Brewing Now: Your Cup Of Tea Gets Dearer By 5–10% As HUL, Tata Hike Prices
The recent price hike is mainly triggered by unfavourable weather conditions, which has affected tea production in the country, increasing procurement costs for these companies.
(Image by Myriams-Fotos from Pixabay)
Your cup of tea gets dearer as the two biggest players of packaged tea sellers — Hindustan Unilever Ltd. and Tata Consumer Products Ltd. — have announced price hikes across tea brands, effective this month.
Consumers can expect sticker prices to rise about 5–10% between October and December, sparking concerns over potential shifts in buying behaviour within the beverage market, which would erode volume growth of the companies.
The recent price hike is mainly triggered by unfavourable weather conditions, which has affected tea production in the country, increasing procurement costs for these companies. The purchasing prices for North India tea were 28% higher year-on-year for the July–September quarter to Rs 250 per kg. Likewise, south Indian tea prices rose 25%, now at Rs 128 per kg.
"Tea price hikes have already started at multiple price points, and this will happen over the December quarter," Rohit Jawa, chief executive officer of HUL, told analysts in post-earnings call on Wednesday.
The company, which sells brands such as Lipton, Brooke Bond, Taj, Tazaa and Red Label, saw tea price inflation of 25% during July–September period over the previous year and 20% when compared sequentially.
The largest consumer goods maker has experienced a "low-single digit decline" in the food and refreshment during the second quarter of the current financial year.
Jawa said the price gap between premium tea and plain tea widened, which is why the company was seeing decline in volumes.
The company, however, has gained market share in tea at the expense of unorganised competitors due to their stronger financial position, while those peers grapple with working capital and inventory issues. Yet, the category volumes have remained subdued, according to Jawa.
Sunil D' Souza, managing director of TCPL, echoed similar sentiments. "Tea costs have gone up by about 25% to 30%, and we expect them to stay elevated for some points of time," he told analysts in a post-earnings briefing. "While we have taken gradual tea price increases, we haven't so far passed on the entire tea cost increase to the consumer."
TCPL, which owns brands like Tata Tea and Tetley, has taken price hikes of 5–6% and it will implement staggered price increases going further, D'Souza said.
However, TCPL will ensure that there is no compromise on market share.
"The key thing is you have to remember, it's a competitive environment out there and the one thing we will not do is sacrifice the long term to deliver a short term," D'Souza said. "Therefore, market share is a very, very important metric to me. Profitability is probably the next. Ideally, I would like to see both of them there. But we will make sure we are competitive out there and move lockstep as competitors move."
D'Souza indicated that a 30–35% price increase is anticipated for tea considering a similar range of inflation in order to fully offset the cost pressure. However, this move is expected to impact volumes.
"If there is a 30–35% price increase, which will have to happen to translate this cost in, I do think you will start seeing stress on volume," he said.
Abneesh Roy, executive vice-president, Nuvama Institutional Equities, has warned that elevated tea costs remain a worry. "Tea business, which is a significant revenue contributor for TCPL, is facing challenges due to rising prices and declining volumes and this is expected to hurt margins Q3 FY25 onward."
Roy noted that while subdued tea category volumes are disappointing for HUL, the return of pricing growth bodes well for the company's long-term growth trajectory.
