Chai Tea bags

Kannan Dasaratharaman

Chai Tea was not new to tea as a product or business. Chai Tea was started as a family business over
100 years ago when the family elders started loose - tea wholesaling out of Surat. Over the years the
family moved into exports and the erstwhile CIS countries proved to be very encouraging.

The company set up offices in the erstwhile USSR under the rupee rouble agreement. Tea was a hot
commodity in the USSR and the company thrived over the years. Slowly they moved into
manufacturing and marketing as the market moved to tea bags and set up factories in Russia and
East Europe countries. This worked out well since the raw material was sourced from India and
(gradually other tea producing markets) and manufactured and marketed locally in those countries.
In fact, they boasted of having over 12 factories across these markets and a host of local brands in
the mid -market segment. Their strength was Value for Money and their brands played well, under
the International brands.

India expansion:

The family (now in its 4 th generation) had plans to access the domestic market. Their strength was in
product formulation and they had a wide range of products varying from Darjeeling & Assam,
traditional Khawah & Masala chai to modern flavours (green tea, ginger, cardamom, lemon, mint,
tulsi) and floral and other infusions (chamomile, frangipani, green apple). They also had state of the
art machinery to manufacture and pack these tea bags as well as good sourcing strengths.

Their thinking was that tea is the dominant hot beverage in the country. With people having less
time, tea bags will become a natural choice. Their decision was to get their products and brands
established in the market now rather than later, and benefit from future trends.

The Market:

India was the 2nd biggest producer (23% by volume and 2 nd only to China) and largest consumer of
tea in the world – the industry size was pegged at Rs 20,000 Cr in 2011 at a per capita consumption
of 0.52 Kg per person – “tea is cheap, affordable and addictive”. In addition to domestic
consumption, Tea was a major agricultural export item. 78% of the tea exported (which accounts for
12 % share of world exports) is in the bulk form. Tea bag exports have been growing over the years.

The market in India for tea bags was small and estimated to be less than 2 % of the total market in
volume and 4 % in Value but growing at an encouraging rate. However this was skewed to the
metros and some Tier 2 towns, hill stations and other tourist locations where it was 3 to 5 %. CAGR
for tea bags has been 12 % in recent years against 5 % for packaged tea.

Consumers were largely those who were looking for convenience and a different tea experience.
They were likely to be affluent families, double income families and singles in white collar jobs. They
would have travelled abroad and experienced tea bags in those countries. Share of tea bags in the
West were growing fast and had reached high levels already (UK: 96%, Germany: 92%, USA: 65%,
Russia: 56%). Tea bags offered the consumer variety at low switching costs especially for In- home
consumption.
Consumers in India were consuming a broad range of tea bag products ranging from location based
(Darjeeling, Assam), Masala and other traditional teas like English breakfast and Earl Grey. Floral and
other infusion based teas (even herbal teas without any tea leaves in them at all!) were on the rise.
Tea parlours and kiosks were also adding to the consumption of tea bags which offered the
consumer a refreshing drink at reasonable costs.

Chai Tea bags:

In the Indian market, competition was mainly from Twinings in the high price point, Tetley and
Typhoo in the mid - price point and Lipton, Tata Tea and a host of other brands (e.g. Wagh bakri,
Society) in the Value for money price point. Further, infusion teas were higher priced than traditional
varieties. Chai Tea decided to price at the same price as Tetley but go in for a wide range from the
start.

The company manufactured a few batches and placed them with some retailers in Mumbai. When
there was satisfactory offtake from retailers, they decided to expand their availability.

They needed to answer some questions:

1. What should their Distribution footprint be?

2. What should their Go to Market strategy be?
3. What should their channel choices be?