Dilmah Tea threatens to quit Australian supermarkets in cost dispute with major retailers

Source:FT

The Australian: One of the world’s biggest tea companies, Dilmah Tea, has threatened to pull its products from Australian supermarket shelves unless the major retail chains agree to pay more for its handcrafted brands of Ceylon teas and cease their demands for discounts.

Leading Sri Lankan businessman and Dilmah Tea Chief Executive Dilhan Fernando, said the company had been losing money in Australia for more than a decade and its market share continued to fall as it refused to compromise its commitment to sustainability and ethical sourcing.

Dilmah, Sri Lanka’s biggest global brand, is sold in over 100 different countries around the world and is among the top 10 tea brands globally.

However Fernando revealed Dilmah would be prepared to pull out of mainstream retail and become a super-premium brand for sales just through hospitality venues and online unless retailers stopped pushing the firm to commoditise its brand and compromise its unique supply chain through discounting.

“We have been told in no uncertain terms that we have to change our model. But we would rather close our doors than compromise,” Fernando told The Australian during a visit to Australia last week, his third since the end of the COVID-19 pandemic.

“It is not fair or ethical to have a fundamentally unfair trading system. The producer needs to be empowered to offer a product with passion where corners are not cut. That can only happen when there is a fair price paid for the product.

Dilmah’s tea remains single-origin and unprocessed, meaning the tea reflects where and how it was made.

Ceylon Tea, part of the specialty tea category that is the fastest-growing globally, sells at a premium over most other black teas from other countries due to its artisanal style of manufacture.

It has remained largely unchanged for more than 150 years since its introduction by the British.

Rival producers have followed Dilmah’s lead in responding to consumer demand.

In September last year, the private equity-backed T2, which now employs more than 1000 people and operates 70 retail stores across the world – including 60 in Australia – reached its long-awaited goal of having 100% of its tea blends sustainably and ethically sourced.

It was the culmination of a landmark three-year project, which started when sustainably sourced tea leaves represented less than five% of the T2 product portfolio.

Fernando said the new generation of tea drinker was looking for single estate teas and quality in the cup, which was big ignored by retailers who were simply looking for “the next big thing”.

“Consumers are giving us a clear message yet the perspective of the retailers is fundamentally different. Significantly here, but also in other countries such as England, there is a very short-term perspective,” he said.

“In this rush to find the next big thing and to address profitability, the retailers are pushing to commoditise our brand. Our effort should be in partnering with retailers to add value in a sustainability way. Consumers are looking for quality. But the directions we are being pushed in are an abandonment of this. It is crazy. We are being forced to chase our tail to deliver the next big thing when what we have in our hands is so substantial.”

The tea industry employs around 10% of the workforce of Sri Lanka, which is home to more than 20 million people.

The country has been going through one of the most tumultuous times in its history as a political crisis has triggered an explosion of inflation plus serious fuel and food shortages.

Fernando said Dilmah had a responsibility to the Sri Lankan people to support the farms and workers that supplied its products. Dilmah exports 95% of its tea to 104 countries.

“Today, our responsibility as a producer is much greater. Quality is critical. But we also find ourselves at the front line of climate change. We have a responsibility to look after the soils and build sustainable farming methods and introduce biodiversity,” he said.

“We have an equal commitment to the community and to nature. It would be tragic if all of what we see were to force us and other growers to be compromised and to move to commoditisation. You would be undermining and destroying an industry that has sustained millions over 150 years.”

He said the combined impact of the COVID-19 pandemic and the exploitative freight rates that followed had fuelled inflation and a multitude of other social and economic issues.

At the height of the pandemic, shipping containers from Colombo were taking between six and eight weeks to arrive in Australia, where previously it would be 21 days.

“It was exploitative, horrible freight rates during the pandemic,” Fernando said.

“That has come down in the last few weeks. The rates have come down nearly to pre-pandemic levels. But in between us and the consumer, you have had massive margins being made. In our supply chain, we make single digit margins and in Australia we have been underwater for most of the time since the GFC. The industry is steered by a trading mindset: buy at the cheapest price and sell at the most expensive.”

He said Dilmah had not been able to deliver a profit in Australia since 2009 “because we have maintained an uncompromising commitment to quality.”

Its annual Australian sales are now $ 29 million, down from $ 37 million five years ago. Its market share has dropped from double digits to 7.5%.

“We have already cut down by 40% in terms of our team here. We have just 10 people here now. We have stood our ground on quality and discounting so our market share has suffered. Discounts are funded by workers, not players in the supply chain,” Fernando said.

“My father said even if you close your doors, you don’t compromise. That will be okay for me and my family. But there will be millions of voices that will not be heard and the irony is consumers are willing to help. The people’s goodwill here is unrivalled.”

In the Australian market, Dilmah makes about 85% of its sales from the retail sector, and 15% from hotels, hospitality venues and the food service channel.

“We would not do more much than $ 150,000 online so it isn’t much. But this year we are increasing our emphasis on it and it is growing phenomenally,” Fernando said.

His father Merrill, who turns 93 in May, was one of the first locals from the British colony of Ceylon – now known as Sri Lanka – to train as a tea-taster before he started Dilmah.

In 1988 he convinced supermarket giant Coles to stock the Dilmah tea brand, which was named after his sons: Dilhan donated the first syllable, his brother Malik donated the second.

It proved to be a launching pad for a brand that grew to turn over more than $ 500 million.

The now billionaire stepped down as chief executive in 2019 for Dilhan to take over the reins but remains involved as chairman.

Dilhan’s son, who is named Amrit and just turned 22, is now a junior executive with the company and is currently visiting Australia with his father.

“My son bears my father’s name. My father trained him from the time he was five years old. He has an incredible passion for the family business. I bring him with me to see this is a business driven by relationships and integrity. He is learning the hard way,” Fernando said.