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September 27, 2002

Tea in Saudi Arabia: A Traditional Market Driven by Change

by Hope Lee.

With a long tradition of drinking tea, Saudi Arabia boasts the second largest retail tea market in the Middle East. Although coffee is the preferred hot beverage, accounting for more than half of all hot drinks in retail value terms according to leading global market analyst Euromonitor, tea continues to play an integral part in family and social occasions in Saudi Arabia. However, while there is still potential for further growth, tea manufacturers need to combat growing consumption trends for other beverages, including diary and soft drinks.

Loose tea dominates, but tea bags drive value growth

Loose tea still dominates the tea market, accounting for some 58% of total volumes, due to the ingrained tradition of this format. But tea bags are the key to growth, with value sales increasing by around 45% between 1997 and 2002. Contrasting with loose tea, tea bags are perceived as a premium format, offering convenience and better quality taste.

Leading manufacturers such as Unilever and AMS Baeshen are competing heavily with each other in this format. Product innovations and marketing campaigns serve to enlarge the consumer base and build demand, and crucially the higher unit price of tea bags is underpinning value growth in the market as a whole.

Tea formats mirror income levels

Saudi Arabia’s distinctive social classes tend to be reflected in the structure of food and beverage demand. Making up 80% of the total workforce, expatriates also play a crucial role in consumer demand. So in contrast to loose tea which enjoys a wide consumer base, tea bags are generally targeted at professional expatriates, and middle and upper-middle class locals.

Loose tea volumes, however, are suffering from the gradual decline in the number of expatriate workers from Eastern countries, who are heavy tea consumers, caused by the Saudisation programme that the Government initiated in 1999. This programme is an effort to place more Saudis in jobs to reduce unemployment and to reverse the process of mass immigration allowed in the oil boom years. This has also contributed to the relative emergence of the tea bag in comparison to traditional loose tea.

Tea pressurised by soft drinks

Despite the rapid growth in some formats, overall sales of total tea have been pressurised by other beverages such as soft and diary drinks over the last five years. Saudi is a young country, with 58% of the total population under 17 years old. These young consumers are attracted by slick marketing campaigns from soft drinks producers.

It is feasible however that the large teenage population will migrate from soft drinks to tea as they mature. It is local tradition for twenty-something groups to drink tea at social occasions, and with increased exposure, the consumer base for tea could potentially increase in the medium term.

Unilever and AMS Baeshen thrive on differentiation

Saudi's tea market is highly concentrated, dominated by the multinational company Lipton Tea Ltd (Unilever) and the local company AMS Baeshen. Unilever held almost half of the total market share in 2001, despite the growing threat from AMS Baeshen and in particular its Al Rabea brand.

Unilever is positioned at the top end of the market. Most recently it introduced a new herbal tea brand Lipton Sun Tea in early 2002, marketed as a premium tea in bag format, targeting higher-income consumer groups.

Responding to AMS Baeshen's launch of good quality, low priced tea bags, Unilever also launched a new tea bag brand, Lipton Pyramid, in 2002. The launch was accompanied by massive TV advertising, samplings and front displays.

Domestic player AMS Baeshen is resilient to the multinational’s dominance, by focusing on loose tea, where it enjoys accumulated long-term consumer loyalty, but also mounting a challenge in tea bags. In 2002, the company introduced a new brand Al Rabea Express, in both loose packs and tea bag format, strongly backed by extensive advertising.

Future prospects

Saudi's per capita value expenditure (US$5.9) on tea remains low compared with neighbouring countries such as Egypt. This suggests growth potential, with retail value sales of tea expected to post real terms growth of 34% to 2007. But the extent of its development will depend on how the main players continue to build the market and their brands in the face of growing competition from other beverages.

In the short term the consumption tea bags may be influenced by recent regulatory changes. In mid-2002, the Saudi Government imposed a 12% duty on imports of black tea in bags below 3 grams, a clear disadvantage to tea bag importers. No marked change in retail prices has occurred since this decision but a slight increase in unit price in tea bags is likely to occur by the end of 2002, potentially deterring more price sensitive consumers make the switch from loose tea.

In the longer term, however, intensifying competition between Unilever and AMS Baeshen, based on brand building and innovation, will serve to enlarge the consumer base and drive demand for added value products.


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