Commodity Prices Up; Tea Makers Wary

Facing tea prices that jumped 29 percent last Tuesday and similar commodity price increases like coffee, gas or sugar, smaller Niche beverage companies and startups say they need to be quick on their feet to maintain high profit margins.

Steven Prato, founder of Joe Tea, says that small businesses like his are generally able to cope, but it can mean that profits aren’t quite as high as usual.

“They can certainly squeeze profits,” he said. “Small companies don’t have the economies of scale that big businesses do.”

For Joe Tea, which is stocked in New York area Whole Foods and other specialty stores, price fluctuation isn’t a big deal. Because customers are generally more affluent and concerned with buying organic products, they would probably pay a few cents more, according to Prato.

“Selling to someone with money is easier,” he said. “You’re not building a business based on undercutting everyone else.”

Running a small business means adjusting to constantly changing variables, and making decisions that anticipate future changes in commodities.

“We would hope that the decision we made holds us for the balance of the year,” says Prato.

The most important commodity changes, he added, don’t come from the tea, sugar or other ingredients that go into the beverage: it’s the container.

“In everyone’s beverage, 99 percent of it is water,” he said. “But packaging costs can be very dramatic.”

Joe Tea packages mostly in glass bottles, and Prato says that staying flexible is important, which is why they’ve dabbled in plastic packaging as well, though changing oil prices affect PET bottles too.

“We’ve played with it over the last few years,” he said. “If we had to move completely into plastic, we could.”

But commodities, Prato pointed out, are universal, and so are many of the pricing adjustments that are associated with it.

“If sugar is going up, it’s not just going up for me, it’s going up for Coke, it’s going up for Pepsi,” he said.

Arthur Ebeling, CEO of Warrior Energy Inc., works with the same set of variables, but has a different strategy to compete in the energy drink category. Warrior Energy produces a tea-based energy beverage, and despite traditionally high margins in the energy sector, commodity pricing still affects them.

“It’s hard on us,” Ebeling said. “The good thing about tea is that it’s not as variable as coffee.”

Due partly to the increase of tea sales and partly because of stockpiled tea, Ebeling said they haven’t felt a sting from increasing tea prices as of yet.

“We have a lot in inventory,” he said. “One good thing about tea is that it keeps.”

Warrior Energy also works directly with farmers to ensure lower prices and greater quality because there are so many things that can affect the price and taste of tea, according to Ebeling.

Like Joe Tea, Warrior Energy will be affected most when it comes to future plans for distribution. Ebeling said he would be less likely to pay new product slotting costs associated with supermarkets if their profits were down.

But he said another way to keep costs from overburdening his company is streamlining internally. Ebeling does this as a way of avoiding an increase in the price of his product so he can remain competitive to brands like Red Bull.

“We want to stay competitive — if there is any price adjustment, the cost will probably be born by the distributors.” he said. “You want to galvanize people and you want people to try it.”