STiR coffee and tea magazine

STiR coffee and tea 25 Tea Shipping: An Inside View The main areas of innovation in tea have long been at the front and back end of the logistics chain from bush to cup: growing, harvesting and processing, and marketing and selling. The middle links are now being recognized as a high payoff target of opportunity: auctioning, reduction of time, intermediaries and costs in the supply chain, and improv- ing freshness in shortening the delivery cycle. That makes shipping a critical element in service to the customer and profitability to the seller. For the many online smaller tea players, this cost that can be one of the major blockages to pricing, margins and customer service. The main issues are small versus bulk shipment, sea versus air, self-management of customs and delivery service versus agents, including Amazon and Alibaba, and free versus fee to customers. A starting point for handling shipping has to be to get a reliable grasp of the numbers, the fixed/variable components, especially in international handling, and benchmarks for assessing management options. Here are two detailed cost breakdowns that give a sense of the issues and scale. They are from a small specialty vendor and track his purchases of a Thai oolong and Yunnan black gold from China: Thai Oolong Yunnan Gold Purchase price per 100 grams unit of sale 2.60 Euros 8.50 Euros Air shipping to Germany 1.50 2.50 EU customs and VAT 1.10 2.60 Operating and admin costs 3.35 3.35 Packaging and consignment 3.50 3.50 Total cost 12.05 20.45 Retail price 17.90 24.60 Gross margin (excludes admin fixed costs) 5.85 (32%) 7.50 (43%) Variable costs for shipping and delivery 6.10 (34%) 8.60 (35%) Reducing purchase cost by 20% has only half the impact on gross margin as cutting shipping expenses by the same fraction. Increasing price by 20% — and surely losing business — has the same effect as the shipping cost improvement. The analysis is complemented by general figures from an importer. He is not at all an enthusiast of the alternate shipping strategies for China teas that buy from registered brokerage firms. These agents purchase product from large factory farms and not from small farmers who cannot obtain the export licenses that are a major blockage to getting the very best teas to foreign markets.) Quality of the bulk teas is variable but they cost much less than do Vendor A's – and this importer's -- direct links to producers and on the ground agents. The explanation is simple: bulk shipping by sea is much, much cheaper than small package air freight. Though it comes at the addition of delays and loss of freshness, centralized warehouse storage adds economies of scale. The importer provides ranges of costs for the full shipping cycle, including following FDA rules for the goods to be handled for safety and sanitary practices by a business that has a food manufacturer's license and getting package from the shipper to the seller. These total around $0.90 an ounce of tea – close to $3 for 100 ounces. This is cheaper than Vendor A's cost structure, but still a high fraction of the cost of a tea that sells for $5-7 an ounce. The price/margin/profit equations are compounded by how to charge customers for delivery: free shipment, subsidized price per order, etc. In any instance, the seller pays the cost. Shipping is a central management problem that has to be viewed as strategic, not administrative. - By Peter Keen Global production was approximately 160 million 60-kilo bags last year, slightly ahead of consumption, according to José Sette, executive director of the Interna- tional Coffee Organization (ICO). Asia and Oceania are experiencing the greatest compound annual growth at more than 2% per year. Emerging markets now con- sume 15% of the world's coffee, up from 2% in 1965, he told attendees in January at the 1st Pu'er International Specialty Coffee Expo. Boosting domestic consumption in producing nations such as China stabilizes demand and reduces market volatility, he said. It is difficult to pinpoint a price level that will discourage coffee production but low farmgate prices are a long-term con- cern compounded by climate change. "It is the mission of ICO to enhance farm profitability through more efficient supply chains, increasing the share of FOB price received by farmers," he said. Dave Seminsky, founder of Sumerian Coffee in Shanghai, China predicts "a sta- bilization in exports with a possible drop in production. For the prior three years, year-over-year, we've seen growth. How- ever, I think soon climate change is going to begin to curb yield." "In 2050 we are looking at an increase of 2.5 times in global demand versus cur- rent global consumption. It is extremely likely climate change will reduce farm yields by 50% compared to today's out- put," he said. "If you take a look at the amount of speculative trading that is taking place in the C future contracts— upwards of 40% it's just going to create volatility with not much stability." Only 3% of coffee traded on the fu- tures market is actually physically delivered. He points out that "if we push up the price of coffee hard enough we will squeeze the shorts (speculators) out of the market and the price will rocket." Trade Volatility

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