The tea retailer is the final step on the humble tea leaf’s journey from farm to cup. After all is said and done, every tea, whether fine, hand picked leaves or pesticide-laden dust, must be sold to the end consumer through a retailer. The final retailer has a huge influence on price, markup and quality. No matter the costs involved in producing a tea, the retailer makes the call to assign that final price. In this final chapter of our Transparency in the Tea Industry series, we examine the inner workings of the retail business and how these final prices get set.
Cost of Goods Sold, Expenses and Markup
Every business has to do one simple thing to be sustainable – bring in more revenue than money spent. That being said, the money a business spends is divided into two broad categories: cost of goods sold and expenses. Cost of goods sold (or COGS) is the cost of the tea itself, including the packaging. This expense is determined by all the market forces at work in the farming, shipping, and distribution of tea, all discussed earlier in this series. Expenses, the second category of cost, is introduced by the tea retailer and, as such, is their responsibility to control to the best of their abilities. In order to break even and remain in business, a tea retailer’s expenses must be met with equivalent income, or they will be looking at a very short venture.
Basic expenses include rent, utilities, payroll, insurance, professional services, rentals, employer taxes, interest on any debt, etc. Depending on how big a business is, these expenses can vary dramatically. To better understand pricing, let’s first look at expenses involved in running an online tea business.
The first big one is rent. To save on rent, many small online shops actually work out of their apartments or from home. Of course, this means lower expenses. Unfortunately, it also means breaking the law and endangering customers. Tea is a food product, and needs to be handled in a food safe facility. This means tea retailers must rent or own a commercial kitchen space to have the equipment needed to properly sanitize scoops, store tea, and keep hands and work surfaces clean and sterile. Here in Minnesota, renting the smallest commercial kitchen space currently on the market costs about $2,000 a month. Add to that rent utilities: gas to heat in the winter, electricity to cool in the summer and keep the tea at a good temperature, light to see what you are doing, and an internet and phone connection to stay in contact with the outside world. At minimum, these utilities add about $600 a month to the bill.
Payroll truly depends on the size of a business. Some tea retailers are in business as a hobby and don’t need to pay themselves. This means less cost is passed on to the customer. However, it also means that their full time and attention is not dedicated to the project. How do you navigate the sourcing challenges, offer fresh product, fast shipping and good customer service as a hobby? Working this way will always involve some sort of compromise, and the more a business grows, the more the strain of these compromises take their toll. For a business to be sustainable, owners need to get paid, even if it is only minimum wage. Depending on the state, this adds about $1700 a month to the expenses of a tea business.
Of course, the more people there are working together on the project, the more incredible work can be done. Having someone devoted to packing orders and customer service allows for much faster turnaround and more accurate fulfillment. Employing a web developer allows a tea retailer’s website to continue growing, making the experience easier and more pleasurable to use for the customer, keeping security measures and protocols up to date, and making sure the way the teas appear on the website reflects the goals and desires of the farmers you represent. Having someone focusing on design and outreach allows for higher quality content, more beautiful pictures, more infographics, more articles, more steeping directions, videos etc. Of course, the most important piece of all is the integrity of the sourcing process. Having someone focused on coordinating harvests with farmers, taking care of shipments, working with customs brokers, and brainstorming with each grower on new tea possibilities is extremely important. This kind of staff can add thousands of dollars a month to expenses.
All of this means that a legally-operating tea company in the US must spend at least $4,300 on rent, utilities and payroll every month. Add hosting fees for a website, credit card processing fees, bank fees, debt interest, and insurance, and you are looking at about $5,500 in expenses a month just to keep a very small operation running. A larger operation that has staff devoted to direct sourcing and a more involved process could cost at least $10,500 to keep operating.
How can tea retailers cover these minimum expenses? Of course, selling $5,500 worth of tea does not mean a tea retailer is breaking even. The tea itself must to be paid for. This is where companies begin to consider their markup. For example, if a tea retailer marks up thier product by 25%, they would have to sell $22,000 worth of tea in a month to break even. On the other hand, if the same retailer marks up their product by 1000%, they only need to sell about $6,000 worth of tea in a month to break even. Effectively, this means that the larger your company is, the less markup you need to take to break even and the more maneuvering room you have to price your tea. A very small business with less sales needs to charge more for the tea to cover their operation.
Meeting a Need: the moral considerations
A lot of businesses get wrapped up in the concerns of the moment, focused on their spreadsheets and setting their prices based on their own financial needs. Of course, to stay in business, a company must meet its expenses month after month. There are many books and many speakers who would love to tell a business owner how to price their merchandise and form a strategy. There are less people asking the important question: why?
Why must a business exist? On the most basic level, the purpose of a business is to meet a need. We live in an often abstract world where money is made through speculation. However, at the end of the day, the backbone of an economy is the relationship between great needs and great solutions.
When I talk about the costs involved in the process of getting tea from farm to cup, most people I know are following right along until we get to the retailer. Everyone agrees that a farmer who labors in the fields and creates a product we need should be paid fairly for their labor. Everyone understands that it costs money to transport and package tea. Yet, people hesitate at the concept of a tea retailer adding their own markup. What exactly does the retailer do? What value do they add, what need do they meet? Why should a tea retailer profit from the work of others?
At least a brick and mortar tea shop can say that they offer convenience, knowledge and service. An online retailer is only one retailer among thousands of others, all equally convenient to access from a computer, a tablet, a smartphone. As an industry, we take our value for granted. Tea retailers feel like they work hard, and they therefore deserve to be compensated for it. The truth is that many in the industry of tea e-commerce distort the true value of what they sell, and justify their markup simply to cover their expenses. As retailers, our markup needs to be justified by the service we provide. If we can’t explain what we do for you that gives us the right to charge more than what the farmers charged us, then we have no business selling tea.
For this reason, every business must crystallize around the question: do you need to exist?
Adding Value: Transparency vs Misdirection
We live in a society and an economy structured around the ideal of people helping each other and solving problems for each other in exchange for compensation. If this is the case, what compensation, or added value, does a tea retailer truly provide? Our main criteria should be whether or not the retailer is providing something absolutely unique and singular.
One of the most valuable assets that a quality retailer brings are their connections and their ability to curate a collection that is compelling for their market. This means seeking out truly unique sources for tea. This requires fluency in language and culture, and forming friendships and praetorships with tea growers based on trust and understanding.
I am sad every time I receive a solicitation or catalog from some large Chinese company, talking about being a small family operation and wanting to send samples and supply us. On average, I receive at least one to two solicitations a day. It saddens me because I know the current laws in China prohibit true small farmers from direct export and that only large factory operations or brokers have the resources to send English language ad campaigns and catalogs, or even to accept US funds. Unfortunately, these solicitations are the main source of what many retailers call “direct-sourced” tea from small family farms.
Companies around the world are either knowingly buying factory farm tea from brokers and calling it direct-sourced, or they are being tricked into thinking they have the genuine article. These brokers are very used to arranging tours for clients that visit China. Companies will take US business owners to farms so that they can have their picture taken with farmers dressed up in ceremonial clothing. Surprise, surprise! Tea farmers do not pick tea in decorative ceremonial clothes. They pick tea in work clothes. Almost every photo op you see that looks staged, is in fact staged. Being escorted by minders and translators to farms is absolutely not direct sourcing. It is lazy, complacent and dishonest to even talk about direct sourcing if you cannot speak Chinese and you aren’t friends and colleagues with the actual farmers who pick the tea. If you can’t communicate with your source and don’t know anything about them, how can you be sure that you are getting the real deal?
Some companies get a little closer to authenticity because they perhaps lived in China, or have friends in China. The most common “authentic” sourcing usually involves knowing a tea shop owner in China and buying tea from them. This is not the same as buying direct from farmers. A Chinese tea shop owner could be sourcing their tea from any supplier, and you still do not know who grows the tea. It would be like buying apples at Safeway and reselling them at a farmers market claiming that you are direct-sourcing, because Safeway purchased the apples from farmers. It simply doesn’t make any sense.
If a company is truly going to the farm, getting to know the farmer and buying direct, why wouldn’t they give you all the details on the harvest – who picked it, what day, etc? Why not include pictures, videos and interviews with the actual growers? If a source is authentic and there is nothing to hide, why not include all the info you can? If a company does not share the information, they probably don’t have it. Either that, or the retailer does know the truth and understandably does not want to share it.
Getting Away with It: Complacency & Orientalism
Every industry begins like the tea industry: a wild west where anything goes. Eventually, industries grow up. When a product becomes mainstream, consumers begin to demand higher standards, and companies respond by sourcing higher quality products and focusing on integrity of source. Coffee made the transformation only a decade ago. Now, almost every independent coffee shop can tell you exactly where the beans are from, and what cooperative picked them.
Tea has managed to hold out against the reforming force of the market a lot longer than you would think possible. This is largely because China has remained closed to the west for so long. Many people who own tea businesses today started before China was even open to trade. Even in the tea trade’s very infancy, the Chinese government worked to create impregnable mystery to protect the state secrets that Europe was so desperate to learn. By nature, China was a mysterious place. Instead of revealing sources and emphasizing that – like coffee or chocolate – tea is picked by real people, the tea industry has relied on exotizing the east. So many teas receive fanciful descriptions and names involving dragons, Buddhas, phoenixes etc. Even though the tribute system has not been in use since the end of the Dynasty system, teas are still referred to as tribute grade, imperial grade etc. The mystique of the East is a smokescreen to keep us from connecting with the real people who produce the tea we love to drink.
Somehow, it is okay to talk about tea and call it monkey-picked, or talk about it as tribute tea. Let’s make one thing clear: tea is not being picked by monkeys. It is being picked by people. Is the industry really comfortable comparing tea farmers to monkeys? I believe that is called blatant racism. Is referring to tea by its old Wade-Giles transliterations like Keemun, Lung Ching etc acceptable? The system was introduced by western missionaries, and has been replaced by both China and Taiwan with Pinyin (which would spell the teas as Qimen and Longjing). Are we saying that we have the right to keep using a language system introduced by conquering colonial powers when the growers prefer to use their own language? Regardless of what was used in the past, both countries now use pinyin as their official method of transliteration. Our partners use pinyin if they ever have need to transliterate, and we respect their choice by using pinyin as well.
Why is the industry allowed to lean on imaginings of colonial exoticism to obscure the truth? Let’s put an end to the embarrassing and unacceptable nonsense. Exoticism may fuel a specialty market in the short term, but it turns off the bulk of the world’s consumers – people who love fine wine, coffee, scotch and chocolate. These colonial practices give the tea industry a bad name as an insular culture that is not open to the rest of the world, where a product is popular because of how well it conforms to exotic fantasy, rather than because of it’s quality craft and origin.
Do not be distracted by fancy names, or legends about tribute and imperial grade this and that. At the end of the day, if a retailer wants to justify their markup through the quality of their tea, they had better be ready to back up their claims of direct sourcing with pictures, video, and detailed stories on the people that pick the tea. The retailers’ work sourcing is only unique and worthwhile if they are connecting tea lovers with tea farmers that have no other way to get their quality product into the cups of tea lovers outside of China. In this way, the retailer provides an invaluable service to their partner farmers by navigating the complex world of international logistics and import / export on their behalf. This allows small farmers to reach a wider audience. As a tea retailer, we do our best to give tea farmers the opportunity to directly shape their industry – an industry that has, for too long, worked instead to disenfranchise and silence them.
Being a facilitator, traveling to China many times a year, becoming fluent in Chinese, living the culture, getting to know tea farmers as peers and friends – all of this is necessary to add value to the complex chain from tea farm to tea cup. This work takes a lot of time and a lot of money. This work is worthwhile because it adds value, and meets a need of both farmers in China and tea lovers around the world.
Adding Value: Curation & Service
Sourcing is not the only piece of adding true value to the tea. What a company doesn’t stock is just as important as what they do. If a customer tried to buy directly from a Chinese source, they would have to try hundreds of teas to settle on the couple they really love. Part of retailer’s responsibility is to curate a selection that gives customers the best chance of enjoying what they buy. No one should have to guess the difference between six grades of the same tea. A tea retailer has a responsibility to cut out any teas that do not present a good value and exciting taste experience. Tea in China can range anywhere from between 10 cents a pound to ten thousand dollars a pound. A retailer needs to save you the legwork and figure out which teas will give you the most for your dollar.
A tea retailer must also provide the service, speed and responsiveness that you can’t get through attempting to buy direct. A retailer provides packaging to keep tea fresh, and makes sure it is shipped to you safely and promptly. Tea farmers are busy enough as it is producing their teas, maintaining their fields and conducting research and development on new styles and techniques – without more family members or additional staff, it would be impossible for small farmers to also think about coordinating tiny retail shipments, answering customer service questions, maintaining a website, making daily deliveries to the nearest post office, etc etc. A tea retailer must also be an educator – an ambassador working as advocates and representatives for their partner farmers by sharing the stories of the tea, teaching customers how to brew, and generally providing any information that can help a customer have a better tasting experience. A tea retailer may even take a base tea and do in-house blending and scenting to create something new. There are many pieces involved in the final presentation of tea. Doing all these pieces well is what it takes to justify a business.
Because we receive all of the catalogs from large-scale factory farm suppliers, we have a pretty good idea of how most companies mark up retail tea. Tea from these catalogs tends to fall between $3 and $8 per kilo. The highest end products are around $30 a kilo. This means that cheaper teas are costing a tea company about 8.5 cents per ounce. Low end teas tend to sell for around $4 for a two ounce package when I see them up on retailer sites. This is a roughly 23x markup (2300%). This means you, as a tea customer, could be paying 23 times more than the tea cost for those discount teas. Suddenly a special 25% off deal doesn’t seem so generous. The higher end teas at the $30 a kilo range cost almost 90 cents an ounce. These tend to sell for about $14 for two ounce packages. That is a 15x markup. Generally in the industry (or in any industry, for that matter), the more expensive a tea, the lower the markups.
Smaller companies often make less markup if they are buying from a US distributor, or if they are paying to ship small packages under the radar from China via EMS (skirting US customs, the FDA and Homeland Security) instead of via ocean freight. These teas can cost the retailer $60 a kilo for the highest end product, and yield a much smaller 4x to 7x markup.
Our Pricing Structure
We buy direct from small family farms, pay a premium for the best and air ship it in small batches for freshness. This means that we have to spend a lot more money to get our teas than anyone else in the industry. Despite this, our prices are structured to be still equivalent to any other specialty online retailer for their premium products. We do this to keep our teas accessible and further the goals of our farmer partners to share with a wide audience.
How can we sell much more expensive tea for much less money? We control our expenses very carefully. In 2014, we partnered with Prohibition Kombucha and Tree Fort Soda to share a brewery space and food facility. All three companies share the same administrative staff. This means that we enjoy nearly free rent, and our payroll is split between three businesses. All of these businesses subsidize the expenses of running a tea business like ours. At the end of 2014, these reduced expenses allowed us to discontinue our looseleaf wholesale program to extend wholesale pricing to our retail customers. This helped us to drop our prices by almost 40%. New wholesale customers’ only price break comes from having their tea packed in bulk bags to save them money on packaging and shipping.
When we moved into our new space, we could have simply kept higher margins with our lower expenses, but our goal is to push the industry towards higher standards. It is our responsibility to pressure importers and retailers in the tea industry to seek higher quality sources and be more transparent about what they do. Working with Prohibition Kombucha and Tree Fort Soda allows us to do more to change the industry, bringing our tea within reach for many more people. Our goal is for every tea business to calculate their margins based on how unique and valuable the service they provide can be, and to ruthlessly examine themselves to honestly determine what – if any – value they are adding to the chain from tea farm to tea cup. Each tea retailer must find their own path, according to their own skills, passion and connections. Whether through their awesome blending skills, their honest and transparent sourcing, their great work as educators, their outreach, or their gorgeous gift packaging, every tea retailer has an opportunity to improve the industry by taking a sober look at what they are truly contributing to fill real needs.
Consumer Demand: the Power of Choice
It is our hope that, by laying bare what goes into your tea from farm to cup, you as a consumer can be empowered to understand the industry and make clear choices that help you get genuine value for your money. At the same time, your choices can pressure the industry to compete, and to improve. There are so many ways to go about farming, picking, shipping, and – finally – selling tea. By recognizing the signs, you’ll be able to understand the whole process behind each leaf, understand whether your tea was made with pesticides, whether the tea farmers were fairly paid, whether the land was sustainably tended, and whether or not the tea retailer is representing the quality work of small family farms. There is always talk about tighter regulation – standards, seals, trademarks and more. Yet, any regulation coming from inside the industry will always be biased. Only the customer has the customer’s best interest at heart. Your awareness is the true standard setting in tea. Do not rely on an agency or institute to tell you what to drink. Ask the hard questions, stick up for your rights to know about everything that goes into your body, and we will see a better world for it.