More broadly, though, the sell-off reflects other “All Change” signals across the Assam landscape. The questions they raise don’t have clear answers. Some point to evolutionary innovations and impacts: the accelerating success, premium prices and government support for small grower specialty teas, for example. Others may be more interrelated and radical—even revolutionary—factors. These most obviously include the 2018 increases in estate worker wage rates, unionization, and mechanization.
For McLeod, the financial moves support a major repositioning of business strategy. Several of the estates it has sold were ones it bought from Unilever Hindustan as recently as 2007, during its expansion surge. Scale was seen as the business leverage and plantation assets as the foundational building blocks. McLeod exited from its four Darjeeling holdings in 2001 because they did not provide volume.
The assets now no longer provide leverage or command premium valuation. The May 2018 press coverage of McLeod’s plans uniformly quoted that it expected to be paid “at least” 400 Rupees per kilogram of production. The actual realizations have been in the range of 320-350 rupees per kilogram.
The basic problem in Assam has been growing for many years: its reliance on CTC (cut, tear, curl) tea in a context of fierce international competition, a stagnant domestic market for basic black tea, unfavorable price trends, and ever higher production costs.
CTC: Well over 90 percent of Assam’s tea production is for CTC, the granular, mechanized commodity black tea. Of the 850 large estates, only 150 make any Orthodox whole leaf. Two hundred 0f Assam’s total of 100,000 small growers account for close to half the Orthodox output.
International competition: Assam has for long been the largest tea growing region in the world. Its traditional export markets, most obviously the UK, gave it a commanding position. Now, even though it produces 25 percent of the world’s output, it has just a 10 percent share of exports. Its premium teas command very high prices and have stellar reputations; its Orthodox and green teas in general sell for INRs250-500 ($3.50) per kilogram and CTC for $2 (INRs 130-140). Overproduction and lagging demand have built up an 80-million kilogram tea surplus stock.
Stagnant markets: It’s no news that the growth markets for tea worldwide are marked by new flavors, variety, wellness, and lifestyle priorities, green tea, flavored teas, botanicals, matcha, millennials, bubble tea, customization, personalization, and technology innovation. None of these terms are dominant elements of Assam CTC bulk tea.
Innovation in Assam is coming from specialty teas produced by small growers. The government and tea agencies are moving fast to strengthen this dynamic. The Guwahati Tea Auction center, which sells close to half of Assam’s production, has reduced the requirement for being listed in the catalog from 500 kilogram to just 1 kilogram. Tocklai, India’s widely-respected tea research center, has been tasked with a comprehensive training program for small growers.
Production costs: Assam’s operating margins are too thin to sustain quality, social stability, and worker incomes. Even when revenues increase, profitability lags. The socially urgent decisions by the government to raise wages by just $0.45 (INRs30) per day and grant land title to thousands of small growers compound the equation. Wages, including benefits, are in effect a fixed cost that amounts to more than 40 percent of direct expenses and often higher. Productivity is low. Assam workers produce on average 2.5 kilograms per day, versus 6 in South India. Prices can rise and fall cyclically but over the longer secular cycle are flat. Costs are going up by 9 percent per year.
