Dilmah’s Ethical Tea Society

 

I have just spent a fascinating morning researching Dilmah teas… after years in Fairtrade, setting up the Equal Exchange and cafedirect brand and tea supply chains, visiting Indian and Sri Lankan tea farms, I wondered what was behind Dilmah’s brand position ‘ethically produced tea packed at origin’.

I bought some tea, read the packaging and websites and researched a little background into the development of the Sri Lankan tea industry over the last few decades.

The Dilmah brand is now widely available in retail and food service, is good tea, but has no third party ethical certification or benchmark.

I am convinced that it is a private family firm with strong ethics and passionate philanthropic generosity. That said it is not Fairtrade or Fair Trade! On the one hand it is an entirely worthy private enterprise. On the other, as a good ethical example, it is not a model that is easily replicated to achieve transformative change for tea farmers generally, whatever the passion or belief of the owners or the impact to workers associated with that business.

A few facts first, then an exploration of the public statements from the Dilmah website.

What is Fairtrade?
•  What is Fairtrade in tea? The website is informative on general principles and standards.
• An interesting comparison of certifiers approach to tea from 2010 helps focus on the commodity.

An important difference , when considering the use of premiums, is the democratic decision making of workers from plantations This road to empowerment, this voice for the tea worker and opportunity for them to learn and become empowered in the business of tea does not exist in the Dilmah chain.

Who is Dilmah?
• A family owned tea company that is the 10th biggest global brand. Strictly it is part of the MJF Group
• Founded by Merrill Fernando in Sri Lanka during the 1970’s to challenge the commoditized tea industry, it took off as a brand in the 1980’s, with breakthrough selling tea to Coles in Australia. (I wonder who the buyer was!)
• Merrill has established the most integrated family tea business in the world ‘with ownership or investment in plantations, printing and packaging, tea broking, import & distribution of equipment & materials for the industry’
• The MJF Group also has interests in coconut, rubber and spices, real estate and the Sri Lankan leisure industry. It also imports tea processing machinery
• Dilmah is a large estate owner in Sri Lanka. As such it is the largest producer (one family) owned brand too, but only in the sense that the Fernando family owns the gardens. Brands such as Divine Chocolate, Cafedirect and Liberation CIC are all owned by small scale farmers who actually farm and own collectively.

The Dilmah website offers a thoughtful interaction with Fairtrade…

 

Why not join Fairtrade?

 

  • Value is in the brand and packaging with all the product blend knowledge that goes with it. Correct
  • Dilmah equates vertical integration of its business model to control the chain from grower to market as ‘Fair’. I would advocate this model as common sense as it develops many skills at origin. Opinion
  • Removal of middlemen: Fairtrade does not claim to cut out middlemen in the tea chain, especially if the tea comes from plantations or estates. Standards are focused on the workers or small holders. This strategy achieves market penetration faster as this is where the traded volumes are. Communication
  • Removal of middle men: This is true in a vertically integrated chain by definition. Other brands are also vertically integrated e.g. Tata’s Tetley Tea but do not claim fairness. The majority of teas still follow the conventional brokerage model. Due to the economy of scale and power of the large entities they offer most advantage as it is difficult to enter those markets. Dilmah has been successful developing a brand selling good quality Sri Lankan tea. This does not work as well in the UK, where the consumer preference is for a stronger East African dominated blend. Communication spin
  • Price paid to workers under Fairtrade certification is governed by national labour standards. Tea workers in India are paid according to regular negotiations between trade unions and government too, predicated under the 1948 Plantation Labour Act. Equivalent to Dilmah
  • Tea prices under Fairtrade standards are subject to a minimum price and a premium defined by origin and grade of tea. Fact
  • Sri-Lankan teabag grades of orthodox teas suitable for teabags (fannings or dust) have a minimum price of $2.40/kg FOB. (East African teas $1.60/kg FOB)
  • Fairtrade pays premiums to worker premium committees and Dilmah pays to MJF Charitable Foundation. Teabag grades of orthodox teas suitable for teabags (fannings or dust) attract a Fairtrade premium of 50 cents per kg. The MJF is governed by members and staff of the Merrill Fernando family and several non-execs drawn from accounting and business backgrounds in Sri Lanka.
  • The Fairtrade premium paid to Sri-Lankan premium committees is worth about 20% more than the price of made tea. Dilmah makes donations of > 10% on packed tea products. Whilst we are not party to the actual packed cost per kg it is safe to say it is probably more than 50 cents…. Does anyone know the estimated cost?
  • Through his Mankada based MJF Charitable Foundation, an NGO and recognized Charity, Merrill Fernando distributes much of his wealth to his staff & workers and to underprivileged persons in Sri Lanka. The Foundation’s key objectives include the improvement of medical and educational facilities for over 30,000 workers and their families on MJF Group plantations, and the approximately 1,500 staff and workers in its trading and production activities. A good model for private business. Nothing wrong with philanthropy.

 

Views on Fairtrade and sourcing
The first Fairtrade certified teas came from Darjeeling and the Nilgiri Hills in India in 1994 (20 years ago)  Fact

• The tea industry supplying UK has moved towards sourcing from both estates and very large farmer associations in Kenya, Tanzania and Uganda over the last 30-40 years. This production is called CTC tea (Cut, Tear and Curl) made in larger factories and also common in India. Sri Lankan tea comes mainly from estates and is sold predominantly to Mid-East and Russia/Central Asian markets with higher quality Orthodox processed still strong in the US and Australian markets. The cost of tea is strongly influenced by wage costs which are relatively higher in SL than India and EA. It was a new business strategy for South Asian firms to enter the tea market as brands as and manufacturers given that margins were so low in the brokering of tea. This strategy is now common in Sri Lanka with over 30% sold this way.
Fact

  • It is impossible to find out how much of Dilmah’s tea comes from their own plantations and how much (if any) is sourced from the national market.   Query

Much of the UK supermarket tea is also sourced from tea estates in India owned by the Bombay Burmah company. It has proven very difficult for smaller companies to break in due to the economies of scale. This demonstrates the competitive difficulty Dilmah faced.  Fact

• Many Sri-Lankans are still small-scale farmers. Some grow tea. Most of these are outside the export economy.
The tea sectors in India and Sri Lanka have moved away from estates (where tea is grow and processed) to small farmers (processed in independent factories without the mandatory social requirements).
The area of tea grown by large and small farms is approximately equal after a huge change away from estates over the last 30 years. This development makes tea cheaper to produce but relies on large numbers of small scale family farms outside the wage economy
Merrill will have faced this trend of declining profitability in his estate business when choosing a business strategy after buying estates in 1971.  Facts

• An Oxfam-Novib study on tea wages in India estimates the ‘in-kind’ services and benefits worth an additional 75% value over the national minimum wage. The inclusions of this are broadly similar to those in Sri Lanka.  Facts

Other critiques
New Zealand fair trade company Trade Aid criticised Dilmah publically ( I could find no record of the article in the NZ Herald) in 2008, eliciting the following response from Dilhan Fernando one of the founders sons and now CEO, on their own blog site

All of this rather confirms my view that Dilmah has achieved significant commercial success as a branded product picked and packed in Sri Lanka. It’s ethical position is certainly very strong for a private company buying from plantations. Because part/all of the tea comes from within the group and there is no third party scrutiny, it is difficult to say absolutely that all is well. However if you want good quality ethical Sri Lankan tea, Dilmah is probably a good bet. I did enjoy the tea! If you want to support small holders, if you want independent scrutiny and want to critique the wider world of trade, choose a Fairtrade certified brand but also knowing that it’s value added is very likely to remain outside Sri Lanka or the producing country.

Having said that both organic and Fairtrade certified teas in my store cupboard are packed in Sri Lanka! Natures Cuppa Ceylon comes from ‘our plantations’… that’s interesting and Oxfam Premium Earl Grey from SOFA small farmers.

Finally, I was left thinking about the similarities and differences between the Fernandos and the Mohan family who set up Tea Promoters India to renovate Darjeeling estates which had been model gardens for the first Fairtrade tea standards, yet who had remained small scale plantation owners and tea makers and promoters of small farmer development too. Perhaps that’s another story.

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