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Nassim covers the accounting and tax rounds for BRW, as well as general business news. She previously worked for The Age newspaper covering general news, state politics and economics.

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Dilmah founder draws on 25 years of tea business

Published 01 July 2013 08:12, Updated 11 July 2013 10:28

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Dilmah founder draws on 25 years of tea business

Dilmah Tea’s founder Merrill Fernando, left, with one of his sons, Dilhan. Merill Fernando says many of tea’s branded players are reducing quality to fight on price, but he refuses to do this. Photo: Josh Robenstone

It was 25 years ago that Merrill J Fernando, the founder of Dilmah teas, convinced a major Australian retailer to stock his brand. Rather than just produce Ceylon tea for the supermarket private-label branded products, which he was doing at the time, he enquired whether Coles would sell Dilmah-packaged tea in Australia.

“In 1985 I talked to a Coles buyer who was well-disposed towards me,” Fernando says in an interview with BRW. “I said, ‘I have my own brand of tea . . . can we stock my tea?’

“The buyer said: ‘We would love to, but you don’t have a chance. The big guys know exactly what the consumer wants’. I responded: ‘They don’t know what the consumer wants. The consumer has to drink what the big guys put on the shelves’.”

Fernando eventually won over the buyer and this year is celebrating 25 years of selling Dilmah in Australia.

Now that black tea is back in vogue, the competition is fierce and the same supermarkets that gave Fernando his big break, are becoming more competitive on price. Fernando is fighting back with a $4 million marketing campaign designed to make the humble tea leaf as important to tea drinkers as the premium grape is to wine buffs.

Push for purity

Australians have been drinking Ceylon tea for decades. Up until the 1970s most of it was tea originating from the source it’s named after: Sri Lanka.

But as the 83-year-old founder of Dilmah discovered almost 40 years ago, quality tea was being phased out. Fernando, who had spent his twenties working as a tea merchant selling to big companies including Lipton and Tetley, says the 5000-year-old tradition of tea drinking was commercialised.

Small traders who were providing consumers pure Ceylon tea, sold out to the multinationals in the 1970s. Thereafter, buyers in Australia, the United States, Europe started purchasing lower quantities of Sri Lankan tea.

In 1974, Fernando bought his first few estates to try producing pure Sri Lankan tea, but in the early years it was hard to find buyers. By the 1980s he started selling bulk tea to all the major Australian supermarket retailers, which would mix his tea with other lower-quality tea varieties and use it for their private label branded products.

“The tea producers were virtually squeezed out of existence,” Fernando says. “They were exploited by the big traders who bought imported tea and sold it at the highest possible price to the consumer.”

Fernando, a tea connoisseur, was outraged that consumers were being duped about the origin of tea. He also knew there was more money to be made in packaging and branding. He was determined to get his own brand onto the shelves.

Originally, the major importer of Ceylon tea was Bushells. The company was taken over by Unilever in 1988 (now also the owner of Lipton and Bushells). Fernando says changes in the industry “temporarily put an end to Australian housewives enjoying delicious fine Ceylon tea. This state of affairs inspired me to bring Ceylon tea back to Australians.”

It took some convincing, but eventually, in 1988, the Coles buyer decided to stock Dilmah tea.

Dilmah started in one Melbourne retail outlet. High consumer demand saw its packaged tea spread to 35 Coles stores across Victoria within its first year. It wasn’t long before Woolworths came to the table.

Dilmah then exported its packaged product to New Zealand (where it’s currently the top-selling brand), and by the 1990s became a niche player in Europe and North America.

Today Dilmah tea is on almost every major supermarket shelf in the country. It’s one of the world’s top 10 tea brands, exporting to more than 90 countries. Global annual retail sales are $550 million – and Australia makes up about 10 per cent of that.

Lipton, Twinings, Dilmah and Tetley account for the largest share of Australian tea sales (more than 80 per cent), with the majority of these being in the tea bag category.

According to Aztec data from April 2013, Unilever takes the No. 1spot in Australia with a 30.6 per cent share of total annual Australian retail tea sales of about $321 million. This is followed by AB Foods (Twinings) with 26.6 per cent, Dilmah with 13.7 per cent and Tetley with 10.8 per cent. Private label brands have about a 2.1 per cent share.

In recent years, Dilmah’s Australian revenue has suffered as a result of higher production costs and reduced consumer spending. In the year to March 2012, turnover (from both retail and food service) was $40.3 million, and profit after tax was about $55,000. In the current year turnover has reduced to $39.1 million and profit after tax fell to $21,000.

Nevertheless, Fernando, who named Dilmah after his sons Dilhan and Malik, has sealed his image as the underdog who took on the mutinationals to give consumers pure quality and “ethically produced” Ceylon tea.

“We grow it, we brew it and we have factories required to add value,” Fernando says. “We do all the processing in Sri Lanka, within days of picking fresh tea in the garden, and we ship it fully packed straight to the supermarket shelf.”

Private label tea dominates shelf space

Fernando may have succeeded in challenging the big traders, but he says most tea traded globally is still in the hands of a few multinationals. According to a report by IBISWorld, the majority of tea consumption in Australia is in-home, with per capita out-of-home consumption being less than 100 grams per annum.

As with most other products on supermarket shelves, private label tea brands are taking up more shelf space, and a greater proportion of sales. IBISWorld says the private-label segment (across products) has grown phenomenally over the five years through 2012-13, to account for about 25 per cent of supermarket sales across all categories.

Fernando says most branded players are also reducing quality to fight on price, but he says he’s refused to do this.

In this new price-driven world, the negotiating powers of niche players such as Dilmah diminish. “In that era (the 1980s) supermarket buyers were more accommodating,” Fernando says. “They listened to you and they explained the reasons if your product was not listed. It was more transparent.”

While Dilmah continues to sell at a higher price point than private label, he fears when price is the emphasis over quality, it may mean consumers stop shopping at supermarkets for quality tea. This is already starting to happen with speciality shops such as T2 tea entering the market.

“Most of the tea on the [supermarket] shelves is without a soul. It’s forcing customers to go elsewhere.”

As premium as wine

Dilmah is spending $4 million this year on marketing its brand to Australian consumers. It has already launched new advertisements with celebrity chef Peter Kuruvita and in mid July it will launch ads celebrating its 25th anniversary with Dilmah’s original brand ambassador, singer Kamahl (see separate story on Kamahl, page 50) who featured in Dilmah’s first television promotion back in 1988 and helped cement the brand in Australia.

The company is launching new flavoured packaged-tea varieties including Acai berry with pomegranate and vanilla, and Ceylon spice chai and also rolling out new “single region tea” leaf tea labels that cater for the discerning tea drinker.

Like wine, the taste of tea depends on weather conditions and the place it’s grown. “The synergies between wine and tea are unbelievable,” Fernando says. “The leaf strength character and flavour can change dramatically.”

For example, in the single region tea category, Ran Watte is grown at 1800 metres above sea level, giving off a light and mellow taste like champagne. Yata Watte, on the other hand, is low-grown, at 300 metres above sea level, giving a heavier and more robust taste like a Cabernet Sauvignon.

The success of Dilmah’s new teas depends largely on the marketing efforts of Fernando’s youngest son, Dilhan. Like is father, he is a tea guru, with expertise on how to match teas with food. He was host of Australia’s third ‘Dilmah Real High Tea Challenge’. The national competition, endorsed by the World Association of Chefs (WACS), allows hospitality professionals to craft their own original tea-based cocktail or mocktail, create tea-infused dishes and pair teas with food.

Dilhan says it’s helped create a tea gastronomy movement in Australia. Going forward, he believes, like his father, that there will be a “resurgence of interest in tea”.

New avenues for growth

The family company is looking to new avenues for growth. “Previously our focus was on retail,” Dilhan says. “But there’s now a tea renaissance. This has led to more and more operators offering a quality tea experience.”

As consumers discover the health benefits of tea, the Dilmah tea family are making sure their business is at the centre of that journey. In 2008, Dilmah set up tea schools in Sri Lanka and France. The company is looking to partner with local training institutes in Melbourne and Sydney later this year, where it can teach hospitality students the basics of tea. This includes lessons on how to serve it, as well as a deeper understanding about its quality and characteristics.

“As my father explained, the commodisation of tea really had a corrosive impact,” Dilhan says. “With it came a lack of knowledge. There are so many myths about fruit tea. It’s very healthy raw, but in its dried form doesn’t do much for the body. In most cases most of these natural herb and fruit infusions have far fewer antioxidant benefits than green, black and white tea.”

Another development that’s helped the company cash in on the tea frenzy is the development of the Dilmah t-Bar – a place where hard-core tea drinkers can drink Dilmah’s gourmet range of teas. There are 12 stand-alone tea bars across tea-loving countries including Poland, Belarus and the United Arab Emirates, Kuwait, Colombo and Chile. The bars offer everything from tea-based cocktails, mocktails, and t-shots, to tea-inspired food.

Dilmah has more than 200 express tea bars worldwide that are set up within shopping centres, hotels and airline lounges. It also opened its Ceylon Tea Trails tea resort in Sri Lanka 2005, with 20 boutique suites in the four villas. While the resort’s revenue is currently only $US2 million a year, it is fast becoming recognised, winning several Trip Advisor Travellers’ Choice awards.

Dilhan says resort revenue is expected to rise to $US10 million a year with the opening of the $25 million Cape Weligama beach resort in Sri Lanka’s south coast.

Refusal to sell out

Fernando says the multinationals have repeatedly approached him to sell out. He is adamant he “never” will, and says his sons, who one day will take over, have promised they won’t either.

The company continues to run the MJF Charitable Foundation, which is funded from 10 per cent of Dilmah’s annual global revenue. The foundation funds various housing, education and environmental programs in Sri Lanka.

Fernando, who is critical of Fair Trade claims that they are making life fairer for farmers – “it’s a noble concept but very badly administered” – is worried that if he sells out, his charity will be put at risk.

Dilhan, who together with his brother Malik is taking a greater management role, says the authenticity of tea is crucial to the company’s business success. And just like his father, who has mastered the art of distinguishing himself from the big guys, Dilhan says: “There’s a purpose in business beyond making money.”

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