Be Acedemic

Topics: Coffee, Economics, Investment Pages: 2 (682 words) Published: May 26, 2013
* The threat of new entrants into the industry
Scarcity of land: tea is an agricultural product and the production quality depends on nature, climate, land, etc… The fact is that tea estates are expensive and tea is grown only in selected lands. It is a barrier for new entrants. Scale economies: Cost reduction through mass production of standardize tea and spreading of fixed cost such as land, factory, machine, employee salary... over a large production volume of tea are the two important sources of scale economies in the context of tea industry. Capital requirement: entering the tea industry requires a high initial investment. It also takes a significant amount of time before firms start seeing this money pay off in term of profit. Hence, the investment into the tea industry is a long-term investment. Besides, because of the huge capital investment involved, the most recent investments have been quasi-governmental. It can be a barrier for new entrants. * The threat of substitute products:

High switching cost: Tea is a low cost product compared to potential substitutes like coffee and soft drinks. Switching from tea to coffee would involve higher monetary cost and thus the threat of substitute is limited. Customer loyalty: Being a traditional drink, loyalty of consumers towards tea in comparison to other drinks is higher. Besides, if price is considered as the primary motivator, consumers are likely to be more loyal to tea as it is the cheapest of all beverages. Taste and preferences: Changing the taste and habit of customers is very difficult. Over time, the people became habituated to tea and for a large population it has become a necessity. This is very difficult to change and hence the threat from substitute is lower. * The bargaining power of customer:

The tea industry is characterized by oversupply, with a surplus of about 80,000 tonnes a year. Thus, there are few buyers and buyer power is higher. Tea is difficult to differentiate which allows...
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