Industry Analysis 2014: Tea

Tea has been around for centuries. From China, it spread throughout Asia until finally in the 1600s, it became familiar in Europe and shortly thereafter in North America. It is the second most popular drink after water in the world. Consumers can choose from a wide array of tea products. Its packaging has changed significantly over time, originally dispensed from wooden crates into singular tins and now “to a more sophisticated, high-speed production line which process, package, and/or bottle thousands of pounds of tea and ready to drink mixes per hour” (Piombino).

Its production involves blending various cut and dried tea leaves from regions around the globe that are delivered. It is then sent to tea packaging machines, where it is packaged into singular tea bags (Piombino).

Current Industry Performance

The tea industry is growing as consumers are opting for healthier beverage choices. Due to the rise of obesity and weight related diseases, consumers are now preferring products that are more focused on health and wellness (Meyer). This has greatly boosted tea sales recently [See Appendix 1, (Zegler)]. This industry currently has $1.6 billion in revenues and is expected to grow at an annual rate of 3%, for the next five years [See Appendix 2, (Coughlin)]. Per capita tea consumption and demand from supermarkets and grocery stores for tea are also expected to rise [See Appendix 3, (Coughlin)].

The recent growth of cafes and tea specialty stores have “illuminated the sociological aspects of drinking tea, which has stimulated demand and increased consumption” (Coughlin). An example of this can be seen in Starbucks, which now carries Tazo, a division of Starbucks that produces and distributes tea. Focusing on healthy living and increasing the variety of tea flavors, strengths and sweeteners has allowed the major players in this industry to differentiate their products from the rest. By also offering more exotic and functional flavors, companies are able to grasp more market share (Coughlin).

Products and Services

The tea industry is segmented into four different product groups (Coughlin), and tea bags make up nearly half of the products and services (See Appendix 4). The segmentation is as follows:

  1. Specialty and Gourmet Tea – This is the fastest growing segment and is estimated to account for 8.5% of industry revenue. It includes imported blends of black and green teas.
  1. Traditional Tea – This segment includes tea bags, loose-leaf tea, concentrates and instant tea.
  1. RTD and Iced Tea – This includes bottled ready-to-drink (RTD) tea and iced tea. However, this segment is classified differently under the NAICS code of 31211 (Soft Drink and Ice Manufacturing).
  1. Herbal Tea – This can be specialty, gourmet or traditional, and makes up of about 17% of industry revenues.

The instant tea segment is on the decline, whereas refrigerated RTD is the fastest growing segment in the market, reporting a 12.4% growth between 2012 and estimated 2013 sales. However, the growth of the bagged, loose leaf, and single-cup tea segment could become an obstacle in this growth pattern [See Appendix 5, (Zegler)].

Major Players

This industry’s market share is owned by the top three players, who make up roughly 72.8% of its revenue (Coughlin). The market shares are broken down as follows:

  1. Unilever (52.2%) which boasts brand names like Lipton and PG Tips. It sells more than 400 brands worldwide. Lipton is the brand it markets in the U.S.
  1. R.C. Bigelow (9.8%) is a private, family owned American tea company. It produces more than 100 specialty tea products.
  1. Hain Celestial Group, Inc. (5.0%) sell tea under the brand name of Celestial Seasonings.

Other companies in the industry have about 33% market share. According to IBISWorld, competition in this industry is moderate but increasing. “Private label had the sharpest decline in 2012 and 2013 as companies stress new brand-name innovations, while manufacturers of bagged, loose leaf, and single cup teas profited from increasing the appeal of teas through wellness and home appliances, such as the Keurig brewer, becoming more important” (Zegler).

The Tea Consumer

Tea is consumed by people of all ages; however, there are different preferences and trends present among different target audiences (Zegler):

  • Bagged tea is the most common product segment amongst adult consumers
  • RTD tea brands were more common purchases for kids and teens
  • Ready-to-brew teas (bagged, loose leaf) appeal more to women, whereas young men (18-24) prefer RTD teas
  • Younger consumers are more likely to seek green and/or flavored teas. as opposed to black tea, than their older counterparts
  • Interest in diet RTD tea has decreased among younger consumers and usage of regular RTD has risen among adult consumers
  • Home is the most popular place of consumption for tea among all its consumers

Key Success Factors

IBISWorld has identified four important key success factors in this industry (Coughlin):

  1. Ability to adapt to change – the ability to anticipate and adapt to changes in the tea industry and consumer preferences in a timely manner
  1. Product differentiation
  1. Supply contracts in place for key inputs – reliable contracts with suppliers reduce supplier volatility
  1. Economics of scale and scope

Recent Trends and Applications

There are three different trends in the U.S. tea market that businesses can utilize for success in this industry. These trends are:

  1. Experience Is All – In today’s world, “online retailing and the rise of quick-service formats (fast food services, for example) has increased the need for the experience of the personal, face-to-face customer service”. In order to connect with consumers, retail brands should offer “pop-up shops that invite consumers on a given day where they can order a variety of tea-based beverages.” Having an environment where consumers can learn about and taste tea can bring in new consumers, while offering coupons can promote long-term sales (Zegler).
  1. The Real Thing – “The need for the real, the genuine, and the true has been at the heart of the consumer experience, but the globalization of culture has amplified the desire for the real thing.” Brands can promote this by showing behind-the-scenes processes of its tea fields, workers and production methods in their marketing, as Lipton has done in the past. Products that are in the declining segment (instant tea mix) should try to create an association of their product with the real tea through illustrated images of tea, fruit, and liquids (Zegler).
  1. Old Gold – “The lowest rate of tea purchase is reported by men aged 55+.The range of teas should be showcased as offering solutions for every lifestyle.” Products could be shown as having a natural way to give you a boost through the day, calming benefits when it is time to relax, or functional benefits such as joint health (Zegler).

Future of Tea

The future of tea looks bright, as it is a growing industry and consumers are becoming more health conscious about what goes into their bodies. As consumers become more exposed to the various benefits of tea, such as antiaging and health attributes, this will create a strong future demand and will drive sales of specialty products (such as green and herbal teas). Concentrating on innovation and new product introduction will further stimulate demand (Coughlin). However, as the millennials replace the existing baby boomers, more focus should be placed on the RTD tea segment because this is the fastest growing segment amongst younger consumers (Zegler), and millennials will look for more convenient ways to derive the benefits of tea due of their busy lifestyles.

References:

Coughlin, Kerry. “Tea Production in the US.” IBISWorld. 2014. Document.

Meyer, Matt. Deloitte: Food & Beverage. January 2013. <http://www.deloitte.com/view/en_xa/xa/industries/foodbeverage/index.htm>.

Piombino, Lou. “Tea Industry.” 2011. International Labour Organization. Document. June 2014.

Zegler, Jennifer. “Tea and RTD Teas.” Mintel Market Research. 2013. Document.

By Bilal Dar



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