Gross Profit Indeed

Retail margins in the specialty tea business are obscene!

There, I said it. And here’s why? Consumers are paying far too much for tea on which growers and producers, and especially the field and factory workers, are receiving far too little.

Recently I came across a notice from an online tea retailer offering a 60% discount to entice people to join their monthly subscription service. 60%! If we assume that this reduced the selling price to the retailer’s cost, and that is highly unlikely, this means that they are taking AT LEAST 60%, and almost certainly more, gross profit on the non-discounted price.

Another example. A major importer/wholesaler advises retailers to trade in “luxury tea” because “loose tea is a high margin product” that can deliver profits up to 400% on cost. That’s a retail margin of 80% at the high end. At the low end, they calculated the retail margins at a measly 71%.

And another. An online vendor is offering a particular high end Wuyi oolong at $35 per ounce. Yet the producer of this tea retails it at approximately $15 per ounce and sells it wholesale at almost half that price. This vendor is earning 60% assuming they purchased it at the retail price and nearly 80% if they paid the wholesale price, which is more likely..

All this gross profit for teas on which the growers and producers will be earning a couple of percentage points if they are VERY, VERY lucky. A producer who has farming costs and factory costs not to mention significant investments in land and machinery. Too many tea farmers and producers actually work on a negative ROI (return on investment,) a totally unsustainable situation. And this is before we even speak of the impoverishment of the workforce.

Retailer Investments

What investments and costs do specialty tea retailers have? Well, for online vendors there’s website development and maintenance, some computer equipment, inventory, and … well, we’ll revisit this if I can think of something else.  Then of course there are operating expenses: an office, though many are run from a residence, a fulfillment service, though this cost often is recovered in shipping and handling charges, travel, if they source their own tea, general office expenses and what else I don’t know. They may even have a couple of employees whom they underpay. Brick and mortar businesses do have additional operating cost, such as furnishings, leases and the like, but nothing that justifies keeping 80 cents of every dollar spent while the growers receive a pittance.

Value Added?

Middlemen in the specialty tea supply chain are important and they do add value (middlemen also include importers and brokers but the focus here is on retailers.) Those retailers who source their own tea often spend years searching out their sources, they need to ensure that the product arrives in the country legally and in compliance with governmental regulations, and retailers actively promote the sale of the teas they carry (yes, marketing does add value.) Further, retailers break down bulk quantities into retail sales units, and also play an important role in educating consumers about tea. But none of this justifies taking not just the lion’s share of profit but that of the biggest lion ever known. And failing to ensure that substantial profits move back to the producers has significant, far reaching and long term consequences.

Abandoned Gardens

Unkempt tea garden in Dong Ding area of Taiwan

Taiwan, the region that I know best, has a tea industry that is dominated by small family producers and has been for generations. Mingjian, a town in western Nantou County in Taiwan is one of the largest producing regions in the county that itself is the largest producing region in the country. Lugu, just to the east of Mingjian is the home of Dong Ding teas, some of Taiwan’s best known. And yet, in both areas (and countless others,) tea gardens are being abandoned because the economic return to the farmer is so low. Throughout Taiwan, the younger generation is being pushed out of the tea business by their own families who know that a better future lies in other pursuits.

The growing shortage of labor and its increasing cost means that many growers, even in the highest quality production regions, need to switch to practices such as mechanical harvesting in an attempt to stay afloat. And we all know that at current levels of development mechanical harvesters simply cannot do the job as well as skilled hand pickers. Quality suffers. Volume suffers as well and supply decreases. This means that prices will increase in any event, but with negative effects. Better to ensure a proper return to growers and producers now and keep supply robust.

World-wide in Scope

Living conditions in Darjeeling

Similar stories play out in tea regions around the globe. Failure to ensure that sufficient profits move upstream means that plantation workers in Darjeeling and Sri Lanka continue to live in squalor (and this is not in any way meant as an apology for the indefensible plantation system.) East African production remains at woeful levels of development and production is declining in Argentina. These situations merely nourish the conditions for justifiable discontent and social unrest. They ensure that poverty will be transmitted from generation to generation. Ensuring profitability to growers and producers is not just an economic imperative; it is a moral one as well.

Better Distribution in the Distribution Chain

I began this plea for sanity in retail margins by noting that consumers are paying too much for tea on which growers and producers receive far too little. But that does not mean that consumers are really paying too much for tea. In fact, in many instances, they are not paying nearly enough. Quality tea should be expensive but it is not. Coffee, cocoa, and Coca Cola all are more expensive by the cup than tea. In fact tea lags far behind and the price in no wise properly reflects the costs (both economic and social) of production. Specialty tea needs to be more expensive and the profits in the industry more equitably distributed.

That’s my take. What do you think?