| CCP:TE 01/4
|
| CCP:TE 01/4
|
COMMITTEE ON COMMODITY PROBLEMS |
FOURTEENTH SESSION OF THE INTERGOVERNMENTAL GROUP ON TEA |
New Delhi, India, 10 - 11 October 2001 |
DEVELOPMENTS IN THE RUSSIAN FEDERATION TEA MARKET |
1. At its Thirteenth Session in Ottawa, Canada, in 1999, after reviewing market developments in North America and the Commonwealth of Independent States (CIS) and Baltic States, the Group requested that the Secretariat continue to analyze markets of interest, particularly those with the greatest demand growth potential. The Russian Federation is the largest tea import market in the world, surpassing the United Kingdom in 1999. It is a market of interest to all tea exporting countries and has an important influence on international tea prices. With anticipated economic recovery, considerable growth in demand is expected. Hence, a better understanding of the characteristics influencing demand is particularly important in devising appropriate marketing strategies.
2. This analysis of the Russian Federation tea market updates the study undertaken by the Secretariat in 1996, and presented to the Group at its Twelfth Session. In the Russian Federation, tea has always been regarded as an essential food item, and it is the only import item included in the consumer basket, which is used to calculate the minimum subsistence level1. Consequently, tea is also included in the list of food products (16 in all) that are rationed to isolated regions by the federal and regional governments. More than 2 100 tonnes were supplied in 1999 to such regions.
3. The Russian Federation produces less than one percent of its tea requirements. Production is confined to Adygeya, which is part of Krasnodar kray, and Adler and Sochi, which are areas near the Black Sea. Adygeya has a humid, sub-tropical climate and produces low altitude tea. Adler and Sochi in the north grow high altitude, high-quality tea, which is competitive with the best in the world. The actual cultivated area has been declining steadily from 1 800 ha in 1985 and currently is about 1 500 ha (Table 1).
| 1991 | 1992 | 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | |
| Area planted in tea, 1 000 ha | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.5 | 1.5 |
| of which plantings in fertile age | 1.5 | 1.5 | 1.5 | 1.5 | 1.5 | 1.5 | 1.5 | 1.4 | 1.4 |
| Output of fresh tea leaf, 1 000 tonnes | 8.14 | 7.24 | 7.63 | 3.96 | 4.35 | 2.40 | 1.60 | 1.50 | 1.93 |
| Yield per 1 ha | 5.43 | 4.83 | 5.09 | 2.64 | 2.90 | 1.60 | 1.07 | 1.07 | 1.38 |
Source: State Statistical Committee (SSC).
4. Over the last decade both productivity and output have fallen dramatically, to a quarter of their former level, mainly due to low prices. Some recovery occurred during the second half of the 1990s, but it is not envisaged that domestic production will ever be able to totally satisfy demand in the Russian Federation.
5. After a sharp drop between 1992 and 1994, during the early years of transition from a centrally planned to a market economy, tea imports stabilized between 150 000 tonnes and 160 000 tonnes (Table 2). With current trends in population and economic growth, no major fluctuation is envisaged from this range. Imports of black tea account for over 95 percent of total imports. Increasing amounts of packed tea have also been imported, peaking at about 70 percent of imported tea in 1997. Before the transition to a market economy, imports were almost exclusively of loose, bulk tea. With the introduction of a 20 percent customs duty on packed tea in June 1997, bulk tea imports began to rise again.
| 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | |
| TOTAL | ||||||
| Volume, tonnes | 91 759.3 | 147 491 | 118 520 | 158 162 | 150 225 | 161 086 |
| Value, US$1 000 | 260 369 | 291 411 | 202 931 | 281 155 | 311 627 | 283 007 |
| Average unit value, US$/kg | 2 .84 | 1. 98 | 1. 71 | 1. 78 | 2. 07 | 1. 76 |
| Black tea, total | ||||||
| Volume, tonnes | n.a. | 145 983 | 113 457 | 151 473 | 147 379 | n.a. |
| Value, US$1 000 | n.a. | 289 599 | 198 596 | 275 636 | 307 590 | n.a. |
| Average unit value, US$/kg | n.a. | 1.98 | 1.75 | 1.82 | 2.09 | n.a. |
| Share of the total tea volume, percent | n.a. | 98.98 | 95.73 | 95.77 | 98.11 | n.a. |
| of which packed tea (pack not exceeding 3 kg) | ||||||
| Volume, tonnes | n.a. | 80 210 | 65 633 | 108 799 | 100 655 | n.a. |
| Value, US$1 000 | n.a. | 189 516 | 139 824 | 213 555 | 233 203 | n.a. |
| Average unit value, US$/kg | n.a. | 2.36 | 2.13 | 1.96 | 2.32 | n.a. |
| Share of the total black tea volume, percent | n.a. | 54.94 | 57.85 | 71.83 | 68.30 | n.a. |
| of which bulk tea | ||||||
| Volume, tonnes | n.a. | 65 773 | 47 824 | 42 674 | 46 724 | n.a. |
| Value, US$1 000 | n.a. | 100 083 | 58 772 | 62 081 | 74 388 | n.a. |
| Average unit value, US$/kg | n.a. | 1.52 | 1.23 | 1.45 | 1.59 | n.a. |
| Share of the total black tea volume, percent | n.a. | 45.06 | 42.15 | 28.17 | 31.70 | n.a. |
| Green tea, total | ||||||
| Volume, tonnes | n.a. | 1 508 | 5 063 | 6 689 | 2 846 | n.a. |
| Value, US$1 000 | n.a. | 1 812 | 4 335 | 5 519 | 4 037 | n.a. |
| Average unit value, US$/kg | n.a. | 1.20 | 0.86 | 0.83 | 1.42 | n.a. |
| Share of the total tea volume, percent | n.a. | 1.02 | 4.27 | 4.23 | 1.89 | n.a. |
Source: State Customs Committee of the Russian Federation.
6. Sources of supply have also evolved significantly, from about 10 countries before the break up of the former Soviet Union, to 70 by 1994. After an initial rush by traders trying to claim a share of the market following trade liberalization, rationalization of the trade occurred, with importers cutting out intermediaries (mainly re-exporters in other European countries) and sourcing directly from producer/exporting countries. Subsequently, the market share of Asian countries increased from 65 percent in 1994 to over 93 percent in 1999.
7. The dominant supplier of tea to the Russian Federation is India, which accounts for more than 70 percent of total tea imports. A major factor influencing its share of the market is the 1994 agreement between the two Governments, which provides for the settlement of India's debt through supply of tea to the Russian Federation. Under the agreement, imports by authorized organizations are not subjected to value added tax (VAT). Sri Lanka is the next largest supplier, accounting for about 16 percent of the Russian tea market and supplying primarily packed tea (80-90 percent of its shipments is packed tea, compared to 70-80 percent for Indian supplies). China is the third largest exporter to the Russian Federation, with a market share of 4 percent. It supplies mainly bulk green tea (84 percent in 1998). After a sharp drop in tea exports to the Russian Federation in the early 1990s, Georgia manages to hold fourth position, providing mainly tea for blending.
8. Tea is included in the list of commodities that are subject to compulsory certification by two organizations, the Department of State Sanitary and Epidemiological Control of the Ministry of Health Care and the State Committee on Standards and Certification. An importer needs a health or hygienic certificate (the Rostest certificate) to certify a product's quality and safety compliance. Tea safety is determined on the basis of tests for toxic elements - mycotoxins (oflotoxin B), microbiological substances (mould) and radioactive nuclides (cesium 137 and strontium 90). At customs entry points, consignments are also checked by phytosanitary inspectors of the State Service for Plant Quarantine under the Phytosanitarian Control Act.
9. In 1997 the Government decided to assist the domestic tea processing industry by doubling import duties on packed tea (pack not exceeding 3 kg) to 20 percent, while that for bulk tea remained unchanged at 5 percent. However, the major suppliers of tea to the Russian Federation (India, Sri Lanka, China and Indonesia) are included in the list of countries with preferential access to the Russian Federation. Import tariffs for commodities originating from these countries are set at 75 percent of the base level. Imports from Bangladesh, Malawi, Mauritius, Cambodia and Laos, being least developed countries (LDCs), are duty-free. Customs authorities also collect a 20 percent VAT imposed on tea imports.
10. During the Soviet period, tea processing facilities performed three basic functions:
11. The industry was highly supported with 70 percent of expenditure for procuring supplies provided by the Government. The economic reforms changed the situation dramatically, and with the fall in domestic production, factories closed.
12. Prior to economic reforms, the distribution of tea was simple. Bulk tea imported solely by the state foreign trade association "Sojuzplodoimport" and tea leaf produced by domestic growers were supplied to 13 state processing factories. Blended and packed tea was channelled from the factories to oblast region dry storage (one per each oblast), which performed both storage and distribution functions.
13. The distribution system has become sophisticated. The major players include large companies, which started as traders performing import and wholesale operations, and which have no need for intermediaries between them and retailers. The largest have affiliates in big Russian and CIS cities, own or rent dry storage and transportation, and have long-term contracts with retailers. They control distribution in order to minimize the risk of counterfeit branded tea products being supplied to retailers. Reputable companies take pride in the quality of tea offered under their brands and quality is controlled from import to retail. Skilled tea-tasters are employed to develop blends; imports are purchased from regular and reliable partners, and distribution is well organized. Another group of tea operators, specializing mostly in processing (former state factories and new private processors), prefer to rely on distribution functions provided by traders. In non-metropolitan regions of the Russian Federation tea is primarily distributed by non-specialized wholesalers that rarely engage in import operations and procure their supplies from larger tea companies.
14. Smaller non-specialized companies that from time to time engage in tea imports do not have regular contracts with retailers. These operators take advantage of favourable terms (credit guarantees or reduced prices) offered by exporters. Since tea is not a perishable product, import is not considered risky.
15. Finally, the distribution channels of counterfeit tea are wholesale and city markets where the control over quality and commodity documents is weaker or even non-existent.
16. There are three basic types of tea retail outlets: the specialized tea stores, the wholesale and city markets and direct selling entities. The average trade margin is more than 20 percent and does not depend on the type of outlet. However, many of them pursue flexible margin policies with basic foods being taxed less.
17. Specialized tea stores are the unquestionable market leaders judging by the diversity of tea on offer - 25 brands and 135 varieties on average. The most famous Moscow teashop sells about 300 tea varieties, including the highest quality. In the pre-reform period, when good quality tea was difficult to find, these shops stocked them. Specialized tea stores have opened throughout the country and are popular among connoisseurs and wealthy consumers. However, these shops have lost their privileged position as the only source of quality tea and have lost customers to other food stores.
18. Specialized and large stores have regular and long-standing contracts with tea suppliers, which include factories and operators. On average, tea retailers procure 10 percent of supplies from tea factories and 80 percent through wholesalers, and the balance through other intermediaries.
19. Wholesale and city markets have become the basic source of food purchases for less wealthy families. Prices are 20 to 30 percent lower but so is the quality of tea sold. Most of the counterfeit tea is sold in these markets.
20. A relatively new phenomenon is direct selling to enterprises and organizations.
21. According to Law No. 201 "Concerning the consumer basket in the Russian Federation in general" of 20 November 1999, the subsistence minimum of an adult is 500 grams of tea annually and 370 grams for a child. The recommended quantity of tea for each litre of boiling water in the Russian Federation is 4 grams, compared to 25 to 30 grams in England and 45 grams in India.
22. There are no official statistics on actual tea consumption in Russia. The only reliable indicator prior to 1997 was the official data on retail sales of tea. The calculation of tea supply on the basis of domestic tea production and net imports provided very different figures (the gap between 1994 and 1995 reaching almost 60 000 tonnes). This difference could not be explained by inventory draw - down, since stock levels were usually between 10 000 tonnes to 15 000 tonnes. The most likely explanation was that official import data were understated, with shadow shipments reaching between 40 000 tonnes to 60 000 tonnes, annually.
23. Data on retail sales are more consistent, and once again indicate the existence of shadow deliveries. In 1994/1995 retail volumes greatly exceeded total supply. However, since 1997 the gap between these indicators has not been as great (Table 3).
| 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | |
| 1. Domestic production | 3 960 | 4 350 | 2 400 | 1 600 | 1 500 | 1 930 |
| 2. Imports | 91 759.3 | 147 491 | 118 520 | 158 162 | 150 225 | 161 086 |
| 3. Exports | 8 361.3 | 6 842 | 7 425 | 9 832 | 6 756 | 1 997 |
| 4. Net imports | 83 398 | 140 649 | 111 095 | 14 8 330 | 143 469 | 159 089 |
| 5. Ending stocks, total | 15 000 | n.a |
10 491 | 12 240 | n.a. | n.a. |
| industry and wholesale trade | 2 000 | 4 200 | 1 400 | 1 000 | 957 | 2 715 |
| retail trade | 13 000 | n.a. |
9 091* | 11 240* | n.a | n.a. |
| 6. Total supply [1+4] | 87 358 | 144 999 | 113 495 | 14 9930 | 144 969 | 161 019 |
| 7. Total consumption (retail sales) | 163 000 | 186 000 | 158 000 | 159 000 | 147 000 | n.a. |
| 8. Total population, 1 000 | 148 366 | 148 306 | 147 976 | 147 502 | 147 105 | 146 693 |
| 9. Per caput supply, kg [6:8] | 0.59 | 0.98 | 0.77 | 1.02 | 0.99 | 1.1 |
| 10. Per caput consumption, kg [7:8] | 1.10 | 1.25 | 1.07 | 1.08 | 1.00 | n.a. |
Notes: * estimated.
Source: SSC and State Customs Committee.
24. In 1998 the Russian Federation consumed 147 000 tonnes of tea, or 1 kg per caput, slightly below the trend in earlier years, possibly due to the economic crisis. This estimate is not distorted by accumulated household stocks, although estimates for the early 1990s were distorted in this way.
25. Tea has been consumed in the Russian Federation for more than 400 years and since the 19th century has been the most popular drink. Russians have a tradition of tea drinking, where the whole family and guests gathered around a "samovar" and drank up to 10 cups of tea each. The analysis reported in this section is based on a market research survey on Russian tea consumption2.
26. In terms of liquid intake, the average per caput tea consumption is 5.26 cups a day, of which 2.74 cups are drunk at work. Market research results suggest that Russians drink tea because they like it (54 percent), are used to it (39 percent), find it good for their health (28 percent) and it is relatively cheap (16 percent). The survey also indicated that more tea is sold in winter for warmth during the cold season, and that consumers generally buy tea twice a month, the average purchase being 1.7 packs.
27. Quality was the most important factor in consumer choice, even among the less wealthy. Price was also a factor though its influence on choice decreased as incomes grew. Higher income groups seemed to have more stable preferences, choosing brands they liked and to which they were accustomed. The market survey indicated that 52 percent of respondents noted a shift in their consumption patterns since the August 1998 economic crisis. Thirty-five percent began to consume more tea instead of other drinks, 21 percent curtailed even tea consumption and 27 percent bought cheaper tea. However, 17 percent , mostly upwardly mobile consumers drank higher priced quality tea. Another development influencing consumption patterns has been the emergence of tea clubs, which popularize the culture of tea drinking, the healthy effect of tea and the importance of choosing high quality tea3.
28. Black tea continues to be the most common drink in the Russian Federation. Of those surveyed, only 5 percent do not consume tea, while 88 percent consume tea regularly. Green, fruit and flavoured teas were consumed occasionally by about half of the respondents and herbal tea by 62 percent. Many who drank herbal infusions did so for medical reasons (some of them collect and dry herbs themselves). Green tea is becoming increasingly popular among health conscious consumers. Flavoured and fruit teas, although new in the Russian market, have also acquired a niche. Generally, the younger generations with above average incomes were the major consumers, and the current market share of these teas was estimated at about 10 percent.
29. The majority of Russians drank loose tea, while tea bags were used less. Tea bags were preferred by the working class, and consumption in this form has grown. Instant tea was not widely known or consumed: 35 percent of respondents did not know that there was such a product.
30. Slightly over 30 percent of tea was consumed due to its relative cheapness and was likely to be replaced by other drinks as incomes grew. In all income groups the most likely substitute for tea was fruit juice, followed by coffee, milk products, other drinks (mostly mineral water) and soft drinks. Less wealthy consumers would like to replace over half of their tea consumption, while the richer ones were satisfied with their current intake.
31. Children consumed less than half of the tea consumed by adults. Children and adults differed not only by the level, but also by quantities of the mixture of drinks consumed. Coffee was the second major drink among adults, but the share of milk and fruit juice was three times larger for a child compared to an adult. Children also consumed over twice the quantity of soft drinks.
32. Pensioners usually belonged to lower income groups. They tend to be conservative in their choice of tea preferring brands, which they had known for decades. However, tea consumed by them is often bought by younger members of the family according to their incomes and preferences.
33. Tea is available in all districts of the country, even the extreme northern territories and remote villages (although the supply there is far less differentiated).
34. Consumption of tea depended on climatic conditions and was highest in the Siberian cities, Irkutsk and Novosibirsk, with consumption shares of 31.5 percent and 17.8 percent above the national average, respectively. Cold winters led to greater demand for hot drinks.
35. Tea consumption depended on income levels. Low income consumers drank less tea. They were more likely to buy tea in wholesale markets and were more willing to substitute tea with other drinks. In recent years overall tea consumption by this group has declined, and there has been a shift to cheaper brands.
36. Middle income consumers drank the most cups of tea, which were usually stronger than those consumed by low income consumers. The dominant consumption trend has been the shift to more expensive, higher quality teas.
37. Wealthy consumers drank less tea than any other group. However, they drank the strongest and higher quality teas and were least likely to substitute tea for other drinks.
38. Prices for tea are officially monitored by the State Statistical Committee. Between January 1997 and July 1998 tea prices gradually grew in line with prices of other foods. The overall increase during this period was 22 percent. The situation changed dramatically in August 1998 when prices of imported products increased significantly due to the sharp devaluation of the rouble. Since July 1999, tea prices have steadily reduced in US dollar terms, although increased in rouble terms.
39. Nevertheless, tea remains the cheapest drink. Given the average monthly tea consumption in grams and the average number of cups drunk daily, 1 kg of dry tea is used for making about 1 300 cups of this drink. Thus, a cup of tea in January 2000 cost 0.11 roubles which is far less than the price of the nearest competitor - milk (1.6 roubles).
40. Tea is the most popular drink in the Russian Federation. Demand for tea has stabilized at a high level. Economic reforms brought about major changes in the Russian tea market, including an increase in the volume of quality teas imported. If trends in recent years continue, the following developments may be expected:
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1 Federal Law No. 201 On consumer basket in the Russian Federation in general of 20 November 1999.
2 The market survey was undertaken by the Institute for Economy in Transition. Their report is tabled as document CCP:TE 01/CRS.1. Information provided in the report is based on official statistics, interviews with commercial institutions and results of consumer and retailer polls that were conducted in March 2000 in six large cities (the federal and oblast centres) in different parts of the country.
