Retail Profits in Specialty Tea

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Tillerman
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Mon Jan 01, 2018 9:27 am

My first "Opinion" of 2018 looks at the distribution of profits in the specialty tea industry. You can read it here: https://tillermantea.net/2018/01/margins. I look forward to hearing the feedback.
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Mon Jan 01, 2018 1:00 pm

A very thoughtful article to start off the new year. The question of long term sustainability and ethics is an important issue for all of us to consider. That farmers and field laborers get very little compensation, while retailers often earn 60-80% of final sales price is unfortunate. I’m thinking this is probably why HY Chen (who many of us buy directly from) only sells directly to the consumer and does not do any wholesale.
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Mon Jan 01, 2018 2:10 pm

Despite the gross profits mentioned, who knows what retailers net? There seem to be a few vendors every year who close shop (whether brick & mortar &/or online). I ignored that obvious warning when buying more tea than I can use myself (thus becoming a vendor) when able to acquire excellent tea not usually available.........No matter what a farmer gets for himself & his laborers, teas like the very best gaoshan are not mainstream which means selling them is quite a challenge. No matter what price charged, it proves to be a venture not worth many vendors time.

At least in Taiwan laborers get a living wage. The country is thriving; so, parents want their children to do better than that. Thus, tea production is rarely done by the young.
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Mon Jan 01, 2018 5:55 pm

Ethan Kurland wrote:
Mon Jan 01, 2018 2:10 pm
Despite the gross profits mentioned, who knows what retailers net? There seem to be a few vendors every year who close shop (whether brick & mortar &/or online). I ignored that obvious warning when buying more tea than I can use myself (thus becoming a vendor) when able to acquire excellent tea not usually available.........No matter what a farmer gets for himself & his laborers, teas like the very best gaoshan are not mainstream which means selling them is quite a challenge. No matter what price charged, it proves to be a venture not worth many vendors time.

At least in Taiwan laborers get a living wage. The country is thriving; so, parents want their children to do better than that. Thus, tea production is rarely done by the young.
I appreciate your comment that a few vendors fail every year. This, I suspect is due to a lack of transactions more than anything else. I also understand your comments on the difficulty of selling tea like the very best gaoshan; that is what I attempt to do myself. The fact that we have chosen a difficult niche, however, is no reason to take outlandish margins.

As to your last comment, Taiwanese tea workers do make a "living wage" but not much more and the foreign workers who come to pluck in the gardens are anything but well paid in the main. And tea garden and factory workers in many regions do not make a living wage yet we vendors still seem to extract the largest piece of the pie.

All that said, I'd like to taste some of your offerings; where can I go to buy some samples?
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Tue Jan 02, 2018 12:45 am

Thanks for the informative and thoughtful article.

What I always find incredible in the case of Taiwan itself is that in the country itself the price difference has a very steep North-South descent. Tea in Taipei is often up to three times to what it is in Tainan for example. Part of it might be due to higher rent, but that doesn’t explain a threefold increase.

One issue is also that not every farmer could sell his teas directly and skipping the middle man. Would be difficult for them to sell off their stock. And shops will take whole harvests in one go.

If I am not wrong, most of tea in Taiwan is consumed locally. People here do not take well to sudden price increases. But - as opposed to foreigners, will not buy teas in tiny quantities like 50-150g per tea. Standard unit is one (Taiwan)Jin, so 600g.
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Tue Jan 02, 2018 6:34 am

I think that retail profits in specialty tea has a negligible effect on the lives of the field and factory workers. In the case of Indian teas, it has minimal effect, since nearly all Indians drink teas costing close to half a cent per gram and not specialty teas.

I was under the impression that the bulk of the teas in other major tea producing countries was dirt-cheap too. Hence, I believe the prices of non-specialty teas are what affects the lives of the field and factory workers.

Specialty teas is a niche market, and it is quite normal in any business to command a premium for a niche service.
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Tue Jan 09, 2018 11:39 am

What investments and costs do specialty tea retailers have? Well, for online vendors there’s website development and maintenance, some computer equipment, inventory, and … well, we’ll revisit this if I can think of something else. Then of course there are operating expenses: an office, though many are run from a residence, a fulfillment service, though this cost often is recovered in shipping and handling charges, travel, if they source their own tea, general office expenses and what else I don’t know.
Firstly, let me say that this is a great article that I hope gets more attention. The margins that some retailers charge are absolutely insane. There are a variety of reasons why they are able to get away with this, but I'll save that for a different comment if people are curious.

Secondly, I wanted to quote the above paragraph because you are missing quite a bit of information. In addition to what you mentioned above, there are the following costs:
1. Marketing - not just advertising, but also photography, design, and everything to make the website pretty and easy to use. It isn't just the hosting services.
2. Legal set-up and ongoing expenses
3. Legally, tea MUST be packaged / prepared in a certified location, which will charge companies some amount to use it (typically hourly). It is illegal to package tea in your house and sell it.***
4. Packaging costs - boxes, bags, labels, design, printing, etc. This costs money. Not only per item, but also in upfront costs to set it all up.
5. Sourcing - It takes time and money (travel) to find and source good teas. Most retailers expect to be compensated for this time / money in some form, and it comes in increased margins.

With all that said... My first point still rings true. Despite all these additional costs, I believe that most retailers charge too much money. I really appreciate that What-Cha lists how much of the cost actually goes to the farmer, and it is something that we plan to do at Leafy Green in the near future. We typically target 30%-50% of the sales price goes directly to the farm, which means the other 50%-70% "gross margin**" has to cover shipping (from Asia to us), packaging, all the costs you mentioned and I added to above, and any promotion that we may or may not run in the future. I believe this is much more fair and hopefully becomes standard across the industry, so that all the companies charging 70%-90% margin (of which there are many) can be weeded out.

**NB: This 50%-70% isn't actually gross margin, as gross margin would also have to deduct the shipping and per item packaging costs, typically lowering it to the 35%-50% range.
***Edit: I believe this is true. Certainly in my state. I'm not sure how other states are affected by it though. My wife dealt with all of this :?
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Tue Jan 09, 2018 2:52 pm

chofmann wrote:
Tue Jan 09, 2018 11:39 am
What investments and costs do specialty tea retailers have? Well, for online vendors there’s website development and maintenance, some computer equipment, inventory, and … well, we’ll revisit this if I can think of something else. Then of course there are operating expenses: an office, though many are run from a residence, a fulfillment service, though this cost often is recovered in shipping and handling charges, travel, if they source their own tea, general office expenses and what else I don’t know.
Firstly, let me say that this is a great article that I hope gets more attention. The margins that some retailers charge are absolutely insane. There are a variety of reasons why they are able to get away with this, but I'll save that for a different comment if people are curious.

Secondly, I wanted to quote the above paragraph because you are missing quite a bit of information. In addition to what you mentioned above, there are the following costs:
1. Marketing - not just advertising, but also photography, design, and everything to make the website pretty and easy to use. It isn't just the hosting services.
2. Legal set-up and ongoing expenses
3. Legally, tea MUST be packaged / prepared in a certified location, which will charge companies some amount to use it (typically hourly). It is illegal to package tea in your house and sell it.***
4. Packaging costs - boxes, bags, labels, design, printing, etc. This costs money. Not only per item, but also in upfront costs to set it all up.
5. Sourcing - It takes time and money (travel) to find and source good teas. Most retailers expect to be compensated for this time / money in some form, and it comes in increased margins.

With all that said... My first point still rings true. Despite all these additional costs, I believe that most retailers charge too much money. I really appreciate that What-Cha lists how much of the cost actually goes to the farmer, and it is something that we plan to do at Leafy Green in the near future. We typically target 30%-50% of the sales price goes directly to the farm, which means the other 50%-70% "gross margin**" has to cover shipping (from Asia to us), packaging, all the costs you mentioned and I added to above, and any promotion that we may or may not run in the future. I believe this is much more fair and hopefully becomes standard across the industry, so that all the companies charging 70%-90% margin (of which there are many) can be weeded out.

**NB: This 50%-70% isn't actually gross margin, as gross margin would also have to deduct the shipping and per item packaging costs, typically lowering it to the 35%-50% range.
***Edit: I believe this is true. Certainly in my state. I'm not sure how other states are affected by it though. My wife dealt with all of this :?
Thank you for your thoughtful comments. I appreciate that you are going to be open about what portion of the retail price goes to the producer; that's a great step.

With regard to the points you raise:

1. Marketing certainly is far more than just advertising - I couldn't agree more.
2. Legal costs should be on setting up your LLC but not much more I don't believe, accounting, generally, is a bigger ongoing cost.
3. In California and, I believe, some other states, Cottage Food Operations are permitted and tea can be packed in the home kitchen.
4. Packaging costs: Initial design is a capital expense, others may be part of COGS or operational expenses.
5. I explicitly acknowledged the costs of sourcing - I do that and am only too well aware of the expense involved.

As to your comment about shipping costs. These do not affect the gross margin as they must be capitalized into the inventory and count as part of the cost of goods. The IRS gets a little bit upset if it isn't done this way. Depending upon how you do your packaging, this can be either an operating expense or part of the COGS (in which case it does not affect margins.)

Anyway, I think you agree with the main point: distribution of profits in the supply chain is distorted and generally disadvantages the producers.
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Tue Jan 09, 2018 7:17 pm

Another thing which might increase the cost:
At least in Taiwan, there is this sort of, let’s call it politely “foreigner tax” which means, anyone non-Taiwanese will get a different price than a local. Only thing that influences that is being introduced by someone, having a long-standing good relationship and of course being married or otherwise affiliated to a local.

Pretty sure the same thing goes for China, no idea about the other tea producing areas. Japanese also do have their fair lot of double standards, so it would surprise me if tea is different.

As for Taiwan, I can sort of understand it a bit, as the living standard is very different, and locals overall can not pay as much for tea. There are some super-rich around, but they are a tiny minority. However understanding stops when the same is applied to foreigners living in the country which then earn similar salaries (except the company paid expats).

I can circumvent this as I have local support, but it is still a bit sad not always to be able to venture on my own without having a high risk of paying up!
Same goes not only for tea, but anything with a more fluid pricing, like antiques, etc.
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Tue Jan 09, 2018 9:03 pm

Bok wrote:
Tue Jan 09, 2018 7:17 pm
Another thing which might increase the cost:
At least in Taiwan, there is this sort of, let’s call it politely “foreigner tax” which means, anyone non-Taiwanese will get a different price than a local. Only thing that influences that is being introduced by someone, having a long-standing good relationship and of course being married or otherwise affiliated to a local.

Pretty sure the same thing goes for China, no idea about the other tea producing areas. Japanese also do have their fair lot of double standards, so it would surprise me if tea is different.

As for Taiwan, I can sort of understand it a bit, as the living standard is very different, and locals overall can not pay as much for tea. There are some super-rich around, but they are a tiny minority. However understanding stops when the same is applied to foreigners living in the country which then earn similar salaries (except the company paid expats).

I can circumvent this as I have local support, but it is still a bit sad not always to be able to venture on my own without having a high risk of paying up!
Same goes not only for tea, but anything with a more fluid pricing, like antiques, etc.
Sadly, this certainly is true, although those who have sourced directly for some time and who have worked at cultivating "guanxi" should not suffer quite so badly if at all.

The same situation applies in China but it also extends to those who are from "other" areas of China. For example, speaking Shanghainese in Shanghai identifies you as a local and recipient of the best pricing.
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Tue Jan 09, 2018 10:48 pm

Tillerman wrote:
Tue Jan 09, 2018 9:03 pm
Bok wrote:
Tue Jan 09, 2018 7:17 pm
Another thing which might increase the cost:
At least in Taiwan, there is this sort of, let’s call it politely “foreigner tax” which means, anyone non-Taiwanese will get a different price than a local. Only thing that influences that is being introduced by someone, having a long-standing good relationship and of course being married or otherwise affiliated to a local.

Pretty sure the same thing goes for China, no idea about the other tea producing areas. Japanese also do have their fair lot of double standards, so it would surprise me if tea is different.

As for Taiwan, I can sort of understand it a bit, as the living standard is very different, and locals overall can not pay as much for tea. There are some super-rich around, but they are a tiny minority. However understanding stops when the same is applied to foreigners living in the country which then earn similar salaries (except the company paid expats).

I can circumvent this as I have local support, but it is still a bit sad not always to be able to venture on my own without having a high risk of paying up!
Same goes not only for tea, but anything with a more fluid pricing, like antiques, etc.
Sadly, this certainly is true, although those who have sourced directly for some time and who have worked at cultivating "guanxi" should not suffer quite so badly if at all.

The same situation applies in China but it also extends to those who are from "other" areas of China. For example, speaking Shanghainese in Shanghai identifies you as a local and recipient of the best pricing.
My wife grew up in China and speaks fluently... it has definitely helped her tremendously when sourcing new farms. Not just due to the lack of a language barrier, but farms are for more likely to speak and negotiate with her than they would somebody non-Chinese like myself.
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Tue Jan 09, 2018 11:05 pm

You eventually work out who is trying to rip you off and who isn't, and can then avoid those who are trying to fleece you! People are gonna be people, regardless of the industry.

As for margins; I'm of the opinion that they are gonna be what they have to be for a vendor to stay afloat. Good tea is still very much a niche business in the west and demand is limited. I think margins will fall as the market gets ever more competitive. Unfortunately I am noticing a lot of 'fake' farmers who are actually dealers popping up, and that is annoying. I know of people who think they're sourcing 'farm direct' who really aren't at all!
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Tue Jan 09, 2018 11:35 pm

tealifehk wrote:
Tue Jan 09, 2018 11:05 pm
You eventually work out who is trying to rip you off and who isn't, and can then avoid those who are trying to fleece you! People are gonna be people, regardless of the industry.

As for margins; I'm of the opinion that they are gonna be what they have to be for a vendor to stay afloat. Good tea is still very much a niche business in the west and demand is limited. I think margins will fall as the market gets ever more competitive. Unfortunately I am noticing a lot of 'fake' farmers who are actually dealers popping up, and that is annoying. I know of people who think they're sourcing 'farm direct' who really aren't at all!
We've definitely encountered these fake farmers. It helps to go to the vendor and make sure you actually visit their farms to get a better sense of whether or not they actually own the place.

My main issue with margins isn't that some retailers use very high margins to rip people off, but that they use highly inconsistent margins... they will offer a bunch of teas at x% margins, and then a few teas at 90%+ margins by simultaneously jacking up the price and lowering the quality. It is kind of like how different grocery stores will have some items (like fruit) really cheap, but other items (like milk) really expensive as they use the former to bring people to the store and the latter to make $$$. It is a practice that just bugs me.

Granted... I have no idea what other retailers are actually paying for their tea, so it is possible that my assumptions are just terrible, but based on how it tastes and where it is priced... I'm guessing I'm not that far off.
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Tue Jan 09, 2018 11:46 pm

chofmann wrote:
Tue Jan 09, 2018 11:35 pm
tealifehk wrote:
Tue Jan 09, 2018 11:05 pm
You eventually work out who is trying to rip you off and who isn't, and can then avoid those who are trying to fleece you! People are gonna be people, regardless of the industry.

As for margins; I'm of the opinion that they are gonna be what they have to be for a vendor to stay afloat. Good tea is still very much a niche business in the west and demand is limited. I think margins will fall as the market gets ever more competitive. Unfortunately I am noticing a lot of 'fake' farmers who are actually dealers popping up, and that is annoying. I know of people who think they're sourcing 'farm direct' who really aren't at all!
We've definitely encountered these fake farmers. It helps to go to the vendor and make sure you actually visit their farms to get a better sense of whether or not they actually own the place.

My main issue with margins isn't that some retailers use very high margins to rip people off, but that they use highly inconsistent margins... they will offer a bunch of teas at x% margins, and then a few teas at 90%+ margins by simultaneously jacking up the price and lowering the quality. It is kind of like how different grocery stores will have some items (like fruit) really cheap, but other items (like milk) really expensive as they use the former to bring people to the store and the latter to make $$$. It is a practice that just bugs me.

Granted... I have no idea what other retailers are actually paying for their tea, so it is possible that my assumptions are just terrible, but based on how it tastes and where it is priced... I'm guessing I'm not that far off.
I have noticed this phenomenon too--it definitely is a very real issue, and not just with oolongs!
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Wed Jan 10, 2018 12:09 am

tealifehk wrote:
Tue Jan 09, 2018 11:05 pm
You eventually work out who is trying to rip you off and who isn't, and can then avoid those who are trying to fleece you! People are gonna be people, regardless of the industry.
I am not sure if the issue in Taiwan is only about money. A lot of people tend to think that Westerners do not know enough about tea, so they feel it is a waste to offer you their best. Furthermore enhanced by the general scarcity of certain high quality teas.

It takes time and effort to get closer to the vendor until you get offered better tea to taste. I have been slowly drinking my way up the mountain over the years…
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