with the total of 17,075,400 km2. Russia is also the eighth most populous nation with 143 million people with population growth rate -0.47%. Each Russian region and city is so different to the next: the nature, the weather, the standard of living, the architecture, the lifestyle all vary from place to place. Within its vast span one can find the largest freshwater lake in the world, rivers and forests teeming with fish and wildlife, awe-inspiring volcanoes, and lofty mountains. In spite of such demographics in Russia, the climate is not much suitable for large production of tea in order to meet demands of total Russian population.

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Thus, it becomes essential for Russia to import Tea from other countries. This provides India with golden opportunity to export Tea to Russia. Hence, Russia has inspired us to study Tea as it is the very part and parcel of Russians as the tea is to Indians.

In 2007, Russia was the biggest importer of tea followed by the U.K., U.S., Pakistan, and Japan.

The tariff barriers in Russia have decreased so it will enable us to enhance the penetration and increase the value added tea sent to Russia. Russia, also known as the Russian Federation, is a country in northern Eurasia. Russia is the largest country in the world in terms of area (more than 6.6 million square miles). Russia is also the ninth most populous nation in the world with more than 142 million inhabitants this gives us an estimate that tea consumption will very high and requirement would be more. The growth rate of Russia has been significant in the years 2001 to 2008. The

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2010 Exporters Market Share

Other Countries 9%

Vietnam Sri Lanka 11% 29%

Kenya 8%

China 11%

Indonesia India 7% 25% Revitalizing Indian tea export in Russia

climate of Russia also plays a huge part in providing the opportunities for the development of tea market over there as the rains which are required by the tea plantations are not available as they face heavy winters or summers. These factors provide opportunities for the development of tea market in Russia. The above graph shows the market share of different countries that export tea to Russia. You will be astonished to know this that 23.6 of total tea of the world are produced by India. This is not the least in 2008 India has produced 805180 tons of tea. In this project we have tried to discover the means through which India can recoup its position and beat Sri lanka to capture its premier share in Russia.

A country’s population and demographics, among other factors, directly affect the potential size of its economy and its capacity to function as an engine of global economic growth and development. So, the study of demographics and social system is vital element for taking into account any trade and business decisions.

Social-cultural pattern, behavior and Habits of Russians:

While thinking of Russians and their drinking habits, 9 out of 10 people immediately think ―Vodka. Many are surprised to find out that Russians are very passionate about tea-drinking and are drinking more tea than British people. If someone invites you to drink tea, expect to have some kind of pastry, cake or appetizers with it. It is hard to imagine Russian tea drinking tradition without samovars used. If you refuse to have tea, it will show lack of respect to the hosts. We can find some cultural similarities

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between India and Russia as even the Russians offer tea to their guests as the welcome gesture similar to the Indians.

Russian political system:

The study of political systems helps to locate the legal bounds prevailing in Russia for performing international business. The Russian political system is widely categorized in to sections such as-Fundamentals of the Constitutional System, Rights and Liberties of Man and Citizen, Russian Federation, President of the Russian Federation, Federal Assembly, Government, Judiciary, Local Self-Government, Constitutional Amendments and Revisions. The Constitution declares that the President of the Russian Federation is invariably the head of state and it's his sole responsibility for guarding the Constitution and its rights, civil liberties, protecting the sovereignty of Russia, territorial integrity, and controlling and coordinating the functioning of the other government bodies of the state. The Russian judiciary has appeal jurisdiction and judicial review which can be undertaken only at the Supreme Court. The Russian Federation operates under three branches of government: the Executive, Legislative, and Judicial.

Russian Tea Market:

Russia has a long history of tea drinking because of its proximity to China and Central Asia. Russia is the largest market for tea in the world, both in terms of all tea varieties, as well as for just black tea. In 2007 in terms of retail value the Russian market was worth $3,266 million and in terms of retail volume it was 161.44 million kg. The year-on-year growth rate of the Russian tea market, for the period 2006-07 in terms of retail

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value was 12% and in terms of retail volume was 2.3%. The Russian market also has one of the highest per capita consumption rates for tea. In 2007, per capita consumption of tea in Russia was 1.3 kg compared to the average global per capita consumption of tea, which was 0.3 kg in the same year. Retail prices for tea in Russia are relatively high and growing. In 2007, the average retail price for tea in Russia was $20.2 per kg, compared to the average global retail price of $13.2 per kg in the same year.

The history of the Russian tea market over the last two centuries was generally determined by imports from China and India, in spite of the fact that the first attempts to grow tea in the Russian Empire date back to the middle of the 19th century. At that time, tea plantations in Georgia and Krasnodar regions were established and satisfied a large proportion of the country's bulk tea requirements. The quality of the tea, however, was not very high - the subtropical nature of the mostly northern tea-growing area affecting both yield and taste characteristics of the leaves. It was therefore necessary to blend locally produced tea with better quality imported tea.

Russia – a large country, high consumption:

Due to the rising affluence and growing health and wellness trend, there is a growing demand for specialty premium teas such as green tea, herbal/fruit tea, and other tea In Russia, as reflected in the following chart below: Tea consumed by Russia with sub-sector bifurcation (2011)

85% Green tea - 23638 Black tea - 149892 13% Fruit/Herbal tea - 3317

Other tea - 409 0% 2% 21 GSR-SAL Institute of Management, A’bad.

Revitalizing Indian tea export in Russia

The consumption level of Black tea in Russia is highest as compared to other teas. This is beneficial to Indian market, as India’s major type of production is in the category of black tea. So, the Russians demand for black tea becomes an opportunity for India to supply it.

Russian Production:

As, the population is very large and unfavorable climatic conditions are not well suited for the tea plantations, Russia is not able to produce right kind of the tea in quality as well as quantity. One of the major constraint faced by the Indian tea industry which directly affect production, productivity and quality, include the old age of bushes with more than 30% of the tea area being above the economic threshold age limit. In addition the slower pace of re-plantation with the rate of replanting being less than 0.5% as against the desired level of 2% and the consistent fall in auction prices during the early-2000 has adversely affected the investment in the plantations. There is steep decline in quality of Russian tea. The tea industry is largely dependent on vagaries of nature. The industry is highly labor intensive and is also subject to stringent labor laws.

Gap Analysis:

Due to the insufficient production of tea in Russia they are incapable to convene the demands of Russians through in-house manufacturing. So there is an immense requisite for Russia to import Tea from other countries. Thus, about 90% of the tea demand is satisfied by importing tea from other countries.

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Russian tea Data YEAR PRODUCTION (+)IMPORT (-)EXPORT = CONSUMPTION 2000 1520 158393 2113 157800 2001 1240 154448 907 154781 2002 1290 165313 1766 164837 2003 870 168894 2959 166805 2004 1240 172145 5817 167568 2005 1260 179578 6686 174152 2006 1150 172860 8525 165485 2007 630 181627 10298 171959 2008 820 181859 11464 171215 2009 630 182149 9713 173066 SOURCE: www.fao.state.org

The above table shows that the consumption of tea in Russia is more than its production. There is a huge gap amid the production and consumption pattern of Russia. This provides tremendous opportunity for the Second largest Tea producing country - India to penetrate and evoke the Russian tea market.

It is clear that Dr. Manmohan. Singh’s government, which is already hobbling on many fronts, just doesn’t have the political clout to push through controversial decisions. Woven into this are other complications too – Indian economy is in doldrums with falling growth rate, an acute balance of payments situation, drastic devaluation of the Indian currency and a grave budget deficit situation and all of this necessitating drastic pruning of major investment decisions.

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India is still ravelling in the past glory of cooperation with Russia. No amount of blame game – connectivity is lacking, banking facilities are unsatisfactory, taxation problems are irritating, language barrier poses obstacle, etc. on – can detract from the home truth that a sense of urgency is lacking in Delhi with regard to the Russian market.

India-Russia relationship serves as an anchor of peace and stability during this transition phase. Together India and Russia can help shape global responses. To rediscover its glorious scientific past and build a knowledge-driven economy, Russia must break old habits and loosen state control on research.

Why Tea is chosen to export in Russia:

• The diverse agro‐climatic conditions prevailing in the tea growing areas of India lend themselves to the production of a wide range of teas – black, (CTC, orthodox), green teas and organic teas.

• A one‐stop‐shop for high quality specialty teas e.g. Darjeeling, Assam,

• Orthodox, high range Nilgiris, etc.

• Strong production base with 75 per cent of the production being accounted for by organized sector covering 1,600 gardens owned by nearly 1,100 entities.

• Competent managerial manpower.

• Strong research backing from well established research institutions.

• Availability of modernised and upgraded manufacturing facilities.

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• Labour welfare laws protecting workmen.

• Emerging small grower sector with young plantation profiles.

• Availability of training facilities for plantation managers, supervisory staff and workers for continuous up gradation of their skills.

Russian federation is recovering. After almost two decades of dire financial drought — and despite the casual disdain for all things intellectual shown by the profit-crazed oligarchy who have become Russia's elite — research is reclaiming its place as one of the country's most noble institutions.

This exceptional effort of Mr. Manmohan Singh gives hopes to trade and business world that creates opportunity for world’s second largest tea manufacturer to regain competitive Russian tea markets.

DOWNFALL IN EXPORTS (2007-2010):

India has an amazing past of tea exports. The glory of exporting to Russia fell down considerably over a period of time. There were many reasons for the downfall in exports. The instable government, the trade policies, the uncertainty of climate, etc led to downfall in exports. Tea exporters in Siliguri expect a decline in exports due to the falling demand for Indian tea in the world market, which is facing tough competition from Sri Lanka and Kenya. The tea gardens of Darjeeling, Terai, Dooars including Assam are well-known to produce the world's best blend of tea and contribute 75 percent of India's total tea production every year. Tea exporters said that entry of the other countries in the foreign market and the ongoing payment problems have led to the decline in the exports. Moreover unfavourable weather conditions are another reason for the

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decline in the tea exports. India faces stiff competition from Sri Lanka and Indonesia in the traditional tea market, and in green tea from China, while Kenya and other African countries vie for the CTC export market.Further it can be

understood by the following table:

Indian Tea Exports

(Figures revised by Tea Board) Month-Wise:~ Figures in M.Kgs

MONTHS 2011* 2010 +/- MONTH +/- TODATE JANUARY 15.79 17.14 -1.35 -1.35 FEBRUARY 11.93 13.36 -1.43 -2.78 MARCH 11.90 23.50 -11.60 -14.38 APRIL 11.36 12.76 -1.40 -15.78 MAY 11.30 11.20 0.10 -15.69 JUNE 12.27 12.75 -0.48 -16.17 JULY 15.27 16.58 -1.31 -17.48 AUGUST 19.42 16.85 2.57 -14.91 SEPTEMBER 21.04 19.34 1.70 -13.21 OCTOBER 19.69 19.64 0.05 -13.16 NOVEMBER 15.42 DECEMBER 14.75 149.97 193.30

Region-Wise:~

Region Jan/Dec'11 Jan/Dec'10 Variance ( +/- )

North India 81.31 83.46 -2.15 South India 68.66 79.67 -11.01 All India 149.97 163.13 -13.16 * Provisional & subject to revision.

The Exports of Indian tea have been continuously declining from 2007 to 2010. So India should take necessary steps in order to revitalize the Indian tea exports into the Russian market. Indian Tea exporters face major threat from Sri Lanka, Kenya and china in the tea market. Tea exporters said that entry of the other countries in the in the export. This year, there has been a decline in exports as our competitors like China, Kenya and Sri

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Lanka have gone ahead of us. Earlier, we were number one in exports, now we have fallen to fourth position. Unfavourable weather conditions are another reason for the decline in the tea exports. The fluctuating weather would also affect the production of tea. India faces stiff competition from Sri Lanka and Indonesia in the traditional tea market, and in green tea from China, while Kenya and other African countries struggle for the CTC (crush, tear, and curl - process) export market.

The concerns which are elevated in our mind about this huge decline in exports are: So, while other sources are ever more aggressive in their outputs, India seems to be lagging. It is no surprise that China has made fast gains on the rest of the pack, given the increases the country has made in its other industries. • But why is this happening in tea, specifically? • What is the fundamental reason, if there is one, for India’s slip in tea supremacy? • Is India unable to understand the international tea market? • Are the business men and traders facing problems in exports? • Do Russians have a different attitude towards the pricing policies? • Are we compromising with the quality, technology, research and development? • Are we afraid to face global competitiveness? • Can we improve the production of Tea in India? • Why has our export of tea decreased over the past 10 years? • Can we increase the exports of tea to Russia?

Now, it’s the time for India to revitalize the tea exports in Russia and summon up those glorious past days which harmonized India and Russia.

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Chapter 3 Research Methodology

Revitalizing Indian tea export in Russia

Research Methodology:

Marketing Research is the systematic design, collection, analysis and reporting of the data and findings relevant to a specific marketing situation face by marketers.

What to study?

Project Title: ‘Revitalizing Indian tea export in Russia’

Why to study?

In a descriptive study the first step is to specify the objectives with sufficient precision to ensure that the data collected are relevant. If this is not done carefully, the study may not provide the desired level of results.

Primary Objectives: The primary objective of this study is to understand and analyze how India can revitalize its tea export in Russia and to know the factors which influence and affect competitive business environment of tea sector in India and Russia. Secondary objectives:

• To get familiarized with the Indian Tea Industry and its marketing to International markets, especially in Russia • To highlight the present Market Scenario of India Tea Industry • To examine the prospects of India Tea Industry in the International Market, especially in Russia

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• To identify and analyze the problems of India Tea Industry for Export to the Russian Market and To recommend some corrective measures to resolve the problems • To understand various international tea exporters and to compare & analyze their position with India • To find out various measures by which India can improve and enhance the quality and quantity of tea production • To examine trade policies of government of India and to find out some measures for better growth of tea sector

How to study?

Research Design:

A Research design is concerned with turning a research question into a testing project. The best design depends on the research questions. Every design has its positive and negative sides. The research design has been considered a "blueprint" for research, dealing with at least four problems: what questions to study, what data are relevant, what data to collect, and how to analyze data and interpret the results.

Descriptive Research studies are those studies which are concerned with describing the characteristics of a particular individual, or of a group, whereas diagnostic research studies determine the frequency with which something occur or its association with something else. The studies concerning whether certain variables are associated are examples of diagnostic research studies.

The goal of this study is to offer or to describe relevant aspect of tea industry, such information may be vital before even considering certain corrective

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steps to revitalize Indian tea export in Russia. Such a description of the advances helps tea exporters of India to gauge their progress in keep up with the competitors.

This study revitalizing Indian tea export in Russia is conceptualized and framed on the basis of secondary data. Data collection, tabulation and analysis of data, calculations, finding and recommendations are given on the basis of such data. Therefore, we firmly believe that descriptive and conclusive research design is appropriate for such study. Even we have considered and applied ex-post facto research method for this purpose. This is the study in which social-cultural, economical, political, environmental, technical etc studies of India as well as Russia is done. We try to understand competitiveness of various tea exporters to understand and analysis such factors. Descriptive and conclusive research design is the most suitable one.

Data Collection:

• Data are collected from secondary data sources. • Data are collected through internet websites, Books, News Papers, indexes other publications etc.

Tools of Data Analysis and Interpretation:

• Regression analysis • Time series analysis • Co-relation coefficient • Bar Chart • Pie Chart • Column Chart

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Data Analysis Software:

• spss • excel

Place: Ahmedabad

Limitations:

• The study related with revitalizing Indian tea export in Russia is done on the basis of secondary data, therefore minor deviations, misprint and misinterpretations may generate the error in further calculations, analysis and related implications. • The various frame works, data collections, suggestions and recommendations are strictly restricted and applicable to Russia only. • Various policies, annual reports of various boards and other vital information and some of the data collection part is the biggest challenge, constraint of this project. • In this exploratory study time duration and cost were also one of the major limitations.

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Chapter 4 Indian tea sector analysis

Revitalizing Indian tea export in Russia

India: Tea sector Analysis:

Introduction:

The cultivation and brewing of tea in India has a long history of applications in traditional systems of medicine and for consumption. Commercial production of tea in India did not begin until the arrival of the British East India Company, at which point large tracts of land were converted for mass tea production.

Ancient India and the Ramayana

Tea cultivation in India has somewhat vague origins. Some quote that the first recorded reference to tea in India was in the ancient epic of the Ramayana, which referenced the "Sanjeevani tea" plant when Hanuman was sent to the Himalayas to bring it for medicinal use. Though the extent of the popularity of tea in Ancient India is unknown, it is known that the tea plant was a uncultivated plant in north east India that was indeed brewed by local inhabitants of the region. The Singpho and Khamti tribes living in northern Burma and Arunachal Pradesh have stated that they have been consuming tea since the 12th century.

East India Company

In the early 1820s, the British East India Company began large-scale production of tea in Assam, India, of a tea variety traditionally brewed by the Singpho tribe. In 1826, the British East India Company took over the region from the Ahom kings

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through the Yandaboo Treaty. In 1837, the first English tea garden was established at Chabua in Upper Assam; in 1840, the Assam Tea Company began the viable production of tea in the region, run by indentured servitude of the local population. Beginning in the 1850s, the tea industry rapidly expanded, consuming vast tracts of land for tea plantations. By the turn of the century, Assam became the leading tea producing region in the world.

"The tea cultivation begun in India in the nineteenth century by the British, however, has accelerated to the point that today India is listed as the world's leading producer, its 715,000 tons well ahead of China's 540,000 tons, and of course, the teas of Assam, and Darjeeling are world famous. However, because Indians average half a cup daily on per capita basis, fully 70 percent of India's huge crop is consumed locally."

Modern tea production in India

India was the top producer of tea for nearly a century, but recently China has overtaken India as the top tea producer due to increased land availability. Indian tea companies have acquired a number of iconic foreign tea enterprises including British brands Tetley and Typhoo. India is also the world's largest tea- drinking nation. However, the per capita consumption of tea in India remains a modest 750 grams per person every year due to the large population base and high poverty levels.

In general, even though India leads the world in tea technology, the methods employed to harvest the crop vary with the type of tea and land. Fine-leaf tea is hand plucked, and hand shears are used on mountain slopes and in other areas where tractor-mounted machines cannot go. A skilled worker using hand scissors can harvest between 60 to 100 kg of tea per day, whereas machines cut between 1,000 and 2, 000 kg. The latter, however, are usually applied to low grade

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teas that often go into teabags. The tea "fluff" and waste from processing is used to produce caffeine for soft drinks and medicine.

Tea is an agro-based commodity and is subjected to vagaries of nature. Despite adverse agro climatic condition experienced in tea growing areas in many years, Indian Tea Plantation Industry is able to maintain substantial growth in relation to volume of Indian tea production during the last one decade.

Tea is an essential item of domestic consumption and is the major beverage in India. Tea is also considered as the cheapest beverage amongst the beverages available in India. Tea Industry provides gainful direct employment to more than a million workers mainly drawn from the backward and socially weaker section of the society. It is also a substantial foreign exchange earner and provides sizeable amount of revenue to the State and Central Exchequer. The total turnover of the Indian tea industry is in the zone of Rs.9000 Crs. Presently, Indian tea industry is having (as on 18.12.2009).

• 1692 registered Tea Manufacturers • 2200 registered Tea Exporters, • 5848number of registered tea buyers, • Nine tea Auction centers.

The tea industry in India is about 172 years old. It occupies an important place and plays a very useful part in the national economy. Robert Bruce in 1823 discovered tea plants growing wild in upper Brahmaputra Valley. In 1838the first Indian tea from Assam was sent to United Kingdom for public sale. Thereafter, it was extended to other parts of the country between 50's and 60's of the last century. However, owing to certain specific soil and climatic requirements its cultivation was confined to only certain parts of the country.

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Market Growth Rates:

Year Growth Rate

1990-91 to 1996-97 1.30% 1996-97 to 2001-02 2.70%

2001-02 to 2006-07 2.20% 2004-05 to 2009-10 1.80%

2009-10 to 2014-15 2.00%

As can be seen from the above table, the market growth rate has been hovering around the 2% mark since the mid 90’s.

Tea process and production:

PLANTATION:

This is a very delicate operation and needs adequate planning and proper supervision. Correctly planted tea plants establish in the field quickly, grow strongly and come into full bearing earlier. On the other hand, a slight error during planting can cause high percentage of mortality or permanent setback to the plants.

There are three kinds of tea plant cultivated in Assam, one called the Assam, or original plant; another China plant, and a third a cross between the two, called the Hybrid.

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Time of planting

Planting can be done in April-June and September-October or October- November with adequate irrigation. Periods of heavy rains should be avoided.

Method of Planting

There are two methods of planting, for plants raised in nursery beds. They are bheti planting and stump planting.

Type of Planting

There are two types of planting:

Pit planting Trench planting

When spacing between plants is wide This method is adopted for closer spacing enough to allow digging of individual and in heavy soils. pits of proper size and without much Trenches 30 cm wide difficulty this is used. 45 cm deep 45 cm wide Dug along the rows 45 cm deep The excavated soil is conditioned and Circular and straight walled returned back as in case of pits and tea is The excavated soil is conditioned by planted directly on the trenches. mixing with 4-5 kg well-decomposed cattle manure or 150-200g well- decomposed oil cakes and returning the soil into the pits.

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Five places of Indian tea plantation:

1) Darjeeling

Darjeeling is one of the India's most popular hill stations, is surrounded by tea plantations that produce prized light coloured, floral smelling tea. Around 25% of India's total tea output comes from Darjeeling.

2) Assam

Assam, located in India's remote north east, is the largest tea producing region in the country. Mostly grown in the Brahmaputra Valley, malty Assamese tea is brightly colored. Jorhat, in the central part of the valley, is often referred to as the "Tea Capital of the World".

3) Munnar

Munnar is a popular hill station in south India. Once owned by Tata, the largest tea manufacturing company in India.

4) Nilgiri Mountains

The mountainous Nilgiri district of Tamil Nadu in south India is known for its unique dark and intensely aromatic tea. Tea has been grown there for more than 100 years, and is the most important industry in the region. Conoor is an excellent place to discover Nilgiri tea. Start at the High field Tea Factory, around 1 kilometre from Sim's Park.

5) Wayanad

Wayanad, a lush mountainous agricultural area of Kerala, also produces a significant amount of tea. Most of the tea plantations are located south of Kalpetta.

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Major Tea Producers in India:

• Godrej Tea Limited • Hindustan Unilever Limited • Tata Tea Limited • Badireddy Global Private Limited • Guru Sharnam Overseas • Hanumatey Exports Private Limited • Jay Shree Tea & Industries Ltd • Kirti Enterprises • Krishna Agrotech Ltd • M/s. Global Agro Corporation • Mataji Trading Corporation • Max Globe India • Newtech Exim Private Limited • Pawan Enterprises • Perennial Trade Link Private Limited Major Tea Growing Regions:

Tea plantations in India are mainly located in rural hills and backward areas of North-eastern and Southern States. Major tea growing areas of the country are concentrated in Assam, West Bengal, Tamil Nadu and Kerala. The other areas where tea is grown to a small extent are Karnataka, Tripura, Himachal Pradesh, Uttaranchal, Arunachal Pradesh, Manipur, Sikkim, Nagaland, Meghalaya, Mizoram, Bihar and Orissa.

Unlike most other tea producing and exporting countries, India has dual manufacturing base. India produces both CTC (Crush, Tear, Curl) and Orthodox

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teas in addition to green tea. The weightage lies with the former due to domestic consumer’s preference. Orthodox tea production is balanced basically with the export demand. Production of green tea in India is small. The competitors to India in tea export are Sri Lanka, Kenya, China, Indonesia and Vietnam.

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Climatic conditions:

Climatic conditions taking their toll on Tea Industry:

Unfavorable weather conditions for tea plantations coupled with global slowdown have badly affected tea exports of Assam. Statistics say that India, the second-largest tea producer in the world experienced a slump by 25 per cent in January 2009. The tea industry is going through a rough patch for last three years due to rain shortage. This along with several other problems is the major reason why the Indian Tea industry is growing at a snail’s place. Let us have a look at the various problems faced by the Industry in India.

Tea requires a fairly hot and humid climate. Climate influences crop distribution and quality. Tea grows best on well-drained fertile acid soil on high lands.

The climatic condition also includes rainfall, temperature, and day length. The average annual rainfall in North East India ranges from 2000- 4000 mm. The excess rainfall in the monsoon months of June-September causes drainage problems. Tea plant facing evapotranspiration, it will dry spell persists for a longer period, tea plants suffer heavily and crop goes down. Thus, a for the growth of tea the ambient temperature required is 13°C and 28-32°C. Maximum temperature is above 32°C which unfavorable. The average winter minimum temperature (Dec-Feb) remains below 12°C. Day length influences growth and dormancy in tea bushes. When days of less than 11hr 15 min duration last for at least six weeks tea bushes become inactive. Average rainfall distribution in the North East India's tea growing regions in mm:

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Season UA CA NB BV Dooars Terai Darjeeling

Winter (Dec-Feb) 4 3 3 3 1 1 2 Pre-monsoon (Mar- 24 27 19 28 14 13 15 May)

Monsoon (June-Sep) 66 63 72 62 79 82 77 Post-monsoon(Oct-Nov) 6 7 6 7 6 4 6 Total 2720 2065 2185 3000 3990 2965 2345

(UA: Upper Assam, CA: Central Assam, NB: North Bank, BV: Barak valley)

Geographical condition:

India contributes 30% of world’s tea production and considered as the largest country across the globe in tea production as well as consumption. Today, there are more than 13000 tea gardens in India. The production of tea in India was 255 million kg in 1947 and it rose to 616.81 million kg in 2008-2009. The North East India accounts for about 75% of the total Indian production of tea. The tea areas of the North-East India lie between 24O-27O North latitude and 88O-95O East latitude. It has attained wide spread plantation in North Eastern states of India including 308 major tea estates and 1232 small tea gardens in the northern West Bengal; and about 760 gardens in Assam.

Agriculture

India is the one of the country which is known by agriculture land. There are almost everything produced in India. It is also said that the most of the revenue generate by agriculture sector. In that one of the major

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produced things is Tea. Tea is mainly produced in Assam, Darjeeling, Nilgiri.

Soil

Tea grows well on high land well drained soils having a good depth, acidic pH in the range 4.5 to 5.5 and more than 2% organic matter. Shallow and compacted sub-soils limit root growth. Tea plants growing on such soils are liable to suffer from draught during dry period and water logging during the rainy months. There should not be any hard pan or concretions in the subsoil within 2m depths. The depth of ground water table should not be less than 90 cm for good growth of tea. Catchment planning is required for improved soil and water management practices in a tea estate for which land survey designed to identify all major and minor topographical features needs to be carried out.

PRESENT MARKET SCENARIO OF INDIAN TEA INDUSTRY:

The tea industry occupies a place of considerable importance in the Indian economy, producing a fourth of the world’s annual tea output among them some gardens producing high quality teas - and employing around 1.26 million people at tea plantations and 10 million persons derive their livelihood from tea. In Northeast India alone, the tea industry employs around 900,000 persons on permanent roles.

With domestic demand at an estimated 825 million kg (MKg) as of 2009, India is one of the largest consumers of tea globally. However, as domestic demand accounts for over 86% of the country’s tea output and since tea imports are permitted only for re-export, India’s share of the global tea trade is on the

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lower side. Nevertheless, exports have a critical role to play in maintaining the demand-supply balance in the domestic market. Although tea is produced in 14 States in India, five of them Assam and West Bengal in North India, and Tamil Nadu, Kerala and Karnataka in South India account for over 98% of India’s tea production. Within that, North India alone accounts for around75% of India’s total tea production, of which 85-90% is consumed in the domestic market. The balance, much of it of high quality, is exported. Tea is among the most labor-intensive of all plantation crops. On an average, around 65% of the cost of production is incurred on labor.

The recent optimism in tea prices, which started from 2006, has come as a relief for bulk tea players, who have had to cope with depressed prices for almost a decade since 1999. Tea prices, after reaching a peak in 1998, went into a steady decline thereafter, with average domestic prices decreasing from around Rs.76.43 per kg in 1998 to a low of around Rs. 58.05 per kg in 2005(Refer Chart for trend in tea prices over the period 1998-2008). Although global tea prices also declined 1999 onwards, driven primarily by oversupply, the decline in average prices was sharper and of a longer duration for Indian teas vis-à-vis the teas from Kenya and Sri Lanka, India’s two main rivals in the exports market. This was on account of a number of factors: lack of marketing initiative by the Indian players to look for export markets beyond the CIS1countries; increase of small growers and bought- out leaf factories (which led to a decline in the quality of tea produced), and failure to check fake varieties of tea from being traded as premium tea (which affected the image of Indian teas in the export market); higher cost of production of tea in India (as compared with that in Sri Lanka and Kenya) on account of the higher social costs here; and existence of certain non-tariff barriers like residual-pesticide (in tea) specifications imposed by a number of importing countries.

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All these factors led to the loss of key export markets, which in turn increased supplies in the domestic market, thereby bringing a downward pressure on prices. This apart, tea prices also came to be affected by the quality factor, which came into play during the early part of the current decade when the delay of re- plantation activities in the latter half of the 1990s began to tell on quality and hence on prices. Most players had deferred re-plantation during the latter half of the 1990s to cash in on the optimism in tea prices during 1997-98, but when the sharp price decline happened subsequently, their financial position got so weakened that they were unable to make the required investments in their tea estates.

Trend in Domestic Tea Prices:

Source: ICRA research

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Increasing domestic consumption, and exports to an extent, behind current optimism in prices

The gradual reduction in pipeline stock since 2003, following a secular increase in domestic consumption on the one hand and muted increase in production on the other, has been the main factor supporting the increase in tea prices from 2006 onwards. According to ICRA’s estimates, while the average growth in production during the period 2003-08 was just 2.0% or so, domestic consumption would have increased annually at around 3.5% during the same period. The steady increase in domestic demand, range-bound export volumes and low growth in production absorbed the pipeline stock over the years and left virtually no carry-forward stock at the end of the 2008 season. Chart presents the trend in India’s production, consumption and export of tea over the period 2003- 08.

Trend in India’s Production, Consumption and Exports of Tea:

Source: ICRA research

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INDIA Vs OTHER TOP TEA PRODUCING COUNTRIES:

Major tea exporting countries of the world are Kenya, Sri Lanka, China, India and Indonesia. However, prior to evaluation of export performance of major tea exporting countries of the world, it is necessary to analyze the production and domestic demand of tea in these countries. On the production front India is the second major producer of the tea in the world .Other major producing countries include China, Sri Lanka, Kenya and Indonesia. During 1951-60, India was producing around 40 percent of world production, declined to 26 per cent in 2008.The declining trend can be observed in case of Sri Lanka as well. Only China and Kenya are able to increase their share in world production considerably. The share of China and Kenya during 1951-60 was 13.59 per cent and 2.67 per cent respectively, increased to 31 per cent and 9 per cent in 2008. In recent years China emerged as major tea producer in the world. Fig-1 shows, during 2004 and 2005, China became number one tea producer in the world pushing India into number two position. India had doubted China’s emergence as a top raking producer, citing limitations infield level statistics and under reporting of the tea production in India. Tea board of India was then engaged in revising the production.

Since 1985, even though China’s area under tea cultivation is lower than earlier period due to improvement in yield, production increased by 3.28 per cent per annum during 1984-94, further increased by 4.13 per cent per annum during 1995-05.In India production increased by 1.83 per cent per annum and 1.07 per cent per annum respectively during the same period. In Kenya, production increased by 5.53 per cent per annum and 3.12 per cent per annum respectively during the same period. Production in Sri Lanka and Indonesia also increased during this period with improvement in supply conditions in Kenya, China and

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Indonesia, India’s share in world production declined even though its total production increased.

Domestic consumption is calculated by deducting export from production. In case of India, there is continuous increase in share of domestic consumption in production; it increased from 32.06 per cent during 1951-60 to 66.92 per cent in 1981-90, further increased to78.26 per cent in 2001-04. We can observe that, whatever additional production is taking place, it is almost entirely consumed internally leaving export surplus to remain stagnant and sometimes export even shows declining trend. In contrast, Kenya’s domestic consumption share in production is very low and declined over a period of time shows that except for a few years, the increase in production of tea in Kenya is almost entirely used for export.

In Sri Lanka, domestic consumption in production is very low and is declining. In 2001-04, around 94 per cent of tea production in Sri Lanka is used for export. In recent years, tea export and production are almost same in Sri Lanka .In china, share of export in production of tea increased over a period of time. From below table one can observe that in China, production, export and consumption shown increasing trend. In Indonesia, share of consumption in production increased, but it is lower than India.

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Revitalizing Indian tea export in Russia

(Source: Global Tea Brokers)

Over the years India has been reducing on productivity and quality parameters. Industry is sensitive to productivity and quality which matters most for the survival of tea companies. Evident that during 2000-2002, although total land under cultivation improved marginally by 2.5 percent, tea production actually dropped by 1.3 percent due to old life of plantations. Even, yield showed a sharp drop of 3.9 percent from 1679 Kg/Hectare to 1614 Kg/Hectare.

Consumption Trends:

There has been a dramatic incline in tea consumption in favor of domestic market since fifties. While at the time of Independence only 79 M.Kgs or about 31% of total production of 255 M.Kgs of tea was retained for internal

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consumption, in 2009 as much as 812 M.Kgs or about 82% of total production of 991 M.Kgs of tea went for domestic consumption. Such a massive increase in domestic consumption has been due to increase in population, greater urbanization, increase in income and standard of living etc. Indian tea export has been an important foreign exchange earner for the country.

There was an inborn growth in export earnings from tea over the years. Till 70s’, UK was the major buyer of Indian tea. Since 80s’ USSR became the largest buyer of Indian tea due to existence of the trade agreement between India and previous USSR. USSR happened to be the major buyer of Indian tea accounting for more than 50% of the total Indian export till 1991. However, with the breakdown of USSR and abolition of Central Buying Mechanism, Indian tea exports suffered a setback from 1992-93. However, Indian Tea exports to Russia/CIS countries recovered from the setback since 1993 under Rupee Debt Repayment Route facilities as also due to long term agreement on tea entered into between Russia and India. Depressed scenario again started since 2001 due to change in consumption pattern, i.e. switch over from CTC to Orthodox as per consumer preference and thus India has lost the Russian market. Another reason for decline in export of Indian tea to Russia is offering of teas at lower prices by China, South Asian countries like Indonesia and Vietnam.

Global competition:

The major competitive countries in tea in the world are Sri Lanka, Kenya, China and Indonesia. China is the major producer of green tea while Sri Lanka and Indonesia are producing mainly orthodox varieties of tea. Kenya is basically a CTC tea producing country. While India is facing competition from Sri Lanka and Indonesia with regard to export of orthodox teas and from China with

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regard to green tea export, it is facing competition from Kenya and from other African countries in exporting CTC teas.

Because of absence of large domestic base and due to comparatively small range of exportable items, Sri Lanka and Kenya have an edge over India to offload their teas in any international markets. This is one of the reasons of higher volume of export by Sri Lanka and Kenya compared to India. Another important point is that, U.K has substantial interest in tea cultivation in Kenya. Most of the first-rated companies, after Industrialization due to implementation of FERA Act started tea cultivation in Kenya. So, it makes business sense for U.K. to buy tea from Kenya and Kenya became the largest supplier of tea to U.K.

India's share in world production:

Country Market share China 31 % India 26% Sri Lanka 9% Kenya 9% Turkey 4% Indonesia 4% Vietnam 4% Bangladesh 2% Malawi 1% Uganda 1% Tanzania 1% Others 8%

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India is the second largest producer of Tea in the world second only to China who overtook India as the largest producer of tea in 2006.

CHARACTERISTICS OF THE INDIA TEA INDUSTRY:

1) Productivity and quality:

The art of plucking, fine-tuned over the last 200 years, requires two fresh leaves and a bud to be plucked manually. Tea productivity can be measured as per unit of labor (man year) and per unit of land (hectare). Mechanized plucking (when labor is in short supply or expensive) enhances productivity, but with compromise on quality, as coarse leaves also gets plucked. When tea is in short supply, some producers increase productivity by allowing plucking of coarse leaves with fresh ones. When premium for quality rises, producers improve the quality by compromising on productivity. The productivity also depends on the age of tea bushes, genetic material, irrigation, fertilizer, cultivation techniques, etc. Replantation to replace old bushes is done to improve productivity.

2) Labor intensity:

This industry is very labor intensive. Labor cost is generally fixed and therefore lower production would result in higher unit cost of production. The proportion of variable elements in labor cost depends on labor legislation and extent of casual and temporary workers employed. If the production suffers on account of bad weather or pests, per unit cost of production goes up significantly.

3) Long gestation:

Tea bushes mature for commercial exploitation in 5-7 years and remain productive for an average 50 to 60 years. Major part of capital expenditure is to be incurred in first five years, which then yields return over the next 100 years.

4) Commodity nature:

Tea prices fluctuate widely with demand supply imbalances. The commodity is perishable and demand is relatively inelastic to price. While demand has a secular growth rate, supply can vary depending on climatic conditions in the

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major tea growing countries. Unlike other commodities, tea price cycles have no linkage with the general economic cycles, but with agro-climatic conditions.

5) Inconvenient but healthy drink:

Tea is a very inconvenient drink to brew. The tendency to form a creamy layer of caffeine -tannin adds to the inconvenience. Tea besides having properties of fatigue amelioration has chemicals, which help in maintaining cholesterol levels and in preventing cancer. However, research work on the subject is not conclusive.

6) Organized industry:

Tea industry is an organized agro industry. This implies that labor laws exist and since the dominant mode of tea trade is through auctions, a large number of small producers get fair prices.

7) Domestic Competition:

The major share of tea market is dominated by unorganized players. There are about 1000 of tea brands in India, of which 90% of the brands are represented by regional players while the balance of the 10% is dominated by Tata Tea, HUL, Wagh Bakri Chai, Godrej, Sapat International and others. With the growing shift from loose to branded tea, regional players are now expanding their reach and also getting premium with their offerings. Special Features of India Tea Industry:

• Production dependent of agro-climatic conditions • Same plant and same agro-practices give variations in quality in different regions • Product Life is for limited period • Labor intensive • High Cost due to high input cost • No priority for Scientific Cost Management • Huge proportion old tea & Low Productivity

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• Low investment in Development Programme

SWOT ANALYSIS OF TEA INDUSTRY OF INDIA:

Strength:

• Demand for tea has been growing at some 2% per annum and should accelerate further • Technical & Manpower Skill: Due to a huge population base in India Technical &Manpower Skill is available in abundant. • Good Research Support by tea growers has will help industry grow further.

Weaknesses:

• Labor intensive industry: The second generation labors are unwilling to join this industry hence it could pose a problem of skilled labor in the near future. • No Effective Cost Management system adopted by companies and other regulatory bodies. • Supply from more efficient players like Kenya, China, Sri lanka • Declining Export of India over the years.

Opportunities:

• Export Potential if India can increase its production capacity. • To make tea more acceptable and fashionable like coffee. • To come up with new flavors/formulation of the tea, tea houses etc to popularize the concept of tea in India. • Large untapped rural market for branded tea companies like HUL and Tata Tea.

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Threats:

• Global competition • Low Cost in some countries like China, Sri Lanka and Kenya. • Import of Tea from other countries. • Cost escalation on account of increase in the cost of production

PORTER'S FIVE FORCES:

Industry Rivalry (High):

• There are approximately700 tea companies in India hence there is intense rivalry amongst them. • Market is dominated by a large number of unorganized players. • Industry growth is slow. • There are low switching costs.

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Bargaining Power of Buyers (High):

• There is a large numbers of buyers purchasing the product. • The bargaining power of buyers is extremely high as the buyers have many options available. • Not much product differentiation in terms of taste also low switching cost. • Buyers purchase a large proportion of the industry’s total output.

Bargaining Power of Suppliers (Low):

• There are a large number of produces of tea in India. • There are substitutes like coffee available • Supplier’s product creates low switching cost.

Threat of Substitutes (Moderate):

• Substitutes like Coffee, Cold drinks, juice (young generation new to tea). • Existing consumers are loyal • Substitute’s price may be lower. • As there are so many players in the industry a price war is unavoidable. • The substitute products quality & performance may be better.

Threat of new Entrants (High):

• Large untapped rural market for branded tea segment in rural India and Indian tea in global markets. • Encouraging government policies like food and beverage act.

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Government and the Indian tea industry

The Indian tea industry as the second largest employer in the country has enjoyed the attention of the Indian government. When export sales went down, the government has been kind to the demand of the industry and its cultivators. It has passed resolutions supporting the industry domestically and has also lobbied extensively with organizations like the WTO internationally.

The Indian administration along with the European Union and six other countries (Brazil, Chile, Japan, South Korea and Mexico) filed a complaint with the WTO against the Byrd Amendment which was formally known as the Continued Dumping and Subsidy Offset Act of 2000 legislated by the US. The essence of this act was that non-US firms which sell below cost price in the US could be fined and the money given to the US companies who made the complaint in the first place. The act adversely affected the commodities business of the complainant states and has since been repealed after WTO ruled the act to be illegal.

Furthermore, the Indian government took cognizance of the changed tea and coffee market and set up an Inter-Ministerial Committee (IMC) to look into their problems in late 2003. The IMC has recommended that the government share the financial burden of plantation industry on account of welfare measures envisaged for plantation workers mandated under the Plantation Labor Act 1951. Moreover, IMC has recommended to introduce means so that the agricultural income tax levied by the state governments can be slashed and the tea industry be made competitive. It has recommended that sick or bankrupt plantation estates

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should be provided with analogous level of relaxation for similarly placed enterprises/estates as are available to industries referred to BIFR.

A Special Tea Term Loan (STTL) for the tea sector was announced by the Indian government in 2004. It envisaged restructuring of irregular portions of the outstanding term/working capital loans in the tea sector with repayment over five to seven years and a suspension of one year, which was to be on a case to case basis for large growers. The STTL also provides for working capital up to Rs. 2 lakhs at a rate not exceeding 9% to small growers.

In addition to these measures, the Tea Board plans to launch a new marketing initiative, which will include foray into new markets such as Iran, Pakistan, Vietnam and Egypt. It also plans to renew its efforts in traditional markets like Russia, the UK, Iraq and UAE. Notable is its intent to double tea exports to Pakistan within a year.

Assam Orthodox Tea is set to receive the Geographical Indications (GI) exclusivity. A GI stamp identifies a certain product as emanate from the territory of a WTO member or region or locality in that territory, where a given quality, reputation or other characteristic of the good is essentially attributable to its geographic origin.

The Cabinet Committee on Economic Affairs set up the Special Purpose Tea Fund (SPTF) under the tea Board on December 29, 2006. The aim is to fund replantation and rejuvenation (R&R) program. In the same year, Tata Tea entered into an agreement to take over Jemca, which controls a 26 percent market share in the Czech Republic.

The CCEA gave its approval for pegging the subsidy at 25 per cent and adoption of a funding pattern of 25 per cent promoter's contribution, 25 per cent

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subsidy from the government and 50 per cent loan from the SPTF. Banks have also been instructed to increase the lending period to over 13 years.

Rs 100-crore package for tea industry

The government is finalizing a Rs 100-crore package for stepping up production and exports of tea through a 'Triple five' promotion scheme with focusing five major countries –Kazakhstan, Russia, Egypt, US, UK. From that package the government contributing 75 percent and the rest coming from the private sector. India produced 967 million kgs in 2010-11, of which 179 million kgs were exported. So India has greater opportunities for global market. They also explored the rate of replantation, transformation and setting specific targets on a year to year basis.

Separate authority to boost tea production by small growers in India

The government would constitute a separate directorate under the Tea Board to boost tea production by small growers in India, amalgamation of Indian Small Tea Growers Associations (CISTA) president Bijoy Gopal Chakraborty. It would also help increase tea exports by India. Over 800 delegates representing trade unions, tea workers, small tea growers and activists from 14 tea growing states participated in the seventh International Tea Day at Kailashahar in northern Tripura.

The first International Tea Day was held in New Delhi in 2005 with the participation of small tea growers and tea workers from Sri Lanka, India, Bangladesh, Nepal, Vietnam, Uganda, Kenya, Malaysia, Tanzania, Zambia and Indonesia. India accounts for 30 percent of global tea production. The number of small tea growers in the country would be around 2.5 lakh,

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producing 257 million kg of tea annually, accounting for more than 27 percent of the country's total tea production.The concentration of small tea growers is largest in Assam, followed by West Bengal, Tamil Nadu, Kerala, Tripura, Arunachal Pradesh, Himachal Pradesh, Mizoram, Meghalaya and Bihar.

Following are the different schemes which are granted by government to promote the Indian tea sector locally and globally.

• Tea Plantation Development Scheme • Tea Market Promotion Scheme • Tea Quality Up gradation & Product Diversification Scheme • Tea Research & Development Scheme • Tea Human Resource Development Scheme

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Statistics:

• MAJOR COUNTRYWISE EXPORTS OF TEA FROM INDIA:

Source : Tea Board of India

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• Estimates of domestic consumption of tea in India:

Year Domestic consumption (in M kg) 1998 615 1999 633 2000 653 2001 673 2002 693 2003 714 2004 735 2005 757 2006 771 2007 786 2008 802 2009 819 2010 837

• Supply and Demand of Tea In India:

For the period of 2005 through 2008, supply of tea in the Indian market has exceeded demand. Below table gives the supply and demand statistics for tea in India.

As per apex industry body ASSOCHAM-‘’The total turnover of the tea industry in India is likely to reach Rs. 33,000 crore by 2015 from the current level of about Rs. 19,500 crore.’’

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Chapter 5 Russia tea market and consumption pattern

Revitalizing Indian tea export in Russia

Russia: Tea MARKET & CONSUMPTION PATTERN

Russia: An Overview

Geographic coordinates 60 00 N, 100 00 E Area 17,098,242 sq km Land boundaries 20,241.5 km Coastline 37,653 km territorial sea 12 nm arable land 7.17% permanent crops 0.11% Population 138,082,178 (July 2012 est.) Population growth rate -0.48% (2012 est.) Birth rate 10.94 births/1,000 population (2012 est.) Death rate 16.03 deaths/1,000 population (July 2012 est.) Urbanization 73% of total population Life expectancy at birth 66.46 years Health expenditures 5.4% of GDP Physicians density 4.3089 physicians/1,000 population Education expenditures 3.9% of GDP Government type federation GDP (purchasing power parity) $2.38 trillion (2012 est.) GDP (official exchange rate) $1.791 trillion (2012 est.) GDP - real growth rate 4.3% (2012 est.) GDP - per capita (PPP) $16,700 (2012 est.) Labor force 75.41 million (2012 est.) Unemployment rate 6.8% (2012 est.) Population below poverty line 13.1% (2012) revenues $382.8 billion expenditures $376.2 billion (2012 est.) Inflation rate (consumer prices) 8.9% (2012 est.) Industrial production growth rate 5% (2012 est.) Imports $310.1 billion (2012 est.) Exports $498.6 billion (2012 est.)

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Russia-Demographics:

Russia, also known as the Russian partnership, is a country in northern Eurasia. Russia is a federal semi-presidential republic, comprise 83 federal subjects. Russia is the largest country in the world, covering more than one eighth of the Earth's populated land area with the total of 17,075,400 km2 . Russia is also the eighth most populous nation with 143 million people with population growth rate -0.47% (2011 est.).

Each Russian region and city is so different to the next: the nature, the weather, the standard of living, the design, the lifestyle all vary from place to place. Within its vast expanse you can find the largest freshwater lake in the world, rivers and forests teeming with fish and wildlife, awe-inspiring volcanoes, and towering mountains. Russia is the largest country on earth, with huge tracts of land .To the west of the Ural Mountains, stretch south to the Black Sea and below the Arctic Sea, lays a broad plain with low hills where the historical core of the Russian nation is located. East of the Urals from the border of Kazakhstan, China and Mongolia and extend north to the Arctic coast lies Siberia - a scarcely- settled area covered by primeval forest, swamps and tundra in the north and mountainous terrain in the south.

Taking into account the size of the country and its tumultuous history - especially the hard times experienced under communism - it is understandable that changes happen slowly here. The transition from communism to capitalism is a very painful process and truly difficult for every generation. The largest cities are adjusting at a faster pace than the rest of Russia. Cities like Moscow and St

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Petersburg, in addition to their mystical structural design and unique way of life are also very modern, with a high standard of living, advanced economies and a technologically-adept population. The Russians are world famous for their unique creativity coupled together with awe inspirational architectural landmarks. The different aspects of Russian art and culture find its best look in its rich heritage. Russia has more than 50,000 state public libraries and a thousand or more art gallery.

Russia has the world's largest reserves of mineral and energy resources and is the number one natural gas producer as well as number one oil producer internationally. Modern-day Russia has the world's 11th largest economy by nominal GDP - $1.894 trillion and Per capita $13,542. Following the Russian Revolution, Russia became the largest and most important constituent of the Soviet Union, the world's first constitutionally socialist state and a familiar superpower.

Russia’s age structure constitutes of age groups:

Year % Male Female 0-14 15.2 10,818,203 10,256,611 15-64 71.8 47,480,851 52,113,279 65 years and over 13 5,456,639 12,614,309 (2011 est.)

Population of Russia: • Birth Rate: 9.95 births per 1000 persons,

• Death rate: 14.65 deaths per 1000 persons,

• Net migration rate: 1.03 migrant per 1000 population.

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Russia’s 73% of total population is city population and having sex ratio: 0.85 male(s)/female.

Religions practiced are Russian Orthodox 15-20%, Muslim 10-15%, other Christian 2% (2006 est.). Majority of the Russians are supposed to be followers of Russian accepted Church; however atheism prevailed during the Soviet period. Other spiritual groups include Catholicism, Protestantism, Buddhism, Judaism and Islam. Russia has large populations of non-practicing believers and non-believers, a legacy of over seven decades of Soviet rule.

Different ethnic groups in Russia consists of Russian 79.8%, Tatar 3.8%, Ukrainian 2%, Bashkir 1.2%, Chuvash 1.1%, other or not mentioned 12.1%. Russians spend 3.9% of GDP on education expenditures and 5.4% of GDP on Health expenditures.

In his recent state of the nation address, President Vladimir Putin said the most urgent problem facing Russia is its demographic crisis.

The country's population is declining by at least 700,000 people each year, leading to slow depopulation of the northern and eastern extremes of Russia, the emergence of hundreds of uninhabited "ghost villages" and an increasingly aged workforce.

Russian political system:

Following the dissolution of the Union of Soviet Socialist Republics (USSR) in August 1991, Russia began its transition to self rule as the Russian

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Federation. It adopted a constitution on December 12, 1993, that established a new political system to replace the old Soviet system of government.

It is widely categorize in to sections such as--- basics of the Constitutional System, Rights and Liberties of Man and Citizen, Russian coalition, President of the Russian alliance, Federal Assembly, Government, Judiciary, Local Self- Government, legal Amendments and Revisions. The establishment declares that the President of the Russian alliance is invariably the head of state and it's his sole duty for guarding the establishment and its rights, civil liberties, caring the rule of Russia, defensive honesty, and controlling and coordinating the functioning of the other government bodies of the state. The Russian judges have appeal authority and legal review which can be undertaken only at the Supreme Court.

The Russian alliance operates under three branches of government: the Executive, Legislative, and Judicial.

Executive Branch:

The Russian Chief of State (President) is elected to a four-year term in office. The president is leader of the Armed Forces, head of the safety group, which manages individual and state safety, and appoints his own cabinet (Ministries of the Government).

Legislative Branch:

Russia's bicameral lawmaking central Assembly is comprised of a 450- seat State Duma and a 178-seat alliance Council, filled by the top decision-making and lawmaking officials in each of Russia's 89 central managerial units. The Council of Heads of Republics include the leaders of the 21 ethnic-based Russian

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republic. The Council of Heads of administration includes the leaders of the 66 self-governing country and region, and the mayors of Moscow and St. Petersburg.

Judicial Branch:

The Russian legal system is based on civil law and includes judicial review of lawmaking acts. Russia's Constitutional Court is empowered by the 1993 constitution to arbitrate disputes between the executive and legislative branches and between Moscow and the regional and local governments.

Political Parties:

The main political party is called United Russia. It was founded in April 2001 as a result of a merger between several political parties. It describe itself as centrist. It is basically a creation of Vladimir Putin.

The main opposition party is the Communist Party of the Russian alliance led by Gennady Zyuganov. Western-orientated reform parties are Yabloko and the Union of Right Forces. Other parties include the People for Democracy and Justice Party.

Climatic conditions of Russia:

Russia is located in the temperate belt and most of the country lies within the same latitudes as Canada and Alaska. Russia's climate is mainly continental, though European Russia is more maritime-continental under the power of the Atlantic Ocean, the Baltic Sea, and the Black Sea. North to south, Russia spans a range of climatic zones form arctic to subtropical. Moving eastward across the Ural Mountains into Siberia, the climate becomes purely continental. Russian climate varies from the southern steppes, to forests, forest-steppes, and semi-

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deserts, to subarctic in Siberia, to Arctic and forest tundra in the polar north, to permafrost in the northern areas of the Far East.

Eastern Siberia's climate is severely continental, and its climatic conditions affect the weather across virtually all East Asia. Northeast Siberia is one of the coldest regions in the world. Temperatures as low as -70°C (-90°F) have been recorded in the uplands around the city of Verkoyansk. In the southern areas of the Far East, including the Maritime Territory and province bordering the East Sea and the Sea of Okhotsk, a monsoonal climate partial by the Pacific Ocean results in moderately warm and wet summers. Winters in this region are cold and relatively dry with little snow.

Russian Federation is a very big country, that’s why the climate differs: there is a cold arctic climate in the north Siberia and there is a sub-tropical hot climate near the Black Sea. The biggest part of Russia is situated in the north and there is a little amount of places, where Russian people can enjoy sun.

The northern part of Russian alliance has a moderate continental climate, which is the best for people live. This type of climate is formed by the western wind rose, which very often brings the cyclone and also there is a warm weather. Also in one of the Russian Federation’s region there is Gulf Stream power, which is formed the Russian climate of the Murmansk region. But the influence of the global warming is also can feel in Russian Federation – winters became warmer, there is less snow.

But in Russian Federation there is a part with continental climate – it’s a central part of the country. In the Siberia and Ural mountain area there is a continental climate, there are relatively warm summers and very cold winters. The lowest temperature was fixed in the level of seventy one degrees below zero in

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nineteen twenty six in Republic of Yakutia – in the north part of Russian Federation. In the Sochi city and some other towns in the south of Russian Federation, there is a sub-tropical weather.

Temperature:

Average temperatures across so vast a scenery as Russia are meaningless, but average annual temperature at select locations provide some basis for understanding the country's climatic variations. The northwest Russian seaport of Archangel averages 1°C (34°F). Further south, at Moscow, the average temperature is 4°C (40°F). Sochi, located beneath the Caucasus Mountains on the shore of the Black Sea has an average temperature of 13°C (57°F). In Irkutsk, located near Lake Baikal in southern Siberia, the annual average temperature is 0°C (31°F). Further, in north, in central Siberia, the average for Yakutsk is -9°C (15°F). The city of Tiksi on the Bay of Buorkhaya on Siberia's north averages a chilly -12°C (9°F). Finally, the seaport of Vladivostok has an average temperature of 5°C (41°F).

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Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Year Record 21.2 23.8 30.3 34 37.7 43.2 45.4 43.5 41.5 33.7 29.1 25 45.4 high °C (°F) 70.2 74.8 86.5 93.2 99.9 109.8 113.7 110.3 106.7 92.7 84.4 77 113.7 Record -71.2 -64.4 -60.6 -46.4 -28.9 -9.7 -9.3 -17.1 -25.3 -47.6 -58.5 -62.8 -71.2 low °C -96.2 -83.9 -77.1 -51.5 -20 14.5 15.3 1.2 -13.5 -53.7 -73.3 -81 -96.2 (°F) (Source: Pogoda.ru.net)

: Hottest Atmosphere : : Coolest Atmosphere

Effect of climate on tea market:

• The effect of rainfall distribution upon tea:

The kind of rain that falls is important in assessing the rainfall requirements of tea. Tea grown in the equatorial zones enjoys two rainy seasons; these agree with the course of the sun across the hot zones.

This means that regions in the North or South only get one passage and are therefore prone to long dry seasons. How the land is configured also has a large impact upon rainfall requirements. For example, Sri Lanka is subjected to two protracted rainy seasons, the north-east and southwest monsoons respectively, yet it has a rain shadow caused by the mountain massif. This deprives the eastern districts of the rains supplied by the south west monsoon. In as similar fashion the Western Ghats of south India are deprived of monsoon rains.

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• The effect of temperature upon tea growth:

The elevation of current temperatures has an important effect in modifying transpiration losses. The range in temperature of a particular region is affected by location, for instance an Oceanic area will have totally different temperature characteristic than a tea growing area located in continental climate. The elevation of the land also has a large impact upon the temperature climate of tea growth. Taken together the location and height can have a large affect upon temperature climate, for example, the upland districts of Sri Lanka have a similar temperature climate range to that of Highlands of Kenya, which are 450 metres higher in altitude.

• Limits of rainfall on tea:

There does not seem to be a decisive upper limit to the amount of rainfall under which tea will maintain a strong growth. In Sri Lanka certain areas receive as much as 5100 mm of rain yet tea does well. As regards the lower range it is thought that rainfall of less than 1300 mm per annum has a detrimental effect upon tea growth.

Economic relations of India and Russia:

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Bilateral trade turnover is self-effacing and stood at US$ 3 billion in 2006–07, of which Indian exports to Russia were valued at US$ 908 million. The major Indian exports to Russia are pharmaceuticals; tea, coffee and spices; apparel and clothing; edible arrangements; and engineering goods. Main Indian imports from Russia are iron and steel; fertilizers; non-ferrous metals; paper products; coal, coke & briquettes; cereals; and rubber. Indo-Russian trade is expected to reach US$10 billion by 2010.

The India-Russia Inter-Governmental charge on Trade, Economic, Scientific, Technological and Cultural Cooperation (IRIGC) is co-chaired by India's External Affairs Minister and the Russian Deputy Prime Minister. There are six Joint Working Groups [WG] under the IRIGC, namely, WG on Trade and Economy [trade and financial matters], WG on Energy [oil and gas, thermal and hydel power, non-conventional energy], WG on Metallurgy and removal [steel, non-ferrous metal, coal], WG on Science & Technology; WG on Communication and in order Technology; and WG on Culture and Tourism. The 13th of the IRIGC was held in Moscow on 12 October 2007.

The two countries have set up India-Russia Forum on Trade and venture at the level of the two deal Ministers to promote trade, investment and economic cooperation. The first Forum was held in New Delhi on 12–13 February 2007, which was attend by the Minister of business and Industry and the Russian Minister of Economic Development and Trade, apart from a large number of business legislature from both sides. The Minister of Commerce & Industry, Shri Kamal Nath participated in the 11th Saint Petersburg International Economic Forum on 9–10 June 2007.

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In February 2006, India and Russia also set up a Joint Study Group to observe ways to increase trade to US$ 10 billion by 2010 and to study possibility of a Comprehensive Economic Cooperation Agreement (CECA). The group finalize its report after its fourth meeting in Moscow in July 2007. It has been agreed that a Joint Task Force would monitor the implementation of the advice made in the Joint Study Group Report, including bearing in mind CECA.

GDP and GNP Data:

India Russian Federation GDP $1.430 trillion ($1,176 per $1.229 trillion ($8,693 per (nominal) capita) capita) GDP (PPP) $4.000 trillion ($3,290 per $2.687 trillion ($18,945 per capita) capita)

(Source: International Monetary Fund – 2011- World Economic Outlook.)

Labour cost:

Cost of Russian labor continues to grow at a very high rate. The regular Gazprom wage in January-November 2004 is 47% higher than in the same period of 2003 (in US dollars). In 2011, tea prices are usually high as demand is still strong, while supply fall short. Especially tea supplies from Kenya, the biggest black tea exporter in the world, are low.

Inflation rate:

In Russia was last reported at 7 percent in November of 2011. From 1991 until 2010, the average price rises rate in Russia was 175.36 percent attainment an historical high of 2333.30 percent in December of 1992 and a record

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low of 5.50 percent in July of 2010. Inflation rate refers to a general rise in prices calculated against a standard level of purchase power. The most well known events of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy. This page includes: Russia price rises Rate chart, historical data and news.

Purchasing power parity:

Year Gross domestic product based on purchasing- Percent Change power-parity (PPP) per capita GDP

2000 7661.47 11.89 %

2001 8233.466 7.47 %

2002 8830.07 7.25 %

2003 9683.023 9.66 %

2004 10726.89 10.78 %

2005 11881.88 10.77 %

2006 13321.87 12.12 %

2007 14899.38 11.84 %

2008 16040.35 7.66 %

2009 14830.3 -7.54 %

2010 15611.99 5.27 %

(Source: International Monetary Fund - 2011 World Economic Outlook)

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Technology and Infrastructure:

The transportation infrastructure in Russia is immature. The transport system is heavily Moscow-centered, with almost all transportation channels of economic meaning emanating from Moscow. Commercial transportation relies heavily on rail. Roughly 90 percent of commercial transport is rail-based and insufficiently integrated into world transport systems. The Russian trucking industry is only minimally developed, and roads are not designed to carry heavy and long-distance truck traffic.

There are serious capital and operating inefficiencies and poor financial performance in what should be cost-recovery sectors, that is, sectors that should be able to pay their own way through user fees rather than through central government subsidy or direct management. These include public utilities (called "natural monopolies" in Russia) such as public transportation, water, gas, and electricity, as well as some commercial transportation systems such as river and lake navigation. Transportation tariffs (user fees) have not kept pace with price rises.

Telecommunications:

Internet and e-mail services are now extensive and quickly improving. In a few short years, Russia made significant progress toward building the telecommunications communications necessary for a market economy. Cross- country digital trunk lines run from Saint Petersburg in the northwest to Khabarovsk in the Russian Far East and from Moscow in the country's European center to Novorossiysk in the south. The telephone systems in over 60 regional capitals had installed modern digital infrastructures by 2000. Cellular services, both analog and digital, expanded rapidly in 2000 and 2001. Three undersea fiber- optic cables connect Russia to the international phone system. Digital switches in

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several cities provide more than 50,000 lines for international calls. Satellite earth stations provide access to Intelsat, Inter-sputnik, Outlast, Inmost, and Orbital.

Russian Industry:

Currently Russian consists of the following competitive industries: oil and gas, mining, processing precious stones and metals, aircraft building, aerospace production, weapons and military machinery manufacture, electric engineering, pulp-and-paper production, automotive industry, transport, road and agriculture machinery production, light and foodstuffs industries.

Agriculture of Russia:

Agro-industrial complex of Russian Federation consists of industries specialize in production of undeveloped products, their processing and storage, as well as the ones supplying agriculture and processing industry with the means of production. Agriculture is the main part of agro-industrial complex. It is characterized by large-scale production. Agricultural lands make up 219.6 million hectares. Major agricultural crops are grain, sugar beets, sunflowers, potatoes, and flax. Among the crops cultivated in Russia are rye, wheat, barley, oats, corn, millet, buckwheat, rice, and legumes (peas, beans, soy beans, lentils). Overall production of cereal and leguminous plants puts Russia in the fourth place in the world (after China, USA and India). Crop farming provides about 40% of the gross output of agriculture; livestock - more than 60%. Livestock is represented by dairy, meat and fur industries.

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SOCIO-CULTURAL FACTOR:

Tea Consumption in Russia:

According to the independent market and media research company ordinary, the following brands top the list of consumer preference in Russia:

• Musky Chain,

• Brook Bond,

• Dolman,

• Princess Gait

• Lipton etc.

Gallup Media Russia reports that 98.5 percent of Russians drink tea and, according to state figures, per capita tea consumption in Russia equals 1.5 kilogram per person per year, while in Great Britain the matching figure is 2.5 kilograms. This indicates that Russia's tea market has the possible to develop. Tea is the only product the consumption of which is higher in the provinces than in the big cities. The leaders in terms of per capita consumption of tea in Russia are the northern lands, Siberia and the Caucasus.

Demand on the market is increasing, even for exclusive brands, and so does the rating of preferences for teabags (15 percent). In addition to the factor of convenience, the increased demand for teabags has resulted from massive

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promotional campaigns organized by such huge companies as Douse Egbert’s and Unilever.

Aware of the trend, Russian companies have rushed to produce tea bags and invest in brand advertising. They can save on advertising tea bags as a product – their competitor are doing that for them.

Other trends on the market include increased consumption of green teas, herbal teas and flavored teas. Of the last category, most popular are teas with bergamot and lemon.

Not very long ago this segment of the market was fully controlled by foreign companies, but now domestic companies are gradually breaking in.

Consumption pattern of tea bags:

As to the tea bags segment Russia repeats the pattern of the European tea market. Russia consumes more tea bags with every year. In 2002 the share of tea bags on the Russian market has increased from 7% to 12%. Accordingly to the industry experts this growth will continue in the future.

The increase of the tea bag sales is by many explained not only with the increased population income but also with the influence of the Russian producers on this market. The tea in tea bags becomes cheaper and tastier as the national producers understand better than anyone else the high requirements to tea quality put forward by the Russian consumers. Thus for the production of the tea bags they choose the grades that are not worse than traditional leaf grades in terms of taste and smell.

Reasons for decline in tea consumption:

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"Russia's tea industry will develop," senior manager of the Milford company Sergei Kramarenko. "However, there are some problems that may negatively affect the tempo of its development.

The most serious problem is that of quality. Many well-known, though dishonest, companies practice merger premium brands with cheaper ones and selling the mixtures as premium brands. Naturally, these companies show higher cost efficiencies, but this is achieved at the expense of quality. Such dishonest methods of rivalry weaken both the market and customer bearing."

Tea Will Be Promoted Among the Young People:

The Russian association of manufacturers of tea and coffee “Roschaykofe” and the Chinese manufacturers of tea are meaning to effectuate certain number of joint actions which must increase the consumption of tea among the young people. Today one of the problems of this branch consists in that “tea is losing its young consumer”. Meanwhile, the Chinese manufacturers of tea are planning to increase significantly the deliveries of green tea in Russia.

Today Russia imports 40% of tea from Sri Lanka, 20% — from India, 12% — from Indonesia and 9% — from China. The yearly consumption of tea in Russia is equal to 170 thousand tons, per capita — 1 kg a year. By the consumption of tea Russia occupies the third place in the world, after China and India. The volume of Russian tea market is evaluated as being equal to US$ 1 billion.

Festivals in Russia: Easter

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The Easter service begins late on the eve of Easter and continue through the night. At midnight the people attending worship, carrying lit candles, follows the priest; this symbolize the women who came to the tomb of Christ and found it empty. As dawn breaks, the Easter service finishes and the worshippers disperse to their homes to break their long fast with special Easter foods and coloured eggs.

New Years Eve Usually people meet the New Year eve in the close family circle. People wait till midnight, eat delicious things, watch TV, try to be happy, merry, hear music etc. They launch fireworks more and more. They like to beautify the fir or a pine in their houses. They like to visit masquerade meetings especially children, to find presents under the decorated tree and elsewhere. They like to meet Father Frost and Snowmaid as fairy tales' characters and most lovely present givers. People dance around the fir, sing New Year songs.

Independence Day

June 12 is Independence Day. It's an official holiday. They spend this day on their dachas which is a small wooden houses in scenery where they plant some vegetables, enjoy nature and live simple life being close to nature. June 12 is Russia's newest holiday, Independence Day, which commemorate the adoption in 1991 of the Declaration of Sovereignty of the Russian alliance.

Russian winter festival December 25 to January 5 is the time of the year for the Russian Winter Festival. Events are held to celebrate the coming new year,especially in Moscow, St Petersburg, Novgorod, Vladimir and Suzdal, where troika rides, along with other traditional Russian folk customs, take place. Because the Soviet Union

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ceased to exist on December 21, 1991, Christmas week now offers another reason to have fun a new beginning.

Christmas: The Christmas' Eve night lasts from 6 to 7 January. Usually on the Christmas' Eve people have a fast from morning till late evening or until the first star will appear. The mummers go from house to house during Christmas; they sing Christmas carols and are treated. Dens are in every family. People make it themselves. The sett is a two-circle small box and there play scenes with wooden figures. The main scene is the Birth of Our Saviour.

Analysis of the Russian Tea Market:

Russia has a long history of tea drinking because of its nearness to China and Central Asia. Russia is the largest market for tea in the world, both in terms of all tea variety, as well as for just black tea. In 2007 in terms of retail value the Russian market was worth $3,266 million and in terms of retail volume it was 161.44 million kg.17 The year-on-year growth rate of the Russian tea market, for the period 2006- 07 in terms of retail value was 12% and in terms of retail volume was 2.3%.18 The Russian market also has one of the highest per capita use rates for tea. In 2007, per capita consumption of tea in Russia was 1.3 kg compared to the average global per capita use of tea, which was 0.3 kg in the same year.19 Retail prices for tea in Russia are relatively high and growing. In 2007, the average retail price for tea in Russia was $20.2 per kg, compared to the average global retail price of $13.2 per kg in the same year.

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Growth potential in Russian market:

If one recollect, prior to the collapse of Soviet Union, India was the leading tea exporter to that country. However post 2000 the share of Indian tea decline to 30000 tn in 2006 from 113,000 tn and this was to the advantage of countries like Sri lanka, Kenya, Vietnam, China and Indonesia. Traditionally the Russian consumer had acquired a taste for Indian tea and always preferred it over brands from other Asian countries. However India lost the market due to poor quality of tea supplies compared to its Asian counterparts. Earlier India lost its share of market to other countries because it imported low quality CTC teas when the purchasing power in Russia tumble due to collapse of the entire economy in 1990s. India now aims to improve its tea image in the mind of Russian consumer by marketing new varieties of tea which is something special for the Russians. The Indians are intent on a paradigm shift to quality based trade from the earlier quantity based approach. It has plans to promote Assam, Darjeeling and Nilgiri tea brands. As when exports to Russia commence we see prices of premium quality tea firming up, which may result into better times ahead for growers of premium quality tea. Recently a Russian allocation comprise of the Association of Russian Tea and Coffee companies and members of Indian Tea Board have signed a MOU for taking appropriate steps to promote export of Indian Tea into Russian market.

The intervention of politics in the tea trade:

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As was shown by the Boston Tea Party, tea makes a good pawn in international affairs and the politicisation of tea is further compounded by the prevalence of consumption by the South, unlike with coffee or cocoa. To take one example, the disagreement between Pakistan and India over Kashmir weakens the South Asian friendship for Regional collaboration (SAARC), which would otherwise have the most potential for influence the tea trade as it includes both Sri Lanka and India, which together market most of the world’s quality value-added tea. Pakistan and India are currently in a quid pro quo arrangement whereby Pakistan will buy Indian tea if India buys Pakistan’s cotton.

Domestic politics also plays an important part in tea manufacture. The activities of the Tamil Tigers in the tea-growing regions of Sri Lanka have been describe as the greatest cost to the Sri Lankan tea industry; while in India over 450 armed separatist extremist organizations disturb the in service environment.

The organization with authority over tea as an export commodity is the World Trade Organization, which would ultimately have authority in mediating any dispute. For example, the WTO has been pressuring the EU to abolish tea tariff ‘preference’ to Kenya, which bestows a major price advantage to that nation.21 The WTO, however, has traditionally kept out of regulating commodities markets, including tea, except in tariff issues.

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The Tea Working Group of the Food and farming Organization (FAO) of the UN, therefore, is more relevant as the international body for the tea industry. On a regional level, organizations gaining in status and legal clout include SAARC in South Asia and the Common Market for East and South Africa (COMESA) in Africa.

Tarrif:

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Productions:

The top five players in the Russian tea market, namely Orimi Trade, Ahmad Tea Fabric, Unilever SNG, Mai Kompanya and Akbar Bros Ltd, contributed to more than 50% of the total sales in 2007. In Table 3 on the next page are the names of the major players in the Russian tea market and their own market shares.

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Forecast of Tea Volumes by Sub-Sectors for the Period 2007 to 2012:

Due to the rising affluence and growing health and wellness trend, there is a growing demand for specialty premium teas such as green tea, herbal/fruit tea, and other tea In Russia, as reflected in the forecasted values below.

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COMPETITIVE ANALYSIS:

RUSSIAN TEA IMPORT STORIES:

History of Tea Import in Russia:

• Tea in Russia was introduced in 1638: When a Mongolian ruler donated to Tsar Michael I four pod (65–70 kg) of tea.

• In 1679, treaty between Russia and china: Russia concluded a treaty on regular tea supplies from China via camel caravan in exchange for furs, the difficult trade route made the cost of tea extremely high, so that the beverage became available only to royalty and the very wealthy of Russia.

• In 1689, the creation of THE TEA ROAD- The Treaty of Nerchinsk was signed that formalized Russia's control over Siberia, and also marked that traders used between Russia and China.

• In 1735, The Russian Empress extends tea as a regulated trade: In order to fill Russia’s tea demand, traders and three hundred camels travel 11,000 miles to and from China, which takes sixteen months. Russian tea- drinking customs appear which entail using tea concentrate, adding hot water, topping it with a lemon, and drinking it through a lump of sugar held between the teeth.

• In 1736, maximum import of tea by Russia to fulfil domestic demand:

Russia was importing more than 3 million pounds by camel procession in the form of loose tea and tea bricks, enough tea to considerably lower the price so that middle and lower class Russians could afford the beverage.

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• Kiakhta tea and tea caravans: The peak year for the Kiakhta tea trade was in 1824, and the peak year for the tea caravans was 1860, From 1860, they started to decline due to Faster train service allowed for tea to be imported from nearly a year and a half to eventually just over a week. By 1925 caravan as the sole means of transport for tea had ended.

Current market trend of Tea Import in Russia:

• Main trends in Tea Sector in Russian market in 2010–2011 In 2010 and 2011 was marked by a strong unpredictability in prices, which nevertheless continued their upward trend. In 2011, Kenya and Sri Lanka registered a record crop while there were declines in India. • New consumption parameters In Russia, most consumers especially for tea are concerned about a number of issues: The use of pesticides on tea plantations, the more general environmental impact of the plantations, food safety, and the welfare of growers. The supply chain must remain attentive and attempt to solve all these problems, to ensure that they do not start to slow down the increasing popularity of the product. • Health and fashion Consumers in Russia are increasingly looking for good-quality and specialty teas. Health issues play an increasing role in determining consumers’ choices of food products. Excellent marketing has allowed green tea, largely from Asia, to benefit from this trend. Fashionable teas are also increasing – for example, iced teas, flavored teas, white, green and other teas, hot and cold. Producer countries should diversify their product range and develop brands which will increase their market

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visibility, and support marketing campaigns and the fight against fake imitations. • Tea-producing countries themselves The tea-producing countries themselves can be considered developing markets. They currently drink only one-tenth of the quantity consumed by the traditional tea-importing countries, leaving considerable potential for growth. The development of these markets would also bring pressure to bear on the value chain and increase the amount of added value retained by the tea-producing ACP countries. • Environment and sustainability The market for fair-trade certified tea and ethically sourced tea should grow, and a new market is opening for ethically sourced tea. The production of tea from sustainable sources marketed principally under the Fair-trade label generally achieves a higher price than the standard product with fair-trade and organic certification increasingly found side by side. • Emerging markets A positive sign is that with demand from consumers rising, tea exports are likely to increase as China and India are trying to increase local consumption of tea, their exportable surplus is reducing. The two countries are likely to consume a growing percentage of the world's tea over the coming decades, leaving more space on global markets for other exporters. Kenya's tea exports to China, India, Russia, and United Arab Emirates have increased. Increasing purchasing power in emerging nations is stimulating their consumption of tea.

Russia the world's leading importer of tea, is consuming more specialty teas and more expensive teas. Import duty, which currently stands at 0% for raw tea and 15–20% for processed tea, will be revised downwards if Russia joins the World

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Trade Organization (WTO), probably at the end of this year. Russia would certainly like to increase domestic output. Import policies highlights:

Russia have less or removed import duty but it continues to maintain a number of import restrictions like charges and fees that exceed the cost of the service, licensing, registration, and certification regimes that are burdensome. Minimum value addition under advance authorization scheme for export of tea has been reduced from the existing 100% to 50% DTA (Domestic Tariff Area) sale limit of instant tea by EOU(export oriyentel unit) units has been increased from the existing 30% to 50%.

In 2007 the Government decreased to 0% duties on agricultural products, which do not grow in Russia. At present import duties on processed tea in primary packing not exceeding 3 kg are highlike 15% to 20%. Import of other tea green and black is duty-free.

When importing agricultural and food production equipment to Russia, there are several ways to document such transactions, each having different tax consequences. Generally, tax planning is connected with VAT. The transaction chain has to be properly created under the optimal scheme; otherwise the supplier will probably need to pay 18% VAT to Russian state budget. Russia enacted a new trade law as of February 1, 2010 (the “Trade Law”) which establishes new rules for sale of food products, and sets forth restrictions on various practices of retailers. The Trade Law establishes new rules for distributorship agreements for all types of products, including food products, establishes deadlines, and bans discrimination against parties involved in business activity. With regard to food products, the Trade Law limits the amount of bonuses payable by the supplier to the distributor

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for a volume of food products that is purchased. Such bonuses are not to exceed 10% of the price of food products. A distributor may not deduct more than this amount as a cost of sold goods.

Major exporting countries’ competition:

Since, the demand of russia is second largest after U.S. in world therefore Russia is dominant on other major producer countries like China, Kenya , Sri Lanka and India. All the major competitors are having remarkable increase in production and croping of tea, but India has slopped down it’s market share globally as well as in Russia Tea Market.

To regain these position of India some strategic decessions must be taken. For this purpose we first need to analyze competitiors position in global as well as in Russian Market. To cope up with competiton we have shown some general information about all the major competitors and their existing strengths and weaknesses with upcoming oppurtunities and threats in global as well as in Russia.

Rank Country Agriculture area Production (in HA in ‘000 Tones) (2009) 1 China 524321 1375780 2 India 179963 972700 3 Kenya 27350 314100 4 Sri Lanka 2610 290000 5 Turkey 38911 198601 6 Vietnam 10272 185700 7 Iran (Islamic Republic of) 48515 165717 8 Indonesia 53600 146440 9 Japan 4609 86000 10 Argentina 140500 71715

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(Source: Faostat.Org)

(Source: Faostat.Org)

As shown in graph China, India, Kenya, Sri Lanka and Turkey are five major global players in tea market production. But here we are focusing on to capture Russian Tea Market. For the purpose to export tea to Russia, ranks are different for different countries. So here some general information about major players exporting to countries to Russia.

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1st Sri Lanka

Sri Lanka is having 4th rank in all over the world tea production. Sri Lanka has 26100000 hectares of agricultural land and with very much popular in its premium quality of Black tea . Approximately 39% of its labor force serves the agricultural sector. About 6.84% of the total tea of the world is produced by Sri Lanka and more over in 2009 Sri Lanka produced 290000 tonnes of tea. Further more in 2009 Sri lanka had exported 54257 tonnes tea to russia with 1st rank in exporting to Russia.

2nd India

India is one of the growing and leading countries in most of the aspects like production and export of tea globally. India ranks number one in most of the cultivating crops but we are here to know about tea produced by India. You will be overwhelmed to know this that 22.93% of total tea of the world are produced by India. This is not the least in 2009 India has produced 972700 tonnes of tea. India is having 179963000 hectares of agriculture land. Where in exporting to Russia India had exported 45788 tonnes to Russia with second rank in 2009.

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3rd Vietnam

The total agricultural area of Vietnam is round about 10272000 hectares . The reason why Vietnam is on our list is because the total amount of tea produced by Vietnam in 2009 was 185700 tonnes and 4.38% of total tea produced in 2009. In 2009 Vietnam was on 6th rank to produce tea in world. In export transaction, Vietnam was on 3rd rank with 20099 tonnes of exported to Russia.

4th China

China is one of the rising nations now days and has a huge name in the open market in most of the things including electronics, crockery, as well as agricultural sector too. You will be find out that 32.43% of the total tea produced throughout the globe is produced by china. While on the other hand 15% of the total land of china is cultivating land. The total amount of tea produced by china in 2009 was 1375780 tonnes and that is why it ranks number one in our list of maximum tea producing countries but in exporting to Russia, china lied at 4th rank with 18614 tonnes exported to Russia.

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5th Indonesia

Indonesia is very much popular in agricultural sector in many aspects because of its production of coffee, tea, and cocoa. In this list Indonesia ranks number 8th in the production of Tea because Indonesia had produced 146440 tonnes of tea in 2009 with 53600000 hectares of agriculture land. Exporting to Russia, Indonesia came on 5th rank with 18462 tonnes of tea in 2009.

6th Kenya

Kenya is one of the major leading countries in it because about 7.40% of the total tea of the world in 2009 was produced by Kenya. Kenya has 27350000 hectares agriculture land and more over Kenya has produced 314100 tonnes of tea in 2009 with 3rd world ranking. But in exporting kenya came to 6th rank with 15033 tonnes exported to Russia in 2009.

All major contries had contributed significantly in Russian tea market. To explore some competitive advantage and to maximize core competancies we have analyzed future trend in Russian Tea Market. With the help of past, present and future estimated data here all the countries are given ranking to understand which country will dominant to Russia or all over the world.

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Comparison Table: Country Sri Lanka India Vietnam China Indonesia Kenya Production (Tones) 290000 972700 185700 1375780 146440 314100 Rank in WORLD by 4th 2nd 6th 1st 8th 3rd Production Agriculture area 2610 179963 10272 524321 53600 27350 (‘000) Rank Area wise 6th 2nd 5th 1st 3rd 4th Export to Russia 54257 45788 20099 18614 18462 15033 (2009) Rank export wise 1st 2nd 3rd 4th 5th 6th (2009) Export to Russia 78520 14074 22587 22173 22088 23239 (2012) Estimated Rank export wise 1st 6th 3rd 4th 5th 2nd (2012) Export to Russia 85083 -2033 28101 25655 25494 28753 (2015) Estimated Rank export wise 1st 6th 3rd 4th 5th 2nd (2015) Export to Russia 96022 -28880 37292 31458 31171 37943 (2020) Estimated Rank export wise 1st 6th 3rd 4th 5th 2nd (2020) (Estimation contain of data from 2000 to 2009. Which are base to find future trend of Russian Market.All data collected from faostat.fao.org)

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Major Tea Exporters to Russia: (Year:2010) Country % share Volume (in tones) Sri Lanka 29% 52664.87 India 25% 45400.74 China 11% 19976.33 Vietnam 11% 19976.33 Kenya 8% 14528.24 Indonesia 7% 12712.21 Other Countries 9% 16344.27 TOTAL 100% 181603 (Source:en.id-marketing.ru/articles/market-of-tea)

SWOT analysis for major players: Sri-Lankan tea industry:

Strength:

• Sri-Lanka holds a dominant position as a leading exporter of black tea and has a strong presence in major markets such as the Russian Republic and CIS countries, Jordan, Egypt and U.A.E.

• It has a reasonable diversified product line, producing both orthodox and CTC tea. It has recently developed a type of Ortho CTC- tea with some of the more desirable features of both forms.

• It has made some progress in production and exports of different forms of valve added tea such as decaffeinated tea, instant tea, and flavoured tea. Many of the private players have targeted the healthy food segment of the world with their

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organically grown tea and are trying to establish direct sales linkage with overseas end distributors.

• The Sri-Lankan tea industry is operating in a diversifies geographical market which gives it strength to sustain future demand fluctuation.

• Quality control within the industry is good.

• Sri Lanka’s image is strong in international tea market.

Weakness:

• The total area under tea in Sri-Lanka is shrinking without much improvement in productivity, in contrast with Kenya were both land area under tea and productivity is on the rise.

• The facilities for the production of the tea have become absolute. The growing stock is old and has lost productivity. Factory modernization is slow and there is an imbalance in production rate in Orthodox and CTC teas. The country has been slow in exploiting the potential of the tea bag market by falling behind the CTC production. In the instant tea market also, despite its earlier lead, Sri- Lanka has fallen behind India and Kenya.

• Its productivity is very low compared to other international producers.

• The availability of quality worker is on the decline.

• The export distribution network for the tea is weak. Most of the Tea is still channelled through commodity auction.

• Technical and management skills are lacking.

• The sector is financially weak.

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• Unit cost is high, relative to key competitors.

• The coordination of production and marketing is weak and international marketing skills are below what is required for a market leader.

• The rate for product innovation is low.

Opportunities:

• World demand for black tea is expected to grow at the rate of 3.2% per year. A substantial part of this demand is likely to come from developing countries. Particularly in the Middle East and from CIS countries which have a preference for orthodox tea. The CIS countries are also likely to continue to be strong buyers of high quality tea as there are indications that the market there has started to recover from its earlier economic problem.

• The demand for tea in the west is likely to become very selective for speciality tea such as instant tea, organically grown tea, and flavoured tea. Sri Lanka has a strong potential for exploiting this premium price segment.

• The future consumption potential in other key market is high.

• The price trends in the major markets like the CIS and U.A.E are strong.

• The world market for beverages is fast becoming segmented due to changing life style and consumption preferences, as well as intensive market promotion by beverage manufacturers. Sri Lanka is placed better than its competitors to take advantage of this segmentation.

• Sri Lanka produces a wide array of tea, from high quality light tea to strong dark tea. It can exploit its ability to expand its product line and diversify into the related products.

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• There is a good potential for Sri-Lanka to achieve forward integration of its market by establishing direct linkage with overseas buyers and consumers. The private tea companies in the country are already exporting branded tea and packaging is developing.

• Deregulation and recent government actions is freeing up the production marketing system extend good opportunities to the private sector to install new production processes that enable cost efficiency and foster increased price competition.

• The favourable exchange rate regime holds good potential for future price competitiveness.

Threats:

• All most all countries competing with Sri-Lanka have higher productivity and productivity growth rate.

• Kenya has overtaken Sri-Lanka as the larger exporter of tea.

• The pace of technology development and product innovation is low.

• Government’s control over labour market still threatens to destabilize the industry.

• Sri-Lanka’s lack of CTC production capacity is likely to make it lose some extremely lucrative market like Pakistan, which is slated to become the leading importer of black tea by the year 2005.

• Changing demography and buyers need and taste are likely to replace the demand for traditional bulk tea with differentiated tea in the world market.

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• Stagnant infrastructure development may decrease the industry’s ability to compete internationally.

China tea industry:

Strengths:

The strengths of a business or organization are positive elements, something they do well and are under their control. The strengths of a company or group and value to it, and can be what gives it the edge in some areas over the competitors. The following section will outline main strengths of china tea industry,

• Being a market leader, as is key to their success as it boosts reputation, profit and market share.

• Competitive pricing is a vital element of china tea industry’s overall success, as this keeps them in line with their rivals, if not above them.

• Keeping costs lower than their competitors and keeping the cost advantages helps pass on some of the benefits to consumers.

• China has an extensive customer base, which is a major strength regarding sales and profit.

• Being financially strong helps deal with any problems, ride any dip in profits and out perform their rivals.

• China has a high percentage of the market share, meaning it is ahead of many competitors except Sri Lanka and India.

Weaknesses:

Weaknesses of a company or organization or industry are things that need to be improved or perform better, which are under their control. Weaknesses are also things that place you behind competitors, or stop you being able to meet objectives. This section will present main weaknesses of china tea industry.

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• China tea industry’s lack of innovation limits its success, as there is no forward thinking.

• Online presence is vital for success these days, and lack of one is a limitation.

• China tea industry’s limited product line is a major weakness.

Opportunities:

Opportunities are external changes, trends or needs that could enhance the business or organization’s strategic position, or which could be of a benefit to them. This section will outline opportunities that is currently facing.

• China tea industry is in good financial position, which is an opportunity for them to explore in terms of investment in new projects.

• China tea industry has the opportunity to enter a niche market, gain leading position and therefore boost financial performance.

• Grasping the opportunity to expand the customer base is something can aim for, either geographically or through new products.

• Expanding the product lines by could help them raise sales and increase their product portfolio.

• China tea industry has a number of highly skilled staff, which is an opportunity for them to explore as expertise of their staff can help to bring the business forward.

Threats:

Threats are factors which may restrict damage or put areas of the business or organization at risk. They are factors which are outside of the company's control. Being aware of the threats and being able to prepare for them makes this section valuable when considering contingency plans and strategies. This section will outline main threats is currently facing.

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• Consumer lifestyle changes could lead to less of a demand for products.

• Changes in the way consumers shop and spend and other changing consumer patterns could be a threat to china tea industry’s performance.

• Price wars between competitors, price cuts and so on could damage profits for china tea industry.

• A slow economy or financial slowdown could have a major impact on business and profits.

• Could be threatened by the growing power customers have to set the price of their products.

Kenya tea industry:

Strengths:

The strengths of a business or organization are positive elements, something they do well and are under their control. The strengths of a company or group and value to it, and can be what gives it the edge in some areas over the competitors. The following section will outline main strengths of Kenya tea industry,

• Competitive pricing is a vital element of Kenya tea industry’s overall success, as this keeps them in line with their rivals, if not above them.

• Keeping costs lower than their competitors and keeping the cost advantages helps pass on some of the benefits to consumers.

• High quality products are a vital strength, helping to ensure customers return to Kenya tea industry.

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• Kenya tea industry’s position in the market is high and strong – a major strength in this industry as they are ahead of many rivals.

Weaknesses:

Weaknesses of a company or organization are things that need to be improved or perform better, which are under their control. Weaknesses are also things that place you behind competitors, or stop you being able to meet objectives. This section will present main weaknesses are

• The lack of business alliances is a major weakness for Kenya tea industry, as they will struggle to get deals, favours and partnerships.

• Kenya tea industry’s lack of innovation limits its success, as there is no forward thinking.

• Kenya tea industry’s limited product line is a major weakness.

Opportunities:

Opportunities are external changes, trends or needs that could enhance the business or organization’s strategic position, or which could be of a benefit to them. This section will outline opportunities that is currently facing.

• Low labour cost and strong man power can stimulate the industry.

• Grasping the opportunity to expand the customer base is something can aim for, either geographically or through new products.

Threats:

Threats are factors which may restrict damage or put areas of the business or organisation at risk. They are factors which are outside of the

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company's control. Being aware of the threats and being able to prepare for them makes this section valuable when considering contingency plans and strategies. This section will outline main threats is currently facing.

• Consumer lifestyle changes could lead to less of a demand for products.

• Tax increases placing additional financial burdens on could be a threat.

• Not keeping up with changes in technology could be harmful to the future of as they could slip behind their rivals.0

• Slow growth and decline of the market is a threat to Kenya tea industry.

• Price wars between competitors, price cuts and so on could damage profits for Kenya tea industry.

According to the recent article of Business Standard:

The total turnover of the tea industry in India is likely to touch Rs 33,000 crore by 2015 from the current level of about Rs 19,500 crore, as per a study titled ‘Indian Tea Industry’, released by industry body ASSOCHAM. With nearly six lakh hectares area under tea cultivation, the domestic tea industry is growing at a compound annual growth rate (CAGR) of about 15 per cent, stated the study.

“India is world’s largest consumer, second largest producer and fourth largest exporter of tea after China and accounts for nearly 30 per cent of global output and nearly 25 per cent of tea produced worldwide is consumed in India ,” said DS Rawat, secretary general of ASSOCHAM while releasing the findings of the study. “Branded market accounts for nearly 55 per cent of the total market and is growing at about 20 per cent while the unbranded market is growing at 10 per

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cent annually,” said Mr. Rawat.

Nearly 35 lakh workers are employed in over 1,500 tea estates across India and about 65 per cent of these are employed indirectly. According to an ASSOCHAM estimate, the tea production during the current year is likely to stay over 950 million kg as against 966.4 million kg in 2010.

“Awareness about health benefits associated with moderate intake of tea is another significant factor behind this rise in its demand as now more and more people are familiar with healing properties of tea,” said Mr. Rawat. Historically regarded as a hot beverage, the penetration of tea in the non-alcoholic cold beverage segment is another driving force for this industry owing to the rising similarity towards ice-tea which currently accounts for over five per cent of entire non-alcoholic beverage market in India, found the study. “There is not much product differentiation at rural and urban levels and thus key industry players are coming out with value added products but with rapidly changing market scenario and technological advancement in agri-business, there is tremendous scope and potential for growth and development of domestic tea industry,” the study found. The Indian tea industry is presently facing tough competition from China, Sri Lanka, United Kingdom, Kenya and Japan. Hindustan Unilever is the current market leader in terms of sales value with over 20 per cent market share; while Tata Tea is the leader in terms of sales volume with nearly 20 per cent market share.

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Porter analysis of global tea industry:

Threat of

new entrant

Competitive Bargaining intensity among power of the competitors buyer

Threat of Bargaining substitute power of product suppliers

Threat of new entrant:

New entrant in an industry creates additional capacity and come with an urge to gain market share and consume franchise. In the process, prices are pushed down and margin is reduced, resulting in reduced profitability in the long run.

In the global tea industry, large scale entry, of the African producer in the 70s, added capacity which led to the excesses being witnessed in the industry today. Some of the producing countries may not have the competitive advantage for producing tea and may actually be pushing industry towards prolong decline.

The major entry barriers are:

• Product differentiation

• Economy of scale

• Governmental polices

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• Major players in the market.

Bargaining power of the buyer:

The ultimate aim of the buyers is to lower the price as far as transferring the profit from the producer to themselves to maximum extent possible.

In the tea market the bargaining power has been important because of the focus of the few large buyers in the auction system where prices could be easily be fixed by collusive action. There is high degree of agreement in the later stages in the tea processing and marketing, the producer have no mean of breaking out of the system without an extremely heavy instrument. The almost undifferentiated or standardized nature of products sold through the auction system has contributed to the bargaining power of buyers.

Bargaining power of suppliers:

If the supplier of the product has enough power over the distribution system, they can control the price and profitability. This usually happens when the suppliers are large, relatively few in numbers, or are in some kind of agreement to limit supply to the market, of the products are of high demand or involve high switching cost.

Tea has been at the disadvantage in all this aspects. The industry worldwide is characterized by an agglomeration of small producer- all trying to increase their output with their expectation of enhancing revenue regardless of the effect on price.

In countries like Sri Lanka and India, substantially investment has already been made in the sector and to support significant employment. It is therefore simple to understand why there are such easy price takers. Also, tea is not the

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product of high switching cost and consumer can easily switch to alternative beverage.

Threat of substitute product:

Producer in the industry constantly compete with firms in other industries producing the same products. Substitute products can be identified by looking at the primary demand at product class level, such as drinking market such as soft drinks may be substitute for tea.

The major substitute products for tea are soft drink, fruit juice, coffee and alcohol. Intra-industry rivalry between these products differs from market to market. In terms of per capita consumption, however there has been a very little change for coffee, tea and alcohol but soft drink consumption have been gone up significantly.

World trade in fruit juice has exceeded five billion US dollars per year and the growth is expected to continue for some time. However all the import of fruit juice can take place in 5 countries of the world, including U.S, Germany, U.K, Nether land and France. All of these are important tea consuming countries also. The growing trend of fruit juice consumption is probably due to growing health consciousness in the developing countries. This industry has been ahead of new product development, such as new flavour and blend juices. Convient packaging and aggressive have helped increase consumer preference for this type of drink.

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Competitive intensity among competitors:

The main reason for the intense competition in the global tea industry has been:

• Competitors are numerous, and many of they are roughly are equal in size and power, such as Sri Lanka and Kenya, India and china, and Malaysia and Thailand.

• Market growth has been low, and share gain at the expense of the competitors has been the only avenue for growth.

• Products have been essentially undifferentiated.

• The cost buyer switching from one supplier to another has been low because of the dominance of the auction system; producers have not developed ways and means to tie theirs consumers into long term relationships.

• The perish ability of the product as created the need to cut the price for clearing the stocks.

• Producer remains in the market in spite of low profits because of sunk investments and the lack of other opportunities.

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Chapter 7 Findings

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Findings: Indian tea exports decline: Russians have begun to take a fancy to tea from Sri Lanka and China instead of India. Of late, India has been losing ground in the global markets, creating a flutter in the Indian tea industry. The fall in exports growth directly reflects on exports to Russia, as it is the largest importer of India tea in the world. This hit the bottom lines of the tea exporting community in India because Russia accounts for more than 50 per cent of total tea exports from the India. Russia becomes vital to the Indian tea industry because of the sheer quantity involved. A fall in exports to this market has snowballing effect on the entire Indian economy.

Tea exporters in Siliguri expect a decline in exports due to the falling demand for Indian tea in the world market, which is facing tough competition from Sri Lanka and Kenya.

The tea gardens of Darjeeling, Terai, Dooars including Assam are well- known to produce the world's best blend of tea and contribute 75 percent of India's total tea production every year.

Tea exporters said that entry of the other countries in the foreign market and the ongoing payment problems have led to the decline in the exports.

"We purchase tea from Middle East and Russia for our export. This year, there has been a decline in exports as our competitors like China, Kenya and Sri Lanka have gone ahead of us. Earlier, we were number one in exports, now we have fallen to fourth position," said Vice President of Federation of All India Tea Traders Association (FAITTA), Kamal Kumar Tiwari.

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Tiwari added that apart from the slowdown in exports, weather also played havoc this season.

"Unfavourable weather conditions are another reason for the decline in the tea exports. The fluctuating weather would also affect the production of tea," added Tiwari.

India faces firm competition from Sri Lanka and Indonesia in the traditional tea market, and in green tea from China, while Kenya and other African countries vie for the CTC export market.

Reasons for poor performance of Indian Tea sector:

As quality is becoming the deciding factor, India will have to produce quality teas if it wants to continue its hold in the international market.

Many factors have been cited as causing the crisis in the Indian tea sector– since the late 1990’s. The striking fall in prices is one of the most significant causes of the crisis. The worst affected are plantation workers and small growers; many estates failed to withstand the descending slide of price and hence moved out of business leading to the closure of tea estates that employ thousands of workers and of factories (BLF) to which small growers might sell their products. Tea prices in India are being driven down by many factors:

a) Decline in demand for Indian tea in the global market

b) Defects in auction system

c) Poor price realization

d) Defective market structure

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e) Increase in cost of production

a) Decline in demand for Indian tea in the global market:

(Source: Annual Bulletin of Statistics 2006, ITC, London)

Year World export of tea Export from India’s share as India percentage of world (in Million kg) export (in %)

1961 554 206 37.18 1971 667 202 30.28 1981 818 241 29.46 1991 1079 212 19.65 2001 1394 183 16.82 2005 1567.20 199.05 12.70 2006 1588.79 218.73 13.77 2007 1587.20 178.75 11.26 The decade of 90’s has been quite depressing for the Tea Industry in India .The major cause of depression in the industry was the decline in the international demand of Indian tea. The traditional markets of Indian tea like USSR and UK have drastically reduced the import of tea from India. Changed global situations like disintegration of USSR, WTO agreement, globalization of markets across the nations, etc. have proved to be adverse to India. In the year 2004, India lost its eminent position of the largest producer of tea to China. Kenya has already taken over Sri Lanka in export pushing India to third position. There is a fierce competition abroad. Indian tea has lost its competitive advantage to other countries on account of high cost and poor quality. While tea production of India grew by about 250 percent since 1947 (1947 production-255mkg and 2007 production-950mkg) but the rate of growth of export remained trivial. It appears

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that, India grow tea mainly for Indians. However, the exports of all other foremost tea exporting countries have grown rapidly over the same period. The fact remains that whatever the size of the domestic demand (per capita consumption was 200grams in 1950, has increased to nearly 700grams in 2007), there is still sizeable surplus amounting between 180 and 200 million kg that needs to be sold.

(b) Defects in auction system:

India’s tea market is facing yet another paradox which could be explained in terms of glaring gulf between the price charged by dealers and retailers. A 2005 report for the International Labour Organization (ILO) notes that the large tea companies are benefiting from fall in auction prices and rise in retail prices for tea. “This widening gap between consumer and auction prices……is cutting into the margins realized by the tea producers but is not being passed on to the consumer in the form of lowered tea prices”. Similarly a report by the Government of Assam published in 2004, found it “unfathomable that the retail price of tea has not come down with the fall of auction price. Certainly, the margins of intermediaries are far too high. Price paid to plantation and small tea growers has fallen since 1998; retail prices for tea have increased.

In India, nearly 55 percent of total tea produce is sold through auction houses, with the rest sold through private sales. Even after the abolition of compulsory auction in 2001, the auction houses are very important constituent of tea marketing structure. The important feature of tea auction sale is that the producers/growers do not take part in the selling process directly. The brokers in the market (few in number who are registered brokers in specific auction center) sell tea on behalf of producers. Brokers generally do not accept proposition from unknown buyers.

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Many industry insiders also believe that the large buyers have co- operated on the auction floor to keep tea price low. An independent report commissioned by the Indian Government in 2002 also suggested a merging of interest between broker and buyers, as well as co-operation between buyers at auction houses, both of which prevented tea growers from fetching a fair price at auction.

The large buying companies use their market power (as they have their own network of sales and marketing all over the country and export tea after blending) to push down price and take the advantage of depressed market to pay low prices; they are clearly benefiting from the current situation. Hindustan Lever, Tata Tea, Williamson Magor, etc. are such powerful buyers having enormous influence on the market and price of tea in India in general and Assam tea in particular. These big tea companies which are in monopolistic competition in consuming countries always try to stabilize prices.

The longer transaction time and higher transaction cost (like warehousing charges, transportation cost, brokerage charges etc.) are some other problems with the auction system. It takes about 35 days for the entire transaction processes to complete.

(c) Poor Price realizations:

The price of tea has been on long term decline while production costs have been increased, putting pressure on tea growers and working condition of labourers. The decline in prices has been first and foremost due to growth in production in the face of lethargic demand. Low prices for tea are generally passed on to the plantation workers in the form of low wages and removal of basic facilities like food, health, education, etc. given that it is easier to cut cost by

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reducing labour cost (as the labour has weak bargaining power) than raising the price of tea (difficult in the competitive market economy) and in most of the cases producers have to remain competitive by lowering wages.

Major causes of poor price realization are due to following reason:

• Competition between producing countries for a share of the world market was one of the major causes of falling price of Indian tea. World production of tea is fairly diversified and not concentrated in a particular area. Presently 36 countries of the world produce tea and many of them are big producers. They prevent the organization of a monopolistic leader in the world tea market to ultimately allow fair and free competition in the market. • Demand for tea is rising very slowly (1.5-2 per cent), therefore the only way to increase market share of export by a country is at the expense of the competitors. • Because of the supremacy of auction system as a day–to–day intermediary between producers and buyers, the actual producers have been incapable to maintain direct contact with the ultimate customer of tea and thereby creating a long term relationship. • Tea is a perishable product. Its quality and flavor deteriorates very quickly. Therefore it is frequently necessary to cut prices to clear stocks. • Tea producers have to stay in market despite cut in prices of their produces as they have invested a huge sum of money; many people are dependent on it and lack of alternatives for them. • It is forecasted that tea production will increase over next few years, despite a slower growth in demand, a trend that can only undermine price of tea in the long run. The present decline in prices was on the back of a

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0.6 percent annual augment in production during 1984–2005 is estimated at 2.8 percent. In 2005 alone, surplus of export available over import requirement stands at about 24000 tones, a surplus of 2 percent. • There is a key shift in the consumption and thereby composition of demand for tea in the developed (importing) countries which has had unfavorable affects on collective export earnings from tea. The increasing use of tea bags and soluble instant tea effectively reduces the quantity of tea needed per cup and also raise the demand for plain cheaper tea. The tea bags accounts for 10 percent of the volume of world consumption–and it is still increasing. Factors which help to motivate consumption of instant tea include its ease of use as a cold drink and introduction of vending machines. These changes in the consumption patterns of tea have also considerably contributed to the decline in tea prices.

(d) Defective market structure:

The tea value chain comprises all the stages from green leaf production from the bushes to finished product and sale to the customers. Value is added to the tea leaves at each stages of the supply chain, each with allied cost. This includes the cost of plucking and sorting, factory packing, internal transportation, ware housing, sales changes (auction or direct sale), freight, insurance, interest, blending, packaging and retailers sales cost etc.

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In general most of the agricultural produces, value addition is done at the downstream in the higher processing and retail stages of supply chain–this is also true with tea. While tea is ready to drink item, the downstream stages such as blending, packing and ultimate marketing are the most profitable one. This part of the value chain is controlled by a handful multinational tea packers and brokers. Concentration is extremely high in the downstream of tea supply chain where 90

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percent of western tea trade is controlled by MNC’s, 85 percent of world production is sold by these MNC’s.

MNCs dominate the global tea market:

1. The companies dominate the Tea trade at the global level:

• Unilever (Brooke Bond, Lipton / Unilever Trading Company UTC, UK- The Netherlands) • Van Rees (Trader/ Blender, Supplying many packers, part of Deli Universal Corporation, Netherlands ) • James Finlay (Trader, Producer, Packer, UK) • Tata Tetley / Stansand (Producer, Trader, Packer, UK)

2. Important Tea Packers in the World: • Unilever (Lipton is a very strong brand with a world market share of 10 %) • Tetley (Tata Group) • R. Twinings ( Associated British Foods) • Ajeepay Group (Typhoo tea) • Ostfriesche Tee Gesellschaft OTG: Major German company which also has activities outside Germany

As a result, these MNCs can considerably influence world retail price. These are the indications that big companies have been influential in keeping world market price low, which affect the sustainability of tea industry.

(e) Increase in cost of production:

While market prices for tea have been falling, the cost of production has been on the rise in India, putting descending pressure on profitability and income.

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Cost of production for made Tea in some producing countries:

Producing countries Cost of production (in USD/ kg)

Sri Lanka 1.70

India 1.53

Kenya 1.18

Malawi 0.99

Vietnam 0.85

Indonesia 0.58 (Source: Estimated by SOMO, Tea Statistics ITA, Indian Tea Scenario 2004) One factor which is intimately related to the cost of production is, of course, productivity in terms of volume per hector which is affected by change in climate, soil fertility, age of the tea bush, high over-head cost, poor agricultural practices etc. The stagnation in productivity in many big estates is compounded by high land labour ratio. Productivity declined in India from 1996 to 2005 in the large garden.

Average yield of Tea in different countries:

Countries Area under cultivation Yield per hectare 2000 2001 2002 2000 2001 2002 India 504366 509770 511940 1679 1675 1614 Sri Lanka 188971 188971 188971 1623 1568 1641 Indonesia 157488 160991 162000 999 1001 1025 Kenya 122236 131581 132000 1933 2239 2175 China 1089000 1140700 1155000 627 615 619

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Myanmar 68392 68392 68392 877 877 877 Labour cost accounts for around half of the unit cost of production and approximately 55 to 75 percent of that labour cost is on plucking. High fuel cost, decrepit infrastructure including transportation and unstable law and order situation in and around garden area etc. result in high cost of production. Field and factory workers’ productivity is also considered low in India. The impact of social cost (health, food, housing, water etc.) in the large estates in percentage terms works out to about 5-8 percent of the total costs. It implies an additional Rs.4.12 per kilo for manufactured tea in NE Region of India and Rs. 3.44 per kilo in South India. Therefore it is assumed that around 80 percent of the cost of production goes towards fixed expenses like fuel, power and labour.

Cost of production in Rs per kg of green leaf of small growers:

Components of cost Assam West Tripura Nilgiris Kerala Bengal Inputs- Fertilizers/ Pesticides 1.74 2.12 1.6 1.78 1.26 etc. Wages 3.58 2.87 2.73 2.92 4.54 Direct Expenses 0.15 0.69 0.32 0.11 0.19 Overheads 0.81 0.64 0.42 0.52 0.6 Total cost per kg of green 6.27 6.32 5.07 5.33 6.59 leaf Average price realization 7.41 5.5 4.54 4.87 5.35

Inflationary pressures are now pushing up these fixed costs further. Labour turbulence is another major problem faced by planter/estates. Looking into

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the profitability of the industry at the current price, does not provide the way to meet these costs. Rising costs and low productivity can have negative consequences on social and environmental aspects of production (sustainability problem), if these costs cannot be passed on to the ultimate buyer.

Statistics:

• TEA TRANSACTIONS BY RUSSIA:

YEAR PRODUCTION (+)IMPORTED (-)EXPORT =CONSUMPTION (IN TONES) (IN TONES) (IN TONES) (IN TONES)

2000 1520 158393 2113 157800 2001 1240 154448 907 154781 2002 1290 165313 1766 164837 2003 870 168894 2959 166805 2004 1240 172145 5817 167568 2005 1260 179578 6686 174152 2006 1150 172860 8525 165485 2007 630 181627 10298 171959 2008 820 181859 11464 171215 2009 630 182149 9713 173066 2010 (E) 618 188613 12775 176455 2011 (E) 537 191683 14002 178217 2012 (E) 455 194753 15230 179979 (SOURCE: www.fao.state.org)

It is clear from the above table that import of tea in Russia from different countries is increasing year by year. It means the tea market of Russia is mounting its size. While other side the production of tea in Russia has continuously declined. Also consumption of tea in Russia has increasing so that exporters of tea have great opportunity to capture Russian tea market.

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• Total Tea Import by RUSSIA from CHINA:

Year FROM CHINA (IN TONES) 2000 2896 2001 9581 2002 14017 2003 15758 2004 13191 2005 14940 2006 13805 2007 15945 2008 15939 2009 18614 2010 (E) 19852 2011 (E) 21013 2012(E) 22173 (SOURCE: www.fao.state.org)

Import of tea in Russia from china is increasing year by year. It means the market share of tea from china is increasing its size.

• Total Tea Import by RUSSIA from INDIA:

Year FROM INDIA (IN TONES) 2000 113571 2001 71351 2002 56123 2003 48893 2004 43015 2005 36188 2006 38218 2007 44525 2008 45774 2009 45788 2010 (E) 24813 2011 (E) 19444 2012(E) 14074 (SOURCE: www.fao.state.org)

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Import of tea in Russia from India has declining drift. It means though Russian tea market size is mounting, the market share of tea from India is reducing.

• Total Tea Import by RUSSIA from INDONESIA:

Year FROM INDONESIA (IN TONES) 2000 3824 2001 7492 2002 13086 2003 13692 2004 16923 2005 20355 2006 15089 2007 10874 2008 15925 2009 18462 2010 (E) 19817 2011 (E) 20953 2012(E) 22088 (SOURCE: www.fao.state.org)

It is clear from the above table that import of tea in Russia from Indonesia is increasing year by year. It means the market share of tea from Indonesia is increasing its size.

• Total Tea Import by RUSSIA from KENYA:

Year FROM KENYA (IN TONES) 2000 96 2001 810 2002 5123 2003 7983 2004 9612 2005 13338

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2006 11820 2007 15084 2008 15637 2009 15033 2010 (E) 19563 2011 (E) 21401 2012(E) 23239 (SOURCE: www.fao.state.org)

The above table suggested that import of tea in Russia from Kenya is increasing year by year. It means the market share of tea from Kenya is increasing its size.

• Total Tea Import by RUSSIA from SRI LANKA:

Year FROM SRI LANKA (IN TONES) 2000 27654 2001 54239 2002 64004 2003 69645 2004 71552 2005 70667 2006 72353 2007 71649 2008 65108 2009 54257 2010 (E) 74145 2011 (E) 76333 2012(E) 78520

(SOURCE: www.fao.state.org)

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It is clear from the above table that import of tea in Russia from Sri

Lanka is increasing year by year. It means the market share of tea from Sri Lanka

is increasing its size.

Reasons for decline in exports: • Fall of Soviet Union, main trading partner of India. Tea exports have come down by70 percent from 44 Mn/Kg in 2000 to 12.5 Mn/Kg in 2003. • Quality has always been the biggest consideration in tea exports. Other emerging countries like Sri Lanka and Kenya are scoring high due to modern methods of production and branding. Whereas, India is on continuous slippage in terms of quality and branding. • Concern over quality has resulted in exports of high margins value added tea (Tea Bags and Branded Tea) come down from 45 percent of total tea exports in 1999 to 33 percent in 2003(value terms). In volume terms, came down from86.8Mn/Kg in 1999 to 39.8 Mn/Kg in 2003.

Global tea industry has witnessed a archetype shift with emergence of stronger countries like Sri Lanka and Kenya. These countries captured large shares in global tea exports at the cost of older players like India. In fact, these countries are eating away the finest grade tea export market and value added tea export market on platform of superior quality and belligerent branding. Impact on India is evident from Sri Lanka’s tea exports which increased from 262.9 Mn/Kg in1999 to 298.8Mn / Kg in 2008whereas India’s reduced from 191.7 Mn/Kg to 196 Mn/Kg during the same period.

Sri Lanka and Kenya are able to increase their productivity at constant pace which helped it redirect higher produce in the export markets. Higher exports

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were achieved by these economies as a result of importunate efforts towards quality betterment and brand building. This exercise actually helped economies towards driving high margin value-added tea exports.

It is witnessed, Indian tea is increasingly been displaced by tea of other Asian and African countries. Trend indicates that although land under cultivation in India has increased at CAGR of 1 percent in last 3 years, yield has actually come down from 1679 Kg/Hectare in 206 to 1614Kg/Hectare in 2009. Sri Lanka witnessed a complete reversal to India with yield increasing by 40Kg/Hectare between 2006 and 2009 with no increase in land under cultivation. Even in Kenya yield augmented more than 10 percent or 242 Kg/Hectare in the same time period.

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Chapter 8 Suggestions

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Suggestion:

• Despite being the largest producer and consumer of tea, the Indian plantation sector lacks suitable mapping of production and consumption levels. Due to nonattendance of precise estimates the formulation of long term industry wide action plans have been affected.

• The fact which emerged from the present catastrophe is that the Indian tea has not been globally competitive. It has concentrated more on building up its large estates and has given less attention to dispensation and improving the quality by proper blending and marketing–for higher price comprehension of their products.

• Unlike its key competitors, India does not have any commanding brand to support its promotion drive in the international market. To win back the confidence of lost foreign markets, Accenture (a global consultancy firm) has identified the need to rejuvenate the image of Indian tea in that international market. A vigorous campaign which include Indian tea logos and making Indian brands acceptable in those markets.

• Further, an independent scrutiny agency should be appointed to keep a quality check on the tea that is exported, as the study also recommended that a major thrust should be made to improve quality for the long term sustainability of tea industry of India.

• Study done by the United Nations Food and Agriculture Organization (FAO, 2001) has suggested the need for plummeting the unit cost of production

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through productivity gains, capacity building of small growers, streamlining marketing channels, improving infrastructure, tailoring marketing activities to individual country’s demand, propagating health benefits of tea and promotion of organic tea using the tea mark. This is exactly what the domestic tea companies should do for their long term continued existence.

• enhancement of supply chain management inside the country and global tea marketing network.

• The tea industry in India has a bequest of corporate farming right from the day of British rule. The current situation in the sector has given abundant reason for a reorganize on whether corporate farming can really boost up agriculture. Time has come when tea companies should sell out their large estates to farmers for cultivation, for ensuring more competitiveness and make the industry viable. This will reduce production costs also. In return gigantic companies should enter into contract with tea growers by giving them technical and marketing support and all that is needed for backward and forward linkages. Indian farmers have done wonders by ushering in the green revolution and ensuring food security in this country. They will duplicate the same in the tea sector also.

• As it is observed, retail price of tea have not declined when prices at the local auction centers have fallen so dramatically since 1990’s, noting the larger profit by the packers/retailers who are mostly at the end of the value chain. The issue here is the role played by these companies in their own plantation, implications of direct purchases by them from other growers and their relationship with brokers at the tea auctions, where price exploitation is widely suspected. These

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defects at the auction centers should be investigated and remedial measures like – bringing more lucidity at the auction market; introduction of online auction practices for tea, etc. should be taken which will lead to changes in the structure of tea auctions to limit the manipulation by the big players in the industry.

• International brands like Liptons, Brooke-Bond of HUL and Tetly tea of Tata Tea; etc are the market leaders and have great power in price determination in both domestic and international market. This needs to be stopped and proper investigation is needed to curtail the wrong practices in the tea market by introducing new laws to standardize the price movements.

• Recognizing the fact that the tea industry’s crisis in India has multiple causes, which require a multiplicity of solutions–one of the most important steps from the government part shall be to introduce a stronger competition law to restrain the maltreatment of corporate buying power and endorse social objectives at the garden level. We believe that focusing on the role of the larger tea companies, which hold a great deal of power in Indian tea market can have a significant authority over conditions for workers on plantations and small growers.

• As quality is becoming the deciding factor, India will have to produce quality teas if it wants to continue its hold in the international market.

• Fresh capital inflow is needed right at this moment for the tea industry of India. Investment in new plantations and production machineries must come immediately to compete in the international market. Since tea industry has to compete globally, it is necessary that they should have admittance to global

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capital at competitive rate. This can bring life to the industry and those who live on it, especially workers.

Market Scenario:

Russian Federation with a tea market size of about 172 Million Kg is the largest market for Indian tea exports (in volume terms). Indian tea exports to Russia have declined from 36.47 million Kg in FY 2005-06 to 34.57 Million Kg in FY 2006-07. There has been a nominal value increase from Rs. 268.22 crores in 2005-06 to Rs. 270.67 crores in 2006-07. This enhance in value realization not only reflects the high prices that prevailed in the Indian auctions at which teas were bought for export to Russia but also points to a shift in the buying pattern from the cheaper varieties of South Indian teas to the more pricey North Indian teas.

All the major tea players in the Russian market – Orimi Trade, May Tea Company, Unilever – Russia and Ahmad Tea have introduced Darjeeling teas in the market. Assam orthodox teas are contending well vis –a- vis the Sri Lankan orthodox teas on the quality front and Assam CTC teas are doing equally well as the tea bag segment grows vigorously in this market. Russia has been enjoying unparalleled economic prosperity since the year 2000 driven by their political stability & booming oil, gas and metals sectors. The affluence and high purchasing power of the Russians can be seen in their big cities where the consumers are demanding good quality teas in attractive packets. Indian teas in Russia are losing their market share to teas from Sri Lanka, Indonesia, Vietnam and Kenya, causing concern. In the orthodox teas – premium segment, Indian teas are losing to Sri Lanka on the physical appearance and image front as the average Russian consumer still perceives the Sri Lankan teas to be of better quality than the Indian teas. In the orthodox teas – economy segment, Indian teas both North and South

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Indian have not been able to match the cheaper prices offered by Indonesia and Vietnam, where teas are plucked and processed in a non plantation nature of industry and thus there are not high labour wages and high social overheads, which plantations in India, have to cope up with. In the CTC tea segment (used in tea bags) the share of Indian teas has been nibbled by the growing demand for CTCs from Kenya which are competitively priced and of good quality owing to their lower labor wages and younger tea bushes.

The main reason for the turn down in exports has been t h e pervasiveness of high prices at Indian auction centers for most part of the fiscal and the strong Indian Rupee vis a vis the currencies of other countries. Added to this is the general insight of the Indian exporting fraternity that Russia is still a risky market in terms of lack of transparency and insistence of the Russian companies to give long periods of credit and sometimes furnishing credit guarantees of Russian Bank s that are not acceptable to the Indian banks.

Three pronged strategy for developing Indian tea exports to Russia, the biggest market in this region.

The strategy for further developing the tea market in Russia is three pronged:–

1) As Russian tea market is a relationship oriented market, Tea Board, Moscow has been encouraging the Indian Tea Companies to open Representative Offices in Moscow / St. Petersburg to liaison with the Russian tea companies on a regular basis. 2) As Russia has graduated from a ”command and control” economy to a “market economy” and as the average Russian consumer becomes more affluent and astute and is demanding good quality tea in attractive

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packets, Tea Board is encouraging Indian tea companies to also graduate from being bulk tea exporter to branded tea exporter. 3) As there is a 5% import duty on bulk tea imports to Russia but a 20% import duty on packed tea imports to Russia, the Indian tea companies are being aggravated to set up tea packaging and bagging factories in Russia.

Most of the countries in this region are becoming progressively brand conscious. In the supermarkets and the departmental stores and in the perception of consumers the competition is more among different tea brands rather than in terms of different countries of origin. However, in some countries like Syria, Saudi Arabia, Turkey, etc. origin still matters

The strategy will focus on production enrichment through re-plantation, rejuvenation, pruning and infilling, higher productivity in small tea gardens, capacity expansion of green leaf output by augmenting factories through modernization and new plants,” “The industry will have to go for product diversification and dual manufacturing facilities for Orthodox and CTC (crush, tear and curl) tea, explore value addition and production of instant tea, decaffeinated tea and specialty tea,”

Tea Board should implemented properly three schemes for marketing and promotion of tea.

• Export Incentive Scheme • Transport Subsidy Scheme • Export Promotion Scheme

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Chapter 9 Conclusion

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Conclusion:

In 2007, India was the second largest producer of tea in the world after China. In the same year, the annual tea production in India was 945 million kg. India was also the fourth largest exporter of tea in the world, with export volumes close to 178.75 million kg. The Indian market size for tea in 2007 in terms of retail value was $876.4 million and in terms of retail volume 226.04 million kg. The year-on-year growth rate of the Indian tea market, for the period 2006-07 in terms of retail value was 3.5% and in terms of retail volume was 2.6%. In 2007, per capita consumption of tea in India was 0.7 kg, which is far less than the per capita consumption of tea in Russia, which was 1.3 kg in the same year. The retail prices for tea in India are very low. In 2007, the average retail price for tea in India was $3.9 per kg, which is substantially less compared to the average retail price for tea in Russia ($20.2 per kg) and also to the average global retail price for tea ($13.2 per kg) in the same year.

For the period of 2005 through 2008, supply of tea in the Indian market has exceeded demand. This, collective with the fact that global supply of tea has also exceeded demand, is the reason for the prevailing low prices of tea in India. Below gives the supply and demand statistics for tea in India.

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The below table gives a comparison of the Russian and Indian tea markets.

The below table provides sales prices of several different sales channels:

The following is a breakdown of the profit margins that tea producers can expect by utilizing different sales channels:

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As can be seen from the table above (which is merely a rough estimate), if the Indian tea producer chooses to sell his tea locally at one of the auction houses he can anticipate a profit of $0.37 per kg, if he chooses to export his tea to international markets he can expect a profit of $0.95, and if he chooses to sell it locally to an Indian retailer he can expect a profit of $1.15. It's quite clear from the table that Indian tea producers can make the utmost profit margins by entering the Russian market and selling tea directly either to Russian distributors or to retailers.

The market size for tea in Russia in terms of retail value is $3,266 million and by capturing just 0.5% of this market, Indian tea producers can increase their turnover by more than $30 million and earn substantially higher profits on each new dollar of sales revenue generated. The Russian tea market also provides a prolific ground for sales of premium specialty tea varieties like herbal/fruit tea, flavored tea, green tea and others, which the Indian tea producers can exploit. Therefore in considering the size of the Russian tea market and the strong growth rate that the tea market is experiencing there, we strongly feel that it is the right time for Indian tea producers to enter this market and garner the benefits of this opportunity in collaboration with our firm.Those who currently export tea in Russia should try to increase the volume of their each deal.

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Chapter 10 Bibliography

Revitalizing Indian tea export in Russia

Bibliography

Websites and Links:

• http://www1.american.edu/TED/indiatea.htm • http://beacononline.wordpress.com • www.gmsworldnet.com/.../vision • http://www.financialexpress.com/news/tata-tea-hul-war-brews-in-tea-mkt • www.hindustantimes.com • http://www.indiatea.org/teascenario/teascenario.html • www.teaboard.gov.in • www.wikipedia.com • http://www.thehindubusinessline.com • www.teauction.com/industry/indiantea.asp • timesofindia.indiatimes.com • www.indiainfoline.com/Research/Sectors/Tea • www.capitalmarket.com • www.dnaindia.com • rusembassy.in/index.php?option...id...russian-tea... • en.wikipedia.org/wiki/Russian_tea_culture • www.euromonitor.com/tea-in-russia/report • www.russianteacompany.com/ • www.russiablog.org/2009/.../russian_tea_market_research_statistics. • www.delhibusinessreview.org/v_5n1/v5n1b_word.pdf • www.foodmarket.spb.ru/eng/archive.php?year=2012&article... • www.viator.com/russian-tea-room • www.noblehouse.ru/

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• agritrade.cta.int/Agriculture/.../Tea/Executive-Brief-2011-Tea-sector • www.maketradefair.com/assets/english/TeaMarket.pdf • www.armresearch.in/.../TEA%20-%20Mcleod%20Russel%20&... • articles.economictimes.indiatimes.com • www.pureceylontea.com/Whats%20New/worldfood%20new.pdf • m.financialexpress.com/news/tata-global...us-russian-tea/906842/ • www.russiablog.org/business/ • www.indiainfoline.com/Markets/...to...Russian-Tea.../5389779857 • somo.nl/html/.../Sustainability_Issues_in_the_Tea_Sector_EN.pdf • www.armresearch.in/.../TEA%20-%20Mcleod%20Russel%20&... • www.slideshare.net/.../indian-tea-expansion-into-russian-market • agritrade.iift.ac.in/html/Training/.../Tea.pdf • www.financialexpress.com/news/tea-exports-to-russia.../426152/ • www.eximguru.com/exim/guides/...export/ch_21_export_to_cis.aspx • www.igidr.ac.in/pdf/publication/PP-062-21.pdf • www.sme.in/CurrentNews.aspx?NewsID=1590 • government.ru/eng/ • india.gov.in • www.wto.org/ • www.un.org/en/ • www.bric.com/

Magazine:

• Fresh Cup Books:

• Marketing Management

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- By Philip Kotler

• Business Research Methods

- By Donald R.Cooper/ Pamela S.Schindler

• International Business

- By John Daniels, Lee H. Radebaugh, Daniel Sullivan

• Strategic Management - By Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson

News papers:

• The Times of India • The economic Times • The Hindu • Hindustan Times • The New Indian Express

Journal:

• Global review of business and economic research • Indian journal of international business • International journal of business intelligence and management • International journal of marketing and trade policy • The journal of world economic review

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