The State of the U.S. Tea Industry.

Joe Simrany, president of The Tea Council of the USA, Inc., discusses tea consumption and current trends in the United States.

Tea consumption in the United States has never been considered traditional by international standards. After all, nearly 80% of all tea consumed in the U.S.

is consumed over ice, a habit not experienced by any other country. With the exception of some strong growth trends in the foodservice segment, tea sales in the U.S. have been virtually flat for the last decade. Yet, while the preferred form of drinking tea may be a bit unusual by global standards, the slow growth trend experienced in the U.S. is by no means unique.

Global consumption has shown very modest growth over the last decade, with the exception of 1992 which reflected dramatic decreases in tea consumption by the former USSR. In attempting to analyze the causes of the near global malaise affecting the tea industry, no easy answers rise to the surface. In fact, the situation is complicated by the disruption of normal buying patterns in the former Soviet Socialist Republic, by the war in the Middle East, and by numerous other anomalies occurring in consuming countries.

However, scrutiny of circumstances contributing to the growth trends in tea in the U.S., the U.K., and Canada allows us to reach certain conclusions. Despite the fact that consumption habits in these three countries are very different (i.e., hot vs. iced tea), the market forces affecting the potential for growth appear to be similar. In all cases, it appears that consumers have either discovered or are in the process of discovering alternative beverages to tea. While this has always been a major factor in the U.S., it is becoming increasingly important in the U.K. and Canada where the market for traditional forms of tea is much more developed. As a consequence, tea consumption is much more vulnerable in the U.K. and Canada than in the U.S., and is reflected in the overall decline realized by the two countries compared to the flat market in the US.

The Convenience Factor

One major factor shaping the market for tea in these three countries is the need for convenience. In almost every form, tea has been less convenient to prepare and consume than its competitive options such as coffee, soft drinks, bottled water, flavored water, and fruit juice. This factor is especially true for tea which is consumed away from the home and is considered of paramount importance in the vending segment.

Ready-to-Drink (RTD) tea in bottles, cans, aseptic packaging, plastic containers, and other packaging configurations now bring the ultimate in convenience to consumers. Ease of preparation had never really been viewed as a strong issue for selling of tea and, in a nation which demands convenience, has served to act as a constraint on sales. It was this same demand for convenience which caused the tea industry to introduce the teabag in 1904 and to create instant tea and iced tea mixes in the 1940s and 1950s.

Closely linked to convenience is availability. Ready-to-Drink bottles and cans have made tea more readily available to consumers than ever before, particularly at the point of consumption. Both the convenience and availability factors are totally compatible with basic trends in the workplace -- specifically, the erosion of "free time" available to American consumers and the resulting trend towards eating lighter meals "on the run."

The U.S. has one major advantage over the U.K. and Canada in meeting the threat of competitive beverages and, ironically, it can be found in its "typical" consumption habits, namely iced tea versus hot tea. Because a majority of the tea consumed in the U.S. is iced, there is no intrinsic resistance by the tea industry to perpetuate traditional forms of hot tea usage. In the absence of that resistance, the iced tea industry in the U.S. has done reasonably well, especially in the foodservice arena. It is in the areas of convenience and marketing that iced tea has lost much ground to its competitors -- that is, until 1993.

The year 1993 was a pivotal year for the U.S. tea industry. In many respects, it represented one of the most important years since the invention of the tea bag and iced tea itself in 1904. In 1993, many new Ready-to-Drink iced tea products were rolled out nationally and, even more importantly, it became apparent that consumers were readily accepting these products. It was also the year in which significantly increased levels of marketing dollars were devoted to supporting the introduction of the new Ready-to-Drink products and to communicating the more appealing attributes of tea over other beverage options.

The significance of the Ready-to-Drink teas on the overall health of the U.S. tea industry cannot be overemphasized. For the very first time, one of the greatest concerns of U.S. consumers was addressed and eliminated -- namely the relative inconvenience of drinking tea versus soft drinks and other similar beverages. Not only did it make tea consumption more convenient and available for current consumers, but it also introduced tea to a great many new consumers who, prior to the advent of RTD teas, were not part of the target audience.

Expected Growth in RTD Teas

As a result of the development of Ready-to-Drink teas, iced tea has become even more the beverage of choice for a whole generation of Americans. In 1993, Americans consumed approximately 2.0 billion gallons of iced tea, a number that will probably grow exponentially as Ready-to-Drink teas are discovered by an increasing numbers of consumers. Today, as many experts predicted, the sales of the new ready-to-drink teas will top $1.5 billion, in effect doubling the size of the traditional tea market in the U.S. Those same industry experts see the market for these new forms of tea doubling yet again over the next decade.

This fantastic growth is the result of many factors, not the least of which is the marketing effort of the U.S. packers and their soft drink partners. The U.S. tea industry has launched a concerted and aggressive advertising effort, blitzing the country with television commercials. Advertising expenditure, in support of the RTD segment, has exceeded well over $100 million.

The availability of Ready-to-Drink teas is not the only reason why tea has become more popular. The resurgence of tea in the U.S. is also based on some very important market trends. One of the most important is the continuing and increasing health consciousness of American consumers. Tea is perceived to be a healthier beverage choice and part of a healthier lifestyle. This perception is likely to be reinforced as more and more scientific research studies confirm the important role which tea plays in human health.

Perceptions of tea consumption in the U.S. are changing and these changes are likely to affect consumers worldwide. Traditions are changing and tea is becoming less the delicate, occasionally-consumed beverage of the past, and more the staple of tomorrow's healthy diet. Yes, the introduction of Ready-to-Drink forms of tea, increased marketing efforts, and favorable scientific research have all played an important part in this resurgence. However, in the final analysis, it is the intrinsic qualities of tea -- great taste, versatility, cost effectiveness, and nutrition -- which have played the strongest role in making tea one of the most sought after beverages of the 1990s.

Changes in Distribution

If anyone believes that the tea industry in the U.S. is not undergoing a dramatic period of change, they should take a quick tour of their local supermarket and observe what is happening. Even within this single distribution channel, change is pervasive and apparent.

The most obvious change is that tea may very well now be found in several locations throughout the supermarket, not just in the designated coffee aisle. The most striking of the new locations is the significant amount of space now being devoted to Ready-to-Drink teas in the soft drink section -- but this is only the beginning. While traveling around the store, tea may also be found in the dairy department in both bottles and other (non-typical) containers. Further, depending on the size of the supermarket, shoppers may also encounter a refrigerated cabinet dedicated to tea near the deli department. More often than not, they may also spot some form of tea on promotional display or in a vending machine by the check-out counters or just outside the store.

During this supermarket tour, other changes become obvious. Among them is the number of new companies marketing tea in new and unique forms. Traditional packers of black tea now offer herbal blends, and traditional herbal packers now offer new black tea blends. Bottled water and soft drink companies have expanded their product lines to include Ready-to-Drink tea, and new start-up companies are pouring into the marketplace. Green tea, once nearly impossible to find in conventional supermarkets, is becoming much more readily available, and even oolong tea is occasionally found.

Increased Interest in Specialty Teas

Additionally, specialty teas have also found their way into supermarkets in a greater variety than ever before and are available from large packers as well as from smaller regional tea companies. New shapes, sizes, and flavors abound as well as a newfound consumer interest in the tea category.

Venturing outside the supermarket environment, the casual observer continues to be bombarded with changes taking place within the tea industry. Thanks in a large part to the ready-to-drink version of tea, the availability of tea in non-traditional outlets has increased dramatically. Today, tea may be found in warehouse clubs, mass merchandisers, gas marts, drug stores, and convenience stores. The availability of tea has also benefited from large distribution increases in the vending sector and in the foodservice sector.

Even if you're a confirmed coffee lover, there is no escaping the fact that tea is increasing in popularity. One has only to note the increasing availability of specialty teas in, of all places, the thousands of coffee shops across the country. Even for confirmed coffee lovers, tea has gained new appeal through its Chai product -- a popular blend of tea, spices, and milk.

Obviously all of these changes are viewed positively by most tea industry insiders because they are serving to make tea more readily available and convenient to millions of potential consumers. More importantly, these changes are combining to raise top-of-mind awareness among consumers. As any marketer will tell you, top-of-mind awareness is critical to future growth.

Predictions for Industry Growth

Any analysis of an industry needs to first consider supply of the raw material. Those industries that are dependent upon only a limited number of sources for their raw material are much more vulnerable to wide fluctuations in price and/or availability of the material. Since tea is commercially (and competitively) grown in over three dozen countries spread across the entire globe, the likelihood of shortages of supply is extremely small.

Despite the great number of counties producing tea, shortages may very well occur relative to specific origins. This could result in increased costs to packers of tea who are dependent upon those origins to maintain their flavor profiles. Shortages of specialty tea, which many experts already consider to be in very limited supply, may also occur. However, it is a very safe assumption that as the market for these high quality teas expands, so will the supply -- as producers switch from growing lower profitability mass market tea to higher profitability specialty tea.

Also, contributing to favorable supply conditions is the fact that, with minor exceptions, there are no import tariffs applied to tea or other regulatory hindrances. This all contributes to our forecast that tea should remain in excellent supply over the next three to five years. Demand should also remain in relative sync with supply. Prices should stabilize for mass market tea but will increase moderately for higher quality specialty tea.

Macro Demands

The tea industry within the U.S. is segmented into four broad categories -- supermarkets, Ready-to-Drink, foodservice, and specialty. While some of the trends affecting consumption cross over segment boundaries, others are segment specific. Included amongst the broad based forces affecting demand are the following:

* Pursuit of a healthy lifestyle and acknowledgment of a greater responsibility for the quality of one's own health.

* Improved knowledge about nutrition and better dissemination of this information to the mass market.

* Increasing disposition to de-stress and simplify one's life.

* Greater reliance on natural homeopathic remedies to prevent disease as opposed to invasive procedures to treat disease.

* Continuing appeal of natural products.

* Concern for the environment prompts buying decisions compatible with that concern.

* Preference for quality products offering true value.

* Acquisition of affordable luxuries.

* Desire for products that go beyond satisfying basic needs of satiating hunger and thirst.

* Increasing sense of adventure and appreciation of foreign customs and cuisine.

* A return to simple pleasures associated with family and home.

* A continuing desire for convenience foods and "to go" foods which is specifically driving the market for RTD teas.

The macro-demand forces have been in place for many years and several major ones are responsible for the creation of a gigantic new industry -- healthy foods. This trend, by nature, is long term and will probably accelerate as more knowledge surfaces about the role foods and beverages play in maintaining health. The demand for tea is also expected to be strong over the next decade, driven by ever more compelling evidence concerning its contributions to health.

Micro Demands

In addition to the broad market forces affecting tea, there are also segment specific or micro-forces at play. Unlike the macro forces that were almost universally positive, some of the micro forces point to areas which need to be addressed to ensure optional growth of the category. A review of some of these forces follows by segment:

Supermarkets:

* infinite demand for the finite amount of space causing supermarket management to assess the contribution of every product category.

* Supermarkets' long-term share decline to other types of outlets such as wholesale clubs, mass merchandisers, drug stores, and the internet.

* Increasing appeal of smaller-sized, higher-retail valued packages of high turnover products.

* Blurring of brand identities caused by an increasing number of branded and generic tea products.

* Relatively slow consumption rate, particularly with large-sized packages that take consumers out of the market place for long periods of time. This factor combines with frequent price promotions that encourage multiple package purchases and exasperates a packer's ability to register a clear brand message.

* Heavy reliance on trade rather than on consumer marketing.

* Increased consumer demand stemming from heightened awareness of possible health benefits.

* Concern of cannibalization as new package formats displace sales of traditional formats.

Ready-to-Drink

* Demand for convenience will continue to drive the market for RTD teas.

* Relative ease of entering this market and success of other start-up companies such as Snapple, Arizona, Lipton, and Mystic will continue to attract other companies and contribute to continued growth of the segment.

* Compatibility of tea with a great many flavors and spices will trigger many new entries including the development of sub-categories such as chai.

* RTD tea represents only a tiny percentage of overall consumer consumption of beverages, especially soft drinks with which the category is most closely compared. With increased marketing effort, RTD tea is likely to pick up significant share from soft drinks consumers, particularly with that segment concerned with health issues.

* As the market for foods consumed away from home continues to grow, RTD tea will continue to benefit from this trend.

* While the entire RTD tea category is still in its infancy, there is much room for growth for higher quality specialty brands as opposed to value based products. Evidence for this assumption is seen in the premium prices that consumers are willing to spend on branded water products. Of course, this necessitates that the branded products are supported by consumer marketing activities.

Foodservice

* Consumers are eating more meals away from home because many of them feel that they have less time available in which to cook.

* When consumers eat out, they bring with them a concern for nutrition that bodes well for the tea industry -- in both fast food establishments and white table cloth restaurants.

* The number of restaurants serving gourmet or specialty tea has been increasing for a number of years and will increase further as consumers' awareness of specialty tea increases.

* The number of coffee houses also serving gourmet or specialty tea has been increasing steadily.

* Interest in stand-alone tea salons has been increasing rapidly over the last few years.

* Hotels serving afternoon tea are now commonly found in most major metropolitan areas.

* Tea has always been one of the most profitable food or beverage items available to foodservice operators and, as consumer demand goes up, there will be a corresponding increase in operator demand for tea and ways in which to merchandise tea.

* An increasing number of operators are moving to develop signature teas as a means to increase profitability and gain a competitive advantage. It is likely that this trend will increase, driven by aggressive vendors and consumer appeal.

Specialty Teas

* There has been a tremendous upsurge in interest on the part of operators, hoteliers, entrepreneurs, and consumers for specialty tea. This interest is strongest in the Pacific Northwest, but there is much evidence that it is spreading to the rest of the U.S. as well.

* The trend to specialty tea is following on the curtails of a similar expansion in the coffee industry. Today, specialty coffee accounts for a third of total coffee sales and an even larger percentage of the profits.

* Consumer awareness of specialty tea is receiving a big boost from the exposure it is getting in coffee houses as well as free standing tea salons, retailers, and catalog distributors.

* Several other categories provide evidence that specialty tea will continue to grow to become a much more important segment than it currently is. In addition to coffee, there is bottled water, premium fruit juice blends, imported beers and micro-brewery beers and ciders. Other examples are found in the foods segment and include premium imported vinegar and olive oils, ice creams, and even fine cigars.

* The move to specialty tea is triggered in part by the lure of high profits, but is also in response to perceived renewed consumer interest in the entire tea category.

* Interest in specialty tea will also benefit from renewed marketing support on the part of producing countries interested in increasing the revenues and profits that they derive from this segment.

These predictions appear to paint a rosy picture for the tea industry over the next 5-10 years. The forces in place are time-proven and significant, and should continue to positively affect growth for the future. However, as the saying goes, the only things guaranteed in life are taxes and death. Consequently, nothing should be taken for granted and the tea leaves will miss its boat unless the industry aggressively pursues the growth opportunities before it. On the basis of the growth realized over the last five years, it is safe to predict that the only hot water the tea industry will encounter will be that used to make the world's favorite brew.

Joseph Simrany has been the president of the U.S. Tea Council for over nine years.