A Look at Premiumization, Emerging Markets and What Drives Growth in Tea
By Howard Telford, Euromonitor International
Editor’s Note: Senior Beverages Analyst Howard Telford, of Euromonitor International, is one of the many distinguished speakers at the upcoming World Tea Expo, June 15 – 17 in Las Vegas (with a pre-conference program June 13 – 14). Telford is also one of the featured experts in the World Tea Expo white paper, “Advancing the Business of Tea: How Key Vertical Markets Can Profit from Tea.” Delve into World Tea Expo education now by downloading the white paper and gleaning insights from Telford in this valuable article.
Global volumes of both hot tea and packaged ready-to-drink (RTD) tea are estimated to have grown by 2 percent in retail channels in 2015, with 4 percent growth estimated in tea sold into foodservice channels for out-of-home consumption. At the category level, growth remains fairly consistent. Euromonitor International has forecasted 2 percent annual volume growth expected for full-year 2016, with value sales growth strengthening slightly.
The past year has certainly not been without its difficulties, with a troubling slump in consumer goods categories across regions and a deteriorating economic outlook for important tea markets. Yet the fundamental advantages of the tea category are its close alignment with the most important consumer-led drivers in food and beverages – healthier lifestyles, more natural products, flavor experimentation and functional benefits. Tea is well positioned to weather the storm.
Cracking the Code on Premiumization
In both established tea markets and developing regions for tea, consumers are seeking out premium options. In the high value world of specialty teas, highly dedicated consumers are seeking education and brand stories with regard to the different varieties of tea, their provenance and proper brewing techniques. This has driven a growing unit price for the tea category as a whole. But even in the broader, mass market beverage universe, consumers are seeking premium RTD teas as a healthier alternative to other beverages. Honest Tea (owned by Coca-Cola) and Lipton Pure Leaf (distributed in partnership with PepsiCo) are two of the most successful soft drinks brands in U.S. grocery – a channel where soft drinks have recently struggled for growth.
Taking the lead from the coffee market, mass market hot tea brands are focusing on the premium segment by launching more flavor varieties, developing tea brewers, and expanding tea specialist boutiques. Unilever’s T.O by Lipton home tea brewer (launched in France in September 2015) uses premium tea pods and offers a more consistent, upscale at-home experience than simple tea bags. Mass market tea brands in the UK –including Tetley, Ahmad and PG Tips – have focused on flavorful, non-traditional extensions to their core black tea products, hoping to win back consumers and create new daily occasions for tea. These innovations, paired with new demand for green tea in North America and Europe, are leading to higher value growth in the wider tea category.
The Emerging, Emerging Markets
Of course, the second half of 2015 and the first half of this year has been marked by turmoil in emerging markets. Consider the BRICs (Brazil, Russia, India and China): Russia, the fifth largest market for tea in terms of total dry weight volume, remains locked in a steep recession, weakened by the impact of economic sanctions and falling oil prices. Brazil, while not a large market for tea, has suffered a sharp decline in its GDP forecast for the next two years. Meanwhile China, the single largest market for tea in the world, has far more uncertain prospects despite positive growth for tea in 2015.
India is the exception. Euromonitor’s latest forecasts anticipate a 4 percent CAGR in retail volume sales of tea in India from 2015-2020 and an 8 percent CAGR in value terms. While an emerging consumer class is lifting packaged hot tea (along with other consumer goods), an affluent, urban middle class is creating a new tier of premium tea consumption. Foodservice concepts like Chaayos and Tea Trails are aggressively opening new outlets in high traffic areas and exploring higher value tea options than traditional chai.
Looking beyond the BRICs, global growth in tea has remained consistent because of smaller markets outperforming. In second-tier growth markets in Africa and Southeast Asia, we see a growing consumer class of urban, affluent and health conscious consumers seeking the functional and therapeutic benefits of tea in everyday life. In fixed, nominal U.S. dollars, there were only five billion dollar or greater retail markets for tea in 2005; Japan, China, the United States, Germany and the United Kingdom.
That list has doubled to 10 markets by 2015, with those markets joined by Turkey, India, Pakistan, Russia and Canada.
What Drives Growth in Tea?
Euromonitor International’s hot drinks forecast model allows us to identify specific, reliable indicators of growth for the tea category by testing 15 years of historical volume and value data inputs against a variety of socioeconomic indicators across 80 global markets in order to forecast expected growth.
Demographic changes may be strong indicators of growth. For example, according to Euromonitor’s forecast model, the volume growth of green tea demonstrates an extremely strong relationship across markets to the population of young women aged 30-39 as a share of the total population. Income proves to be less impactful. In contrast to coffee, we have found that tea generally demonstrates a far weaker relationship with growth in GDP per capita (a good proxy for income) across the 80 markets included in our data set. As such, the recent downgrades in expected GDP growth in Russia and the United States may impact coffee to a greater extent than tea. This is reflected in our latest quarterly update. The relative weakness of the relationship between income and retail volume sales of tea also illustrates the fundamental challenge of the category: creating value in a product that many consumers across the world view as a highly commoditized, traditional option.
World Tea Expo showcases the consumer-led factors that make tea an attractive consumer packaged goods (CPG) category and a resilient retail product in uncertain times: the versatility and variety of tea-based beverage options, which can satisfy a growing demand for healthful, flavorful and natural food and beverage options. The tea category remains in a strong position to capitalize on these trends.
Howard Telford is a senior beverages analyst with Euromonitor International, a world leader in strategic research solutions and business intelligence. In his role on Euromonitor’s global beverages team, he provides insights on consumer trends and market performance in soft drinks and hot drinks across 80 markets. Telford’s insights have been cited in a variety of national programs and publications including CNBC News, the Wall Street Journal, Bloomberg and Fortune. A native of Bedford, England and long-time resident of Chicago Illinois, he holds his bachelor’s degree from DePaul University and his master’s degree from the University of Chicago. He has been with Euromonitor International for the last five years. For more insight on the tea industry, visit euromonitor.com/tea.
Telford is also one of the featured experts in the World Tea Expo white paper, “Advancing the Business of Tea: How Key Vertical Markets Can Profit from Tea.” Delve into World Tea Expo education now by downloading the white paper.