Aarati Krishnan

IT has been clear for a few years now that the real profits in tea business are to be made either in the marketing of packet tea in the domestic market or in the selling of specialised variants in the export market.

The plantations side of the business, tea companies lament, has become non-remunerative, due to rising costs and the social obligations that come from managing a huge labour force.

One study points out that the Indian production costs for tea at $1.62 a kg are 30 per cent higher than those in neighbouring Sri Lanka ($1.23) and 40 per cent higher than those in Kenya ($1.16).

These two countries are among India's biggest competitors in the export market.

The steady decline in bulk tea realisations over the past few years, combined with increasing attractiveness of the packet tea business, has forced quite a few companies to hive off or restructure their plantations business in recent times.

The retail prices of branded packet tea have held on, amidst tumbling loose tea prices.

In April 2004, Eveready Industries first announced its intention to hive off off its bulk tea business into a separate entity, while retaining its packet tea business.

This was recently completed, with the bulk tea business hived off to a new company - McLeod Russell India.

In March 2005, Tata Tea finalised a proposal to hive off its 14 tea estates in Munnar, with about 12,000 workers, to Kannan Devan Hills Plantations Ltd, with the employees in these plantations holding majority stake in this entity.

Hindustan Lever's current move to transfer its tea plantation business, acquired earlier from Brooke Bond, to wholly owned subsidiaries should also be seen in this light.

This will help the company focus more keenly on its packet tea business. With healthy profit margins and strong branding possibilities, packet tea is a more comfortable fit with HLL's FMCG portfolio than plantations business.

© Copyright 2000 - 2009 The Hindu Business Line