CHAPTER 4

Chapter 4

 

 

The United Kingdom Tea Market

 

Large companies dominate the tea market in UK even though the price of tea determined by supply and demand. These companies have a great influence on the world markets. During the early 90’s the tea market in UK was dominated by the Western trade by 90% by the transnational group of companies and 85% dominated by multinationals. Large companies enjoy purchasing control because of their heavy power to the demand for specific type of tea. It can also be consider that having their own plantation gives them an advantages in the tea industry, The distribution of the share in the UK tea market is as follows: Unilever/Brooke Bond, Cadbury Schweppes, Allied-Lyons and Associated British Foods/Twining. These companies controlled 85% of the tea market especially in UK.  

Graph 1: Source:  year 2000.

 

 

Consumer Behavior in the Tea Industry

 

 

According to the latest retail sales report, hot drinks in the United Kingdom Hot beverages is currently facing a very competitive market sharing it with the soft drinks market. Children nowadays are enjoying soft drinks, while many older consumers are preferring tea and coffee as their main beverages.

 

            According to the UK Tea Council, the popularity of herbal and fruit teas decline in the late 90’s, but had experienced a very dramatic increase of 50% and 30% respectively between 2002 and 2004. This dramatic increase was motivated by the inclination of the consumers to prefer premium specialty teas in order to have healthy lifestyles and continuing concerns for a long term health, which they believe can be developed through drinking teas. The tea industry in UK is becoming to be diversified because of the growing trend of more exotic, fruity flavors, and caffeine free teas. It can be said that the tea market is beginning to be segmented because of the efforts of the manufacturers to regenerate the market. While the regeneration of the traditional tea products, it places the market in a position of tremendous competition with other health drinks, energy drinks and functional drinks.

Some innovative consumer and market studies identified the reasons behind the motivation and discouragement of consumers from buying tea products. These studies These studies present that 1/3 of the consumer population, drink tea all day, however, only a very small percentage opted tea as a source of caffeine, 13% of consumers think that premium tea is authentically with high quality and tastes better than regular type of tea. Approximately, 1/3 of adults purchase one kind of tea only. These consumers are at the age of 15-34 year old, from London and the South. They are considered to be mid-market consumers from what they call C1 economic category.

When Chinese green tea penetrated UK, the most popular tea is green tea. Food retailers and Asian shops in UK has been selling green tea for decades. But green tea had only entered the mainstream tea market in the past five to ten years. All leading retailers are now selling wide range types of green tea. This discovery of the UK’s green tea industry centers on the increasing significance of green tea and its place within the bigger tea market. Both green and black tea are manufactured from the similar Camellia sinensis plant, and vary only in the detail that green variants evade the oxidization or fermentation process that gives black tea is dark color and strong flavor. Green tea as a result is characterized by its lighter flavor and greenish-yellow coloring.

The Chinese Tea in the UK Tea Market

 

            Since 1980, the actual price of Chinese tea has dropped by 15%. The graph below presents the problem that Chinese tea faced two decades ago; the fall of the prices of Chinese Tea was the result of the strong increase of supply in the slow-moving demand of Chinese Tea until year 2000.

 

Graph 2

The competition in the tea market in UK is shared by numerous tea producing countries and this is the contributing factor to low Chinese tea prices. The Chinese Tea market lowered their prices because of the following reasons:

·         There are significantly large population of other countries that produce tea, Chinese tea market needs to establish a monopoly that will allow vicious competition.

·         The demand of tea is rising and the only solution is lower the price n order to raise significant quantity of tea exported at the expense of its competitors.

• It is quite simple for consumers to change from one producer to a new producer, particularly for blends for all the rage tea bags as any variation in flavor with the modification in the supply of one tea can be covered up by mixing with other teas. As a result of the control of the sale system in stand-in as a day-to-day agent between manufacturers and consumers, manufacturing countries have been incapable to maintain long-term relationships with its consumers.

 

• As tea depreciates fairly swiftly it is commonly essential to cut prices in order to clear stocks.


• The demand for tea supply is increasingly high.

 

• Other manufacturing countries maintain their spot in the market despite of scant profits because they have invested a great deal in tea production and lack of other options.

 

 

Porter’s Five Forces Model on the UK Tea Market

In analyzing the competitive structure of the UK Tea Market it is important to use Porter’s Competitive Forces Model and it is interesting to see how this well-defined part can be modeled so that the knowledge that it contains can be used in an expert system. ( :1996) Knowledge in the field of strategic analysis is either uncertain or incomplete. An expert in the field generally will not have all data at his disposal. In particular, many data concerning the environment of the enterprise, such as data of competitors and suppliers, will sometimes be missing or is difficult to uncover and thus cannot be taken into account. But also data from within the own enterprise is not always readily available. Whatever the reason for this lack of data may be, the expert is expected to generate an analysis the best he can based on data that is available. Naturally, the more relevant data he can use, the better the quality of the analysis will be. In other words, if the input data is not sufficiently available, conclusions drawn will be correspondingly less certain. This is one of the most striking characteristics of an expert. He is able to come to conclusions based on a limited number of data that – in addition – may also be uncertain. For this purpose he will use his experience. It must also be observed, however, that sometimes an analysis report must be generated in a very limited period of time and then, whether available or not, the number of data used must inevitably be limited. It is obvious that an expert system must also be able to deal with this type of heuristic knowledge and come to conclusions that consequently will also be uncertain.

 

 

The Five Forces Model

 

Porter’s model supports analysis of the driving forces in the UK Tea industry. Based on the information derived from the Five Forces Analysis, management can decide how to influence or to exploit particular characteristics of their industry. To describe graphically please refer to figure 1:

figure 1

Since the industry of tea in UK depends on the supply and demand of tea, the tea suppliers have bargaining power; The term ‘suppliers’ comprises all sources for inputs that are needed in order to provide goods or services. Supplier bargaining power is likely to be high when: (:1979)

 

• The tea market is dominated by large suppliers rather than a fragmented source of supply,


• There are no substitutes for the particular input,


• The suppliers customers are fragmented, so their bargaining power is low,


• The switching costs from one supplier to another are high,


• There is the possibility of the supplier integrating forwards in order to obtain higher prices and margins. This threat is especially high when


• The buying industry has a higher profitability than the supplying industry,


• Forward integration provides economies of scale for the supplier,


• The buying industry hinders the supplying industry in their development (e.g. reluctance to accept new releases of products),


• 
  

  The buying industry has low barriers to entry.

  
  

 

In such situations, the buying in the UK tea industry often faces a high pressure on margins from their suppliers. The relationship to powerful suppliers can potentially reduce strategic options for the organization.

 

            If the suppliers have bargaining power customers are also empowered in bargaining. Similarly, the bargaining power of customers determines how much customers can impose pressure on margins and volumes. Customers bargaining power is likely to be high when: (:1979)

• They buy large volumes, there is a concentration of buyers,


• The supplying industry comprises a large number of small operators


• The supplying industry operates with high fixed costs,


• The product is undifferentiated and can be replaces by substitutes,


• Switching to an alternative product is relatively simple and is not related to high costs,


• Customers have low margins and are price-sensitive,


• Customers could produce the product themselves,


• The product is not of strategically importance for the customer,


• The customer knows about the production costs of the product


• There is the possibility for the customer integrating backwards.

  

Also according to Porter competition is high when there are new entrants like the Chinese tea manufacturers in the business. (:1998) The competition in an industry will be the higher; the easier it is for other companies to enter this industry. In such a situation, new entrants could change major determinants of the market environment such as market shares, prices, customer loyalty at any time. There is always a latent pressure for reaction and adjustment for existing players in this industry.  The threat of new entries will depend on the extent to which there are barriers to entry. These are typically

 

 

A threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same purpose. (:1997) They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for existing players. This category also relates to complementary products.  Similarly to the threat of new entrants, the treat of substitutes is determined by factors like

• Brand loyalty of customers,


• Close customer relationships,


• Switching costs for customers,


• The relative price for performance of substitutes,


• Current trends.

 

In a competition there will always be competitive force and rivalry.  (1997)  This force describes the intensity of competition between existing players (companies) in an industry. High competitive pressure results in pressure on prices, margins, and hence, on profitability for every single company in the industry. Competition between existing players is likely to be high when

• There are many players of about the same size,


• Players have similar strategies

·         There is not much differentiation between players and their products, hence, there is much price competition

• Low market growth rates (growth of a particular company is possible only at the expense of a competitor),


• Barriers for exit are high (e.g. expensive and highly specialized equipment).

Product Life Cycle

The primary drivers in the Tea Market Industry in UK includes: Financial pressures to decrease costs, increase efficiency, do more with less increased competition. In regards to shorter product life cycles and value migration there are stricter regulations. Industry and community needs for sustainable development through increased demand for accountability. Rising customer expectations regarding service and quality and greater availability of potentially useful new technologies coupled with the need to keep up or exceed the competition in applying these new technologies and the changing economy. Although cost reduction has been a major driver of profit in the tea market, other drivers are also important. Regulatory drivers have become more important in the last several decades. In addition, companies increasingly feel they must promote their image and this has become a major driver of environmental and sustainable development innovations. A good image can help promote both customer loyalty and a company’s growth strategy. As noted above,  (1996, 2000) sees important recent change in both (a) the drivers of innovation and (b) the importance of radical business concept innovation for organization survival. Basically, he argues that a dramatic change in the overall economy has occurred and that this economic environment no longer protects established mainstream businesses. He further argues that organizations must develop an innovation competency if they are to survive: radical business concept innovation must become a core component of this competency.

 

The process of innovation and adaptation is essential to the survival of any organization. To stand still is, in effect, to go backwards as there will always be rival organization going forwards. All products have a finite life cycle. They will be displaced in the market by changing tastes and the emergence of better products; therefore firms must pursue a policy of creating new products that will meet changing needs, and for this some speculative research and development will be needs. In fact, in order to remain competitive in uncertain and turbulent times, innovation is a MUST for companies ( 2003).

So what is innovation? Innovation has been attributed with various definitions, such as that of the (1995) that defines the term as “the successful production, assimilation and exploitation of novelty in the economic and social spheres” (p. 9); or that of  (1991), which described innovation as “The generation, development, and adoption of novel ideas on the part of the firm” (p. 556); or of  (1973) that characterized innovation as “Any idea, practice, or material artifact perceived to be new by the relevant unit of adoption” (p. 10).

Broadly speaking, definitions of innovation can be classified in two categories: innovation as the final event and innovation as a process. In the first category fits the definition given by researchers  (1973). With the latter, meanwhile, fits  (1968) attribution of innovation, which they see as a process that proceeds from the conceptualization of a new idea to a solution of the problem and then to the actual utilization of a new item of economic or social value.  (1987) adopt the latter definition and use the terms innovation and innovation process interchangeably.

 

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