Managing Asia

Tea grower takes Malaysia's brewing storm in stride

Reporting by Christine Tan | Written by See Kit Tang
Boh Plantations CEO: 'Tea comes in the blood'

Homegrown tea producer Boh Plantations believes that the numerous risks threatening Malaysia's economy will not affect demand for its products.

"Tea is a category that is not typically affected by economic downturns," Caroline Russell, CEO of Boh Plantations, told CNBC's "Managing Asia."

"In fact one reason why we set up the business in 1929 is [because] tea is one of the global commodities that didn't come under big pricing pressure. It's already one of the cheapest beverages in the world; people will still drink tea even if their wallet is under pressure."

The 86-year-old company which is based primarily in Cameron Highlands, is a dominant household name in Malaysia, where it generates approximately $100 million in revenue per year. While the privately-held family business declined to reveal actual figures for its overseas markets, Russell said that sales in international markets such as Singapore, Japan, United Arab Emirates and parts of Europe currently account for less than 10 percent of the company's total revenue.

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This is not to say that Boh Plantations isn't feeling the pressure from a toxic mix of headwinds that has seen Malaysia's second-quarter gross domestic product (GDP) growth slow to its lowest rate since the third quarter of 2013. The Southeast Asian economy expanded 4.9 percent on-year over the April-June period amid uncertainties in global growth, persistent weakness in oil prices and the spreading of what is being called the country's worst-ever political crisis.

The ringgit, among the world's worst performing currencies, has fallen around 17 percent year-to-date. On Friday, the U.S. dollar fetched around 4.2260 ringgit.

Russell told CNBC that the depreciation of the Malaysian currency has more than offset the benefits that cheaper oil have on the price of fertilizers, resulting in higher input costs for the tea grower. Fertilizer prices usually move in tandem with crude oil, as rising energy prices usually increase production costs and freight rates.

"This is in fact a very strange period because with lower international oil prices, fertilizer prices should drop accordingly. However due to the ringgit depreciation, we're not seeing that normal cycle happen so our input costs have risen very substantially during this period," the third generation leader said.

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The weaker ringgit has also added to the concerns surrounding the tea industry's high dependence on foreign labor. At the moment, around 80 percent of Boh Plantations' tea pluckers are non-Malaysians.

"With the growth in incomes, Malaysians don't want to work on a tea estate anymore [so] our workforce demographic has changed very considerably over the years. We are now dependent on workers from other countries like Nepal and Indonesia," Russell told CNBC. If the downtrend in the ringgit continues, the company may need to revise its recruitment strategies so that the company stays competitive, she added.

For now, Boh Plantations remains profitable, thanks to the company's treasury management which has helped to "offset some pressure" from a depreciating ringgit.

"We are very cognizant of what's happening in the market place. This has been a difficult year for Malaysians with the introduction of Goods and Services Tax (GST) in April. I think Malaysians are beginning to feel the pinch hence we are reluctant at this stage to increase our pricing," the chief executive said.

"But if the ringgit stays at these levels for many more months, we will need to review our pricing."

The view over the Boh tea estate in the Cameron Highlands, Malaysia.
Leisa Tyler | LightRocket via Getty Images

Beyond Malaysia

While Boh Plantations remains dominant in its home market, the tea grower faces a less rosy picture abroad.

Russell attributes that to the fact that Malaysian tea companies are still relatively unknown compared to better-established rivals in Sri Lanka.

"One of the challenges is that Malaysia is not well known as a tea grower. We are, in fact, a very small tea grower [without] a global reputation. Countries like Sri Lanka have spent a lot of money in branding so there's an international recognition for them," she said.

To overcome that, the company is adopting a niche positioning in foreign markets such as the U.S. – a departure from the mass-market brand it is recognized for in Malaysia – as well as venturing into alternative sales platforms such as the internet.

"We are still at an infancy stage overseas so it is very, very difficult to compete in the mass arena. We'll be aiming to be a niche player looking more [at] the specialty segments because I believe we have very distinct, unique teas that the connoisseur market will appreciate. We've also recently forayed into the Chinese market where we are looking at online as a new channel," said Russell who hopes to increase the contribution from overseas sales to 30 percent in the coming years.