Hospitality Industry
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New trends and challenges in the tea industry

The tea market reflects the quality of its product: it is discreet, differentiated and in good health. After water, tea is one of the most drunk beverages in the world. Yet the tea market seems far from having reached a maturity but keeps expanding and is now targeting Gen Z. In this short article we assess the tea market and we sketch the future trends and challenges faced by the expanding tea industry.

The tea production and consumption

According to the 2022 FAO report, tea production (intended as 'camellia sinensis' processed leaves) has grown exponentially since 1990 reaching a 6.5 million tones in 2021. Tea consumption has also skyrocketed since 1990 with an annual increase of 3.5% reaching a 6.4 million tones in 2021. The FAO continues to describe that in the last decade, pro-capita consumption increased by 2.5% per year but unevenly among producing countries and importing countries: while in the firsts there has been an increase, in the seconds there has been a contraction.

According to the FAO Tea Composite Price, an average black tea price (orthodox and CTC), was exchanged in the four major actions for 2.62 USD per kg at the end of 2021. The Russia-Ukraine war is negatively affecting the price for two reasons: i) from a demand perspective, Russia is one of the major importers of Indian and Sri Lankan tea, and ii) from a supply side, Russia is the biggest fertilizer supplier.

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Tea trends & challenges

The FAO expects a yearly increase in production of black tea by 2.1% and a production increase of green tea by 6.3% till 2030, while the consumption of black tea will increase by 2% in the next decade.

Behind the growth in demand stand the health benefits associated with tea drinking. This conclusion is upheld by journalist Indiana Lee, who points out that more and more consumers will join the world of tea driven due to its alleged health properties. Regarding this increase in tea consumption, the FAO points out that innovation and diversification will play a decisive role in boosting the market.

Here is what we should expect from future developments in the tea industry.

 

1. Ready to drink tea

Lee, in line with FAO’s conclusions, looks specifically at the still under-explored ready to drink tea (RTD), and in particular, at the morning drinkers whose schedules leave no time for a tea ceremony. According to Lee, while coffee drinkers can count on a lot of solutions for their “to go” morning coffee, tea lovers have a limited choice. There are therefore options to expand this market both in terms of taste (more flavors) and in terms of “to go” receptacles (e.g. cans).

 

2. Tea bag pros and cons

The current common “to go” solution for tea drinkers consists in tea bags. However, tea bags are controversial as they do not always meet the flavor standards of tea lovers, for several reasons.

First of all, tea bags (RTD) are seen as poor-quality options for tea lovers. The tea contained in tea bags is perceived as having been made from low-quality tea. To better understand this, consider the CTC process (in which tea is chopped, crushed and curled) used for the preparation of the majority of black tea on the market and that is particularly destined for tea bags. Because of its result (a powder), CTC - differently from orthodox methods - allows to mix higher quality tea with lower quality tea.

Secondly, tea lovers tend to be very attentive to how the tea is brewed. They have high standards in terms of water temperature, time of infusion, infusion methods, type of containers, and they favor giving the tea leaves plenty of room to open up during the brewing phase.

All this contrasts with the idea of tea prepared from a bag. In fact, for tea bags, the room left for the tea leaves (if not reduced to powder) is limited to the sachet, the infusion method is already decided and the material employed for infusion is also pre-established. Lastly, to-go options imply cheap containers, such as plastic or paper.

While expanding the variety of tea in the sachets and improving the quality of the tea in bags (by including, for instance, tea leaves instead of CTC tea) would help to attract more drinkers. But, it may not necessarily retain them. In fact, according to the U.S. Tea Association 2022 report, tea bags and loose-leaf tea sold via traditional channels show a decline while the overall sells are still up to the high pandemic level. Instead, what show signs of growth, were the sells of “high-end specialty tea”.

The conclusion is the following. The growth in tea drinkers is mainly upheld by those looking for the health benefits of tea. These types of tea clients are particularly attentive to the production process and they prioritize non-industrial tea. They are not only driven by the taste of the product but also by its origin, its process and its presentation.

As things stand today, tea bags can retain old tea drinkers and might tempt some new tea drinkers - but the latter will very likely switch to higher quality products given the choice. The challenge here is how to retain these new customers. From a marketing perspective, the industry needs to convince these drinkers that tea bags come from non-industrial organic farming. We should assist therefore in changing in the way these tea bags are presented.

 

3. Tea experience

According to Lee, tea drinkers not only care about the product itself (good tea) but also about the experience when buying their tea. They want to be surrounded by tea culture as they walk into a shop, they look for tea presentations and also for information. Now, according to the FAO report, the demand for tea depends indeed on income and age, but also on education and cultural background.

Therefore, we should expect more and more niche markets, a demand for individualized tea experiences and the need for more skilled workers that can assist customers and guide them through the sophisticated know-how of the tea world. Subsequently, the service and the human touch behind the customer experience will count more than ever.

4. Tea time for Millennials and Gen Z

 

According to the Coffee and Tea company Orinoco, millennials and Gen Z seem to i) prefer non-alcoholic beverages, ii) be willing to pay for higher quality tea and iii) pay attention to ethical and sustainable tea. For Orinoco, this implies, that consumers will:

  • Increasingly turn to loose-leaf tea (rather than tea bags),
  • Look for tea blends and/or combination with plants and flowers,
  • Ask for non-alcoholic tea cocktails and sparkling tea (where sparkling water is mixed with tea),
  • Try out powdered tea because it's easy to prepare,
  • Choose tea based on its healthy chemical composition and additional flavors.

Tea is the most popular beverage after water but is far from being a mature market. Generation after generation, tea has reshaped itself and has met our evolving needs conquering our early morning thoughts, afternoon breaks and evening rests. Always the same yet always different.

The opportunity in today's tea market is not so much about tea changing a receipe as old as humanity, but rather the way tea is brought to us. The growth of the market is more a marketing challenging (intended in the broad sense) rather than a production one.

Or, as Mary Lou Heiss says, author of 'The Story of Tea: A Cultural History and Drinking Guide', “A simple cup of tea is far from a simple matter. Understanding tea is a complex study of how's and why's."

 
Written by

Associate Professor of Economics at EHL

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