Rabobank sees ‘huge upside’ in China milk tea opportunity

Global tea companies will have to hit the M&A trail to unlock opportunities in important tea markets including China, Russia and India, according to Rabobank.

A world tea market worth around $40.7bn is dominated by black tea (42%) and green tea (26.5%) but Rabobank describes the marketplace as “relatively static” in comparison to coffee or soft drinks.

“Within global tea there has been limited M&A activity and industry consolidation has been slow,” Rabobank’s Food & Agribusiness Research & Advisory analysts wrote, in their 2014 Global Beverage Outlook report: ‘Beyond the Yellow BRIC Road: Finding Growth in Global Beverages’.

The Top 10 tea brands represent only 30% of the total tea market – the respective figure for coffee is 52% – and Rabobank said the low level of globalization suggested there was “still ample room for large tea companies to expand across international markets”.

Unilever, Tata and ABF

Unilever (Lipton) is market leader with an 11.7% share by retail value followed by Tata Global Beverages (3.1% share) and Associated British Foods (2.5%).

“These three companies are the only truly global competitors in tea, and while they remain strong in mature markets, their challenge is to continue growing organically and penetrate the important tea markets of China, Russia and Japan.”

Critically, China is forecast to account for half of global growth through to 2017, but Unilever’s market share is only 1.6% and neither Tata Global Beverages nor ABF have a presence there.

“Success for global tea companies in China will require M&A with local players or new product development to satisfy Chinese demand for local products such as Strong Milk Tea and Xiang Piao Piao,” Rabobank’s analysts write.

Chinese leaders fire anti-corruption salvo

Chinese milk tea (Xiang Piao Pia is an instant version) originates from British colonial culture, and the practice of taking black tea in the afternoon with milk.

But the Chinese typically add evaporated or condensed milk to the tea instead: the leaves are boiled and brewed in water then separated from the water and strained to extract full flavor.

Speaking more generally of the beverage industry outlook in China, Rabobank said that the nation’s new political leaders – who took office in March 2013 – have fired an “opening salvo” against corruption.

As we can see from the Diageo results today, luxury goods such as high-end spirits have been hit, as has dining and entertainment – with a recent string of restaurant closures.

“The effect is expected to linger on into 2014,” Rabobank’s analysts added.