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Tea set to be costlier as major brands grapple with a cost surge

Tea set to be costlier as major brands grapple with a cost surge

Your Grocery Bill Could Rise With Hindustan Unilever & Tata Consumer Likely To Hike Tea Prices Very Soon

Business Today Desk
Business Today Desk
  • Updated Sep 4, 2024 6:06 PM IST
Tea set to be costlier as major brands grapple with a cost surgeThe average cost per kilogram of tea purchased at auctions rose by nearly 23 per cent to Rs 216 for Tata Consumer Products, while for HUL, it surged by nearly 45 per cent to Rs 281.

The two largest packaged tea sellers in India, Hindustan Unilever Ltd (HUL) and Tata Consumer Products Ltd (TCPL), are likely to implement staggered price increases soon. This is in response to soaring procurement costs and dwindling stockpiles, according to multiple sources. This development could impact tea prices on supermarket shelves, affecting consumers nationwide.

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A report cites a spokesperson from HUL who acknowledged the challenges posed by the current market conditions. "We are witnessing inflation in tea procurement prices this season. As with any commodity-linked category, in tea as well, we continue to monitor our pricing across our portfolio, while maintaining our competitive product offerings across the price pyramid for our consumers," the spokesperson said.

Tata Consumer Products, however, declined to comment on the situation.

The significance of the tea segment for both companies is substantial. Tea contributes to 25% of HUL's annual revenue, while Tata Consumer Products derives a whopping 58% of its global consolidated revenue from the beverages business, of which tea is a major part. Despite this, neither company reports their income from tea separately, making it difficult to gauge the exact financial impact of these rising costs.

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Hindustan Unilever’s tea portfolio comprises legacy brands like Lipton, Taj Mahal, Brooke Bond and Bru.

Tata Consumer Products operates brands like Tata Tea, Tetley, Teapigs and Tata Starbucks.

The surge in tea prices stems from a sharp decline in production. From January to July, India’s total tea production dropped by more than 13 per cent to approximately 553 million kilograms due to erratic weather conditions. The primary tea-growing regions of Assam and West Bengal were particularly hard hit, leading to a spike in prices at auction centres.

In July, the average price of tea at auction centres in East and Northeast India, known as North Indian auctions, increased by over 21 per cent to ₹255 per kilogram. In South India, auction prices saw a more modest rise of 12 per cent, reaching ₹118 per kilogram, according to the Tea Board India. By the end of August, prices continued to climb, with auction rates in Kolkata rising by 31 per cent to ₹281 per kilogram and in Guwahati by 34 per cent to ₹265 per kilogram. Similarly, South Indian auction centres saw prices rise, with Cochin experiencing a 21 per cent increase to ₹156 per kilogram, and Coonoor witnessing a 37 per cent jump to ₹123 per kilogram.

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Faced with these escalating costs, Tata Consumer Products significantly reduced its tea procurement from auction centres in East India by over 70 per cent during the April-August period. HUL, while also cutting back on its purchases, reduced its procurement by a lesser margin of 18 per cent. Data from tea brokers reveal that Tata Consumer Products bought only 3.7 million kilograms of tea from auction centres in Kolkata, Siliguri, and Guwahati during this period, compared to 12.7 million kilograms in the same period last year. HUL, in contrast, purchased 15.8 million kilograms, down from 19.3 million kilograms the previous year.

A senior official from a major tea plantation company noted, "From what Tata Consumer Products bought in the auctions, it is evident that they relied mostly on their existing stocks and bought tea directly from the plantations to mitigate cost pressures." HUL, however, continued to rely more heavily on auctions.

The average cost per kilogram of tea purchased at auctions rose by nearly 23 per centto ₹216 for Tata Consumer Products, while for HUL, it surged by nearly 45 per cent to ₹281. Despite buying less volume, HUL’s total procurement costs still increased by 18 per cent to ₹4.4 billion during the April-August period. Tata Consumer Products spent ₹865 million on tea procurement in the same period, a sharp decline from ₹2.2 billion the previous year.

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"Typically, large tea retailing companies buy less tea when auction prices are high and tend to wait for the monsoon flush to bring prices down. However, the monsoon flush has also been affected this year, so auction prices are expected to remain high," the report cites a senior official from a leading tea brokerage firm as saying. The term "flush" refers to the season when tea leaves are harvested, with the monsoon flush generally considered inferior in quality compared to the summer harvest.

As procurement costs continue to rise, industry officials suggest that both HUL and Tata Consumer Products may have little choice but to increase prices. "Sales volume may take a hit in the short term if they (HUL and Tata Consumer Products) resort to price increases. On the other hand, if they don't, then margins will come under stress, and this is something they would tend to avoid," said a sector analyst from a domestic brokerage.

The analyst further added that consumers might be able to absorb minor price hikes in the range of 1-3 per cent, but anything higher could potentially impact sales volumes. HUL recently indicated that consumer demand is gradually improving, and the company is focused on maintaining its operating margin, which stood at 23.8 per cent during April-June.

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Some regional tea companies have already adjusted their prices, particularly in the super-premium and luxury segments, where demand is less sensitive to price changes. However, the budget segment, where prices typically range from ₹220 to ₹1,000 per kilogram, remains highly price-sensitive, making sudden price increases a risky move.

Looking ahead, it appears that HUL and Tata Consumer Products will likely adopt a staggered approach to price hikes, especially for their premium brands, while being cautious with their budget offerings to avoid alienating price-sensitive consumers.

Published on: Sep 4, 2024 6:06 PM IST
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