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Informist, Wednesday, Sep 4, 2024

 

--Sources: HUL, Tata Consumer may hike tea prices on cost pressures

--Sources: Regional tea retailing cos have already raised prices

--Sources: HUL bought 18% less tea YoY via auctions during Apr-Aug

--HUL official: Seeing inflation in tea procurement costs

--HUL official: Continue to monitor pricing across product portfolio

--HUL official: Will maintain competitive pricing across products

--HUL official: Will continue to invest on branding in tea segment

--Sources: HUL tea procurement cost up 18% on year during Apr-Aug

--Sources: Tata Consumer tea procurement down 70% on yr in Apr-Aug

 

By Avishek Rakshit

 

KOLKATA – The two largest packaged tea sellers in the country, Hindustan Unilever Ltd and Tata Consumer Products Ltd, may raise prices in a staggered manner due to a sharp increase in procurement costs and gradual depletion in existing stocks, multiple sources told Informist.

 

Asked about the same, an HUL spokesperson said, "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."

 

Tata Consumer Products refused comment.

 

The food and beverages segment, of which tea is a part, accounts for 25% of HUL's annual revenue. Tata Consumer Products earns 58% of its global consolidated revenue from the beverages business, of which tea is a part. Both the companies do not report their income from tea business separately.

 

"In the current inflationary scenario, our priority is to provide value to consumers, invest behind our brands and protect our financial business model," the HUL spokesperson said.

 

Fall in tea production has led to a sharp increase in prices at the auction centres this year, thereby increasing procurement costs for companies involved in retailing tea. The country's total tea production in the Jan-Jul period fell by more than 13% to around 553 mln kg due to erratic weather conditions. Prime tea growing regions in Assam and West Bengal were the worst affected.

 

Average prices of tea at the auction centres in east and north-east India, referred to as north Indian auctions, shot up by over 21% to 255 rupees a kg in July. In south India, average prices at the auctions were up by over 12% at 118 rupees a kg, according to the Tea Board India. Towards the end of August, auction prices per kilogram of tea increased further. Prices were up by 31% in Kolkata at 281 rupees a kg, and in Guwahati, up by 34% at 265 rupees a kg. In south India as well, prices rose by 21% in Cochin to 156 rupees a kg, and in Coonoor, they increased by 37% to 123 rupees a kg.

 

However, Tata Consumer Products, which had a considerable stockpile of tea in its warehouses, reduced procurement from the tea auctions in east India by over 70% during Apr-Aug due to high procurement costs, a senior industry official said. On the other hand, HUL, which also had a substantial stockpile but not as big as Tata Consumer Products, also bought 18% less tea from east India auction centres during Apr-Aug, the industry official said.

 

Data from tea brokers sourced by Informist showed that Tata Consumer Products bought only 3.7 mln kg of tea from the auction centres at Kolkata, Siliguri, and Guwahati during Apr-Aug compared with 12.7 mln kg bought in the year-ago period. HUL, on the other hand, bought 15.8 mln kg of tea from these same auction centres during the same period as against 19.3 mln kg in the year-ago period.

 

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

 

The average cost per kilogram of tea bought at the auctions rose by nearly 23% to 216 rupees for Tata Consumer. For HUL, the same was nearly 281 rupees, which represents an increase of nearly 45%. Despite buying lesser volume, total procurement cost for HUL increased by 18% to 4.4 bln rupees in Apr-Aug. Tata Consumer Products spent 865 mln rupees on tea procurement in Apr-Aug compared with 2.2 bln rupees in the year-ago period.

 

"Usually big tea retailing companies buy less tea when auction prices are up and tend to wait for the monsoon flush to come to the auction centres at reasonable prices. But the monsoon flush also seems to have been affected, and so auction prices are expected to be significantly higher going forward as well," a senior official from a leading tea brokerage firm said. "If one considers the trend in the auctions, prices have only been increasing in accordance to the flush for sale."

 

In the tea industry, flush refers to the season of harvesting tea, like spring and summer. The monsoon flush refers to the tea harvested during the monsoon season. It is of inferior quality compared to the harvest during the summer season.

 

Industry officials said HUL and Tata Consumer Products will have to go for price hikes to stave off increased procurement costs or face some heat on their margins.

 

"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 which they would tend to avoid," a sector analyst with a domestic brokerage said. "As I see it, they will have no other option but to increase prices in the coming months."

 

The sector analyst said that consumers may be able to absorb partial price hikes in the range of 1-3%, but price increases higher than this may upset HUL and Tata Consumer's sales volumes. In the recent past, HUL had said that consumer demand is improving gradually and the company is looking at maintaining its operating margin, which was 23.8% during Apr-Jun.

 

Some regional tea retailing companies have already increased prices but those are in the super-premium and luxury segment where demand is consistent and does not entirely depend on prices but on quality of tea, industry officials said. Retail prices of super-premium and luxury teas are usually in the range of 3,000–35,000 rupees a kg depending on flush and quality. However, tea prices in the budget segment are usually in the range of 220–1,000 rupees a kg and are extremely price sensitive.

 

Industry officials said HUL and Tata Consumer Products may not be able to suddenly increase prices to pass higher procurement costs on to consumers fully as sales volumes could take a hit, and consumers may resort to downgrading their purchases when faced with a sudden jump in tea prices.

 

"Historically, tea retailers have taken a staggered price increase and hiked prices more of those brands which are premium as compared to budget brands," the tea industry official said.

 

On the National Stock Exchange today, shares of HUL closed 1.7% higher at 2,841.25 rupees and those of Tata Consumer Products ended down 0.3% at 1,194.95 rupees.  End

 

Edited by Ashish Shirke

 

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