There are basically five types of beverage teas: 1) non-oxidized tea; 2) lightly oxidized tea; 3) semi-oxidized tea; 4) oxidized tea; and 5) fermented tea. These are generally produced from the same tea plant using different processing methods. As stated above, tea exports from Sri Lanka essentially consists of one type of oxidized tea (black tea), non-oxidized tea (green tea) and a derivative of black tea (instant tea). As presented in Table 1, 98% of the tea produced in Sri Lanka is black tea. Out of this, 95% is “orthodox tea” (tea made or processed using traditional methods) while the remaining 3% is CTC (crush, tear and curl) tea. In orthodox tea production, the green leaves are processed through; withering, rolling, oxidizing, drying and sorting. In CTC tea production, withered leaves are cut to a uniform size by machine and fed into the CTC machine where they are crushed, torn and curled. Orthodox tea is usually brewed in teapots while CTC tea is used for tea bags (usually small porous sachets with four grams of tea in each one), which is more convenient to use.
In both processing methods, different types of tea grades are produced that vary according to the size and the appearance of the manufactured leaf. By one count there are 40 different grades of orthodox tea, including Broken Orange Pekoe, Broken Orange Pekoe Fannings and Orange Pekoe (Tea Exporters Association of Sri Lanka, 2017). Out of these 40 grades, 16 are considered as main grades. In Sri Lanka, these tea grades are brought to the Colombo tea auction and blended according to buyer requirements. The uniformity, unchanging nature and heavy reliance on black tea in the export basket of Sri Lankan tea clearly shows that Sri Lanka is failing to innovate in terms of both products and processing.
As mentioned earlier, Sri Lanka has mainly engaged in incremental innovations in tea production, primarily in blending and flavoring. “Blending” generally refers to the mixing of teas from different origins to obtain a desired taste, color and aroma. “Flavoring” generally refers to the addition of flavors in the form of liquid or granules to tea. These teas are then packed in convenient size packs or containers (packaging). Instant tea is manufactured by extracting “tea brew” from tea leaves, tea waste or undried oxidized leaves. The extracted brew is concentrated under low pressure and dried to a powder by freeze drying, spray drying or vacuum drying. Apart from the production a small quantity of instant tea, all other types of innovations in the Sri Lankan tea sector — blended teas, flavored teas, tea bags and tea in packets — can be considered incremental innovations.
According to Figure 2, Sri Lanka started exporting tea packets in 1962, when they accounted for only 0.8% of the total export quantity. This figure gradually increased to 36% in 1987 and then declined to 30% in 2017. Sri Lanka started instant tea export in 1963 and tea bag exports in 1976. Exports of tea bags and instant tea experienced slower growth compared to tea packets in the time period studied. The total contribution of incremental innovations — determined on the data in Figure 2 on the export of tea packets, bags and instant tea — has not shown noteworthy growth since 1996.
The initial positive trend of incremental product exports (tea packets and bags) could be explained by the policies adopted to promote value added tea exports under the export-oriented trade liberalization in Sri Lanka beginning in 1977 (Ariyawardana, 2001; Ganewatta et.al, 2005). Recognizing the importance and potential of tea bags and retail packets as an alternative to bulk tea export, the Sri Lankan government promoted value added exports through two main institutes: 1) the Sri Lanka Tea Board (SLTB); and 2) the Export Development Board of Sri Lanka (EDB). The EDB initiated the Custom Duty Rebate Scheme and Export Expansion Grant Scheme to promote incremental innovation in the 1980s. Under these two schemes, tax breaks and grants were provided that encouraged Sri Lankan exporters purse export expansion through incremental innovation. At the same time, the SLTB initiated a promotional support scheme for tea bags and tea packet for exporters in 1991.
Under this initiative, tax breaks of 40% for tea bags and 20% for retail packets were granted to exporting firms (Ganewatte, 2005). In addition, the SLTB provided a 50% interest rate subsidy on loans for the purchase of tea bagging machines, which increased in number by 75% during 1995-1998 (Kelegama, 2003). Also, complete duty exceptions for tea bag packing machinery and color separators were offered. To encourage more tea bag and packet exports, cash grants were provided to exporters who had increased the volume and export price of processed teas over the previous year. The increases in exports of tea bags and retail packets clearly shows that Sri Lankan tea exporters positively responded to policy initiatives taken by the government to increase innovation.
The decline of value-added tea exports from 44% in 1996 to 31% in 2000, and then sluggish growth (37% in 2017), can be attributed to both domestic and international factors. Domestic factors include: 1) the. failure to capture new customers and markets through incremental and radical innovations; and 2) an inability to come up with inputs such as machines and materials needed for bagging and packaging at the local level. Most these inputs were expensive and had to be imported. International factors include: 1) competition from other tea-producing countries particularly Kenya and Vietnam; and 2) import restrictions from buying countries and trade embargos. For example, the liberalization of the tea market in Russia, second largest importer of Sri Lankan tea during the early 1990s, had a profound impact on Sri Lanka. Up to that time Russia mainly imported packaged tea from Sri Lanka. However, to control tea packet and tea bag imports, Russia imposed a 10% import duty of bags and packets while imposing no duties on bulk tea. In 1997, the import duty on pre-packed tea and bulk tea was increased to 20% and 5% respectively. Although the import duties were reduced after the WTO discussions, Sri Lankan tea brands, with teas packaged in Sri Lanka, had to compete with teas packaged in Russia by Russian packers established during that time (Embassy of Sri Lanka in the Russian Federation, 2015).
Apart from the aforementioned incremental innovations in tea blending, flavoring, bagging and packaging, Sri Lanka has also tried some radical innovations. These include ready-to-drink teas, soluble instant tea, tea concentrate, catechin mixture, carbonated tea, tea sherry, tea cordial, tea mock tail and tea capsules for nespresso machines. While few products developed by the private sector, such as ready-to-drink teas and tea capsules are being exported in small quantities, and some developed by the Tea Research Institute of Sri Lanka are being tested for commercial purposes by the private sector, most other efforts have been discontinued at the experimental stage.
Some feel Sri Lanka should not give up on such radical innovation efforts. Ariyawardana (2001) has pointed out that in the global tea trade there will be a significant role for incremental and radical innovations in tea because of the sophistication of tea consumption patterns. Future demand for tea is likely to be different from that of the past (orthodox black tea leaves brewed in teapots), and there could be more demand for convenience-oriented tea products. Growing dietary health and beauty concerns have increased the consumption of tea in various forms, as tea is considered to have many health benefits. Although there appears to be a strong demand for incremental and radical innovations in the tea consumption market Sri Lanka has not stepped up to exploit it while Japan has.
We analyzed the tea product basket of Japan to see to what kind of incremental and radical product innovation is taking place in the Japan tea industry. One major observation was that, unlike in Sri Lanka, tea is produced and consumed in many different beverage and non-beverage types in Japan. In contrast to Sri Lanka, which exports up to 97% of its tea production, Japan domestically consumes 96% of the tea it produces.
In Japan, the tea plant is exposed to many different types of processing methods, there are vast product and process variations and many different beverage and non-beverage products and types are produced. According to Table 2, green tea is the major tea type produced in Japan. Different types of green teas are produced using different processing methods. Sencha, the main green type produced, accounts for 58% of the total tea production, while gyokuro, kabusecha, matcha and tamaryokucha — other types of green tea — collectively account for 11% of tea production. The remaining 31% is made of a variety of green teas (kyobancha, hojicha, kukicha, konacha, tencha, etc.), black teas and oolong teas, fermented teas and white teas. There is also a wide price variation among the green teas produced using different processing techniques. Sri Lanka, on the other hand, grows much, much more green leaf tea, output, but only produce two types of black teas (orthodox and CTC) and small quantities of green and white teas. Sri Lanka has not been able to come up with innovative processing techniques and has not been able to generate valued-added income by coming up products that cater to different consumer groups and tastes.
In Sri Lanka, there were 710 green leaf processing factories in 2016. Out of the total, 700 (99%) were managed by the private sector, while the rest (1%) were owned by the government. About 98% of the total production of these factories is sold at the Colombo Auction as primary product (bulk tea) and only 2% is sold through direct sales (Hemaratne, 2016). According to a recent report from the Tea Factory Owners’ Association, 62 of the 710 factories have either closed down or reduced their production due to lack of green leaf production (Daily Mirror, 2019). Some factories operate only two or three days per week. An emphasis on economies of scale to reduce costs of production in black tea, rather than developing methods to gain a competitive advantage such as product innovation appears to have hurt the tea industry in Sri Lanka.
Table 2: Major type of green teas produced in Japan
|
Sub type
|
Production share (%)
|
Price (Yen/kg)
|
|
Sencha
|
58.6
|
1,800
|
|
Gyokuro
|
0.3
|
5,462
|
|
Kabusecha
|
5.4
|
1,552
|
|
Matcha /Tencha
|
2.8
|
3,134
|
|
Tamarykucha
|
2.8
|
1,644
|
Source: Ministry of Agriculture, Forest and Fisheries, Japan, (2017)
Although the total production volume in Japan is about one third of Sri Lanka, there are 4,698 factories in Japan (Table 3). These factories basically fall into two groups: 1) factories producing primary output, and 2) factories producing finished products. A total of 892 factories (19% of all tea factories) produce finished products. Of these 74% are sole proprietorships. These small-scale tea processing factories are very common in Japan and they produce a number of innovative tea products. At a typical family-owned tea processing factory, about 70 tons of primarily processed tea is converted into 30 different types of tea beverages annually. They are marketed both locally and internationally through direct sales, tea shops in Japan and e-marketing.
Table 3: Types of tea processing factories in Japan according to ownership.
|
Ownership
|
Type of output
|
|
Primary product
|
Finished products
|
|
No. of factories
|
%
|
Number of factories
|
%
|
|
Sole proprietorships
|
2763
|
72
|
664
|
74
|
|
Farmer groups
|
363
|
10
|
58
|
7
|
|
Registered Agricultural Unions
|
118
|
3
|
29
|
3
|
|
Private companies
|
419
|
11
|
64
|
7
|
|
Agricultural cooperatives
|
140
|
4
|
72
|
8
|
|
Other
|
3
|
0
|
5
|
1
|
|
Total
|
3806
|
|
892
|
|
Source: Central Tea Association in Japan, 2018
Apart from the beverage types, there are a vast range of non-beverage tea products produced in Japan (Table 4). These products can be considered as radical innovations in the tea industry. According to our observations and findings, many of these products are created and manufactured in small and medium scale enterprises (SMEs) and they are supported by the government institutes established in each prefecture for technical knowhow and production and testing facilities. Some of these products are sold under their own brand names, at their own sales outlets or regional supermarkets. Although an actual count could not be taken, observations at large Japanese supermarkets show that there are hundreds of SMEs using tea as an ingredient to make thousands of different products in Japan. The tea-based confectionary industry is highly developed and is mainly comprised of small- and medium-size family businesses. An ice-cream named “Ceylon milk tea ice-cream” is available in Saga that generates income and jobs for Japanese not Sri Lankans.
Table 4: Examples of non-beverage tea products in Japan
|
Confectionary
|
Culinary products
|
Cosmetics
|
Product derivatives
|
|
Chocolate
|
Wasabi green tea
|
Soap
|
Food supplement
|
|
Ice cream
|
Green tea noodles
|
Face wash
|
|
|
Pudding
|
|
Shampoo
|
|
|
Cake
|
|
Creams
|
|
|
Musket
|
|
Perfumes
|
|
|
Cookies
|
|
Tea tree oil
|
|
Source: Survey conducted in Kyushu, Japan, 2019
Such efforts are hardly seen in Sri Lanka. The survey conducted with 43 tea manufactures in Sri Lanka revealed that innovation was something beyond their mandate. Of the 43 firms, 25 (58%) are large firms whose annual export quantity exceeds 1 million kilograms. Their main product portfolio is made up of blended, flavored and packed tea improved through incremental innovation. Some firms (30%) have tried radical innovations such as introducing tea concentrate, tea aroma, ready-to-drink (RTD) beverages, tea energy drinks, and tea cordial but had little success marketing them. Innovation output has been very low. Only seven products were invented in 2013-2018 time period and of them were the result of incremental innovations. None of the surveyed firms have tried to create products for local market and ideas that would be categorized as radical innovations are new and not pursued. Although attempts have been made to make new beverages, there are hardly any tea-based non-beverage products in Sri Lanka.
c) History of tea innovations in Sri Lanka and Japan
Tea was first introduced from China to Sri Lanka in 1824 by the British followed by tea plants brought from India in 1839. Commercial cultivation of tea in Sri Lanka was started by a Scotsman named James Taylor in 1867. Cultivation techniques and processing technology to make orthodox black tea and other teas were introduced by the British. There was a high demand for tea produced by the British in Ceylon in the world market thanks to unique climatic and soil conditions in Sri Lanka, which gave rise to a tea, many say, with superior taste, flavor and aroma. The British brought in Tamil workers from India to work in the tea plantations for relatively low wages making tea production and prices low. Sir Thomas Lipton started purchasing Ceylon tea and distributing it through Europe and the U.S. beginning in the 1890s. After that tea production was very profitable in Sri Lanka and tea became the largest money-generating sector of the economy.
Although many things have changed in the tea industry — soil fertility and pH, for example the socioeconomic conditions of the plantation workers — tea production and processing has changed very little in Sri Lanka. Since independence from the British in 1948, there has not been a significant contribution from the Sri Lankan scientists or industrialist to the tea industry in terms of innovation, except for introducing some new tea cultivars and incremental innovations in blending, flavoring and packaging tea.
As for Japanese tea history, written records say that both tea drinking and the tea plant were introduced from China by Japanese monks in 805 (Brekell, 2018). By 1867, when commercial tea cultivation was just starting in Sri Lanka, Japan was already a major global tea exporter. At end of 19th century, Japan exported more than 70% of its total tea production of and only silk was a bigger export commodity (Sugiyama, 2012). At this time, the main product was pan-fried green tea, a tea type originally introduced from China, and the U.S. was the main export destination for Japanese tea. In 1738, “Japanese Sencha” was invented. In 1835, using a new innovative process, Japanese developed “Gyokuro” tea, which even today fetches high prices in Japanese tea markets. The Japanese continued to build on this foundation of quality improvement and innovation laid in early stages in the Meiji era mainly by: 1) the establishment of quality standards; and 2) direct government intervention for trade fairs and skill development.
In the 20th century, the Japanese export tea market faced up to major challenges with innovations. The first challenge was cheap, good quality tea exports from countries such as India and Sri Lanka. Japanese tea exports declined from 23,142 tons in 1918 to 7,138 tons in 1921 and American tea drinkers began consuming black tea from India rather than green tea from Japan. To address the loss of markets, Japan turned to product innovation and began pushing “steamed sencha”, a variation of the tea developed by the Japanese in 1738. Steamed sencha was upgraded and marketed in accordance with consumer preferences in the U.S. (Florent, 2012). As massive tea exports from India and Sri Lanka continued to flood traditional markets, Japan began looking for new markets. Attention was turned to countries in the Soviet Union and the Middle East a new innovative tea was invented — Mushi-sei tamaryoku-cha, a steamed tea similar to the Chinese green tea favored in these places (Florent, 2012).
World War II (1940-1945) paralyzed international trade and the quantity of Japanese tea exports dropped to 1,500 tons by 1945. In Japan, it became increasingly difficult to maintain tea plantations and many were transformed into fields for growing vegetables to feed a starving population. In the post-World War II period, tea was chosen as one of the products that was to be exchanged for food and fuel, and this boosted plantations and factories (Florent, 2012).
After World War II. Japanese tea producers focused not only on export markets but also on domestic markets and had to deal with competition from emerging rivals such as Taiwan and a lack of labor on the tea plantations as rural people moved to the cities where wages were higher. This resulted in higher wages on the tea plantations which in turn increased the price of tea (Sugiyama, 2012). One way Japanese tea producers overcame these challenges was by introducing many new, innovative beverage and non-beverage products with higher added value. The rapid development of Japan increased the purchasing power of Japanese consumers, creating increased demand for more expensive Japanese tea.
To get a picture of what is happening in the Japanese tea market today, we analyzed recent consumption trends in the domestic tea market in Japan using household expenditure of tea. According to Figure 3, during most of the 2000s and 2010s, the average annual household expenditure for tea remained constant: — around 10,000 yen a year — but expenditure on leafy type tea declined by 32% while the expenditure for ready-to-drink (RDT) beverages increased by 48% during period between 2002 and 2017.
This clearly shows that consumption patterns have changed, presumably due to the changes in the lifestyle of tea drinkers and a wide range of choices of styles, tastes and packaging of tea. These finding clearly show the impact of radical innovation on the tea industry of Japan (See Table 4). The packaging or RTD beverages has changed a great deal. Canned green tea was introduced in 1985, tea in PET bottles began in 1986, followed by milk tea and lemon tea in containers in 1990 (Japan Management Association, 2016). Table 5 shows RTD tea production for the domestic market in Japan based on container and tea types. According to this data, RTD tea in PET bottles is more popular than tea in other container types. This clearly shows a radical innovation transition from leafy type of tea to RTD tea, followed by incremental innovations in package types addressing consumer preferences for different kinds of packaging — such as aluminum cans, steel cans, glass bottles, PET bottles and paper packs — presumably chosen based on convenience. Through these adaptions, the Japanese tea industry has thrived in the face of changing consumer habits and increased competition from other beverages.
Table 5: Production share of RTD tea according to container type in 2017 (%)
|
Type of container
|
Green tea%
|
Oolong tea
|
Black tea
|
Mugi tea
|
Blended tea
|
Other tea beverage
|
Total
|
|
Aluminum cans
|
0.2
|
0.3
|
2.9
|
0.1
|
0.7
|
0.7
|
0.7
|
|
Steel cans
|
1
|
0.7
|
2.9
|
0
|
0.9
|
0.4
|
1.1
|
|
Glass bottles
|
0
|
2.3
|
0
|
0
|
0
|
0
|
0.2
|
|
PET bottles
|
96.3
|
94.2
|
74.4
|
97.3
|
0
|
79.9
|
92.4
|
|
Paper pack
|
2.6
|
2.5
|
19.2
|
2.6
|
98.2
|
18.8
|
5.5
|
|
Other
|
0
|
0
|
0.6
|
0
|
0.1
|
0.1
|
0.1
|
Source: Central Tea Association in Japan, 2018
Japan has never stopped innovating and it seems likely it will continue to do so to overcome new challenges facing the tea industry. A case study conducted by Takano and Kanama (2019) in Sashima, Japan on an effort to develop a new black tea market sheds light on this. Here, researchers have conducted several trial and error experiments to improve black tea in Japan. In the study, Japanese farmers learned technology from researchers and even farmers in Sri Lanka and this led to farmers in Japan coming up with new black tea processing techniques that differed from conventional orthodox and CTC techniques. We want to highlight the fact here that if Ceylon tea exporters in Sri Lanka want to radically innovate tea production in terms of packaging, there is already a wide variety of beverages in such packaging in international markets. Ironically, although there are many RTD beverages available in Sri Lankan market — some of which are unhealthy because of high sugar content — not a single tea-based RTD beverage could be found Sri Lanka. Our own interviews with the Sri Lankan and foreign tea consumers in Sri Lanka indicate that there are no RTD tea beverages nor places that serve quality Ceylon tea in Sri Lanka.