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The Transformation of the Puerh Market
Adjusting the Pipeline and its Influence on Future Needs and Price Indexes
By Chen Zhi Tong

PROFILE

Chen Zhi Tong is one of the leading experts on Puerh tea in the world today. He is a renowned speaker and the author of several prominent books and hundreds of published articles. His latest book "The Profound World of Chi-Tse" has become the academic and market standard for identifying state produced vintage Puerh. It would be difficult to find a Puerh shop in Asia without a Chen Zhi Tong book, magazine or poster somewhere amongst the tea.

2006 was an important year for Puerh tea. Many goods made a dramatic showing in market shares, and many big firms adjusted their stratagems and products. Furthermore, many of the larger factories like Menghai multiplied their product lines to meet the increasing demand. As I predicted in several lectures the year before, an imbalance between supply and demand is the prime cause for scandals such as forged teas and poor quality or mislabeled teas. Producers needed to increase their production to satisfy the growing consumer base and prevent them from purchasing along these other avenues, which affects the entire market negatively. An increase in production helps prevent imitation from developing. As the price index of the market is staid, imitations and lower quality fringe-products have less of a chance to develop.

Major factories' production increased across the board. Menghai, however, increased in variety of tea rather than amount of each, focusing on the promotion of their total production line. The number of second and third-grade Menghai agents rose noticeably last year, showing that besides Guangzhou, the northern, southwestern and northwestern tea markets are maturing enough to absorb products from the large factories. Menghai then stimulated competition from other firms, who also showed an increase in production over the year. The competition between these large factories will of course raise the price index of raw material, and as each firms struggles for access, the bigger more established factories will necessarily have superiority. This competition also adjusts distribution plans, pipelines and financial estimation - all of which will play a central role in the future of the Puerh industry.

Menghai

Menghai has definitely gone through a series of transformations since their takeover in 2004 by Bowen Technological Company. I predict that greater future changes will occur in the direction and flow of their market pipelines. Menghai will begin to play a greater role in controlling the pipeline positively, because administration of this passageway influences profit directly. Efficient movement of product in more directions is a quick and good way to increase the overall profit margin.

According to the stock trade graphs below, Menghai and Bowen's averages are both increasing. This doesn't mean that they represent a valuable investment at the moment, but it does show an interesting correlation between the two companies. One wonders if the increase in Bowen's average also relates to future production of Menghai. Studying and discussing the relationship between these two companies, their stock and influence on each other is an interesting topic for experts to spend the next year considering. As mentioned above, production increases caused the price index of raw material to rise, which in turn caused competition between factories trying to purchase the same limited quantity. It's evident that joint operations between Menghai and Bowen, especially with an increase in investment and capital, will threaten many other second-grade firms. I predict that some of these companies will even be eliminated in the coming year or two.

In the next year, as I mentioned, Menghai will have to control the pipeline of distribution more efficiently, because that is where all the profit is being generated. It's impossible for them to let their agents manipulate the price index themselves while they bear all the risks. This is what caused the collapse of many of the Puerh factories previously. Menghai must play a greater role in distribution over the long run. Of course this will put them in opposition with many of their agents, especially on the first level of distribution, but it's a change that must proceed, as a matter of business interest the first-tier agents will face a reduction in fee for their services.

One of the biggest topics of discussion amongst those with an interest in market analysis is whether these first-tier agents should even exist. Many of the factories are already reflecting on this. In addition to creating stratagems to limit the amount of imitations, these agents face the added difficulty of competing with one another. The price index set by the first-tier agent in one area affects those in other areas, even though the markets might be structured differently. As antifraud technology increases, and the real products are easier to distinguish, this problem will become more serious. The differences between prices of the same product in different places will become apparent to consumers. I'm unsure how this change affects the largest market in Guangzhou, but outside of that market I feel that the profit margin of large factories like Menghai will continue to rise while that of the agents will decline steadily, until not just first-tier, but second and third-tier agents are also affected. I think that Guangzhou agents, representing the largest market center in the world, will be affected less and later than the others. These agents still have a large quantity of products in stock. In the end, as the agents decrease, I predict that the agents in Guangzhou, along with the large production firms themselves, will see the greatest increase in profit.

The price of stock in trade still influences the current market. I think the same changes happening elsewhere will eventually reach Guangzhou in two or three years. The most important advice for agents there is to remember that as the price index of raw material increases so will the stock in trade, causing products from 2004 and 2005 to increase in value significantly.

I also expect the larger factories like Menghai to continue seeking out and creating new kinds of distribution pipelines. For example, in Kunming I noticed in 2006 that several tobacco agents were ready and willing to begin distributing tea. These wholesale distributors already have a well-established pipeline that, if opened to Puerh, will affect the entire industry. This could ultimately affect the role of Guangzhou, which is currently the largest wholesale Puerh market in the world. Other areas, like Fang Cun, are also opening distribution pipelines for the larger factories, and we may see local wholesale markets centered there in the future, as well as in the North, West, Southwest and areas along the Yangtze River.

Xiaguan

Xiaguan has always had a more efficient administration and its production is also more stable than the other large firms. However, Xiaguan's products have an inferior circulation. Menghai's longer standing reputation perhaps has something to do with this, as it cannot be correlated to the quality of tea the two factories are producing. Still, Xiaguan is a major competitor in the market; many collectors, especially in China, buy up products from these two factories. During 2005, Xiaguan's price index was unstable, but this improved greatly over the course of 2006. This change indicates that raising prices stabilizes a market in which the demand is greater than the supply. It resolves the problems associated with product allocation, eliminating those unwilling to pay the higher price.

Xiaguan's products may increase in price just as Menghai's have continued to do. Nonetheless, I think that the increase will not be as great because of the enormous production of Xiaguan factory - the largest production of any factory. This also exerts pressure on other new and second-grade firms.

Chang Tai

Although the larger firms always influence the market in some way, their position is not always entirely assured. For example, after Cheng Tai presented their Yi Chang Hao cakes in 1999 the company grew exponentially because it initially had no rivals. Any new merchandise of good quality may afford the producer a stable position in the future market. This new merchandise faces the burden of competing with the stock of products already in hand from 2000 to 2006, which creates great risk in the development of such innovations.

Chang Tai's position in the market remains vague. It vacillates between a first and second-grade factory. However, it has the potential for development, despite the unusual nature of its products. Its best product line is still its Yi Chang Hao. Collectors should pay attention to the value of the 99 Yi Chang Hao: if it can maintain its current value of 1500 RMB or increase, this bodes well for the future of the brand.

The Chang Tai Group exploited several different distribution pipelines to other provinces last year. If this stratagem succeeds and these markets mature, it will mean that the company will generate great profit in the coming years. They are currently still adjusting their pipelines, just like the other factories all appear to be doing. I predict that Chang Tai will also face with their agents in the coming year or two, especially concerning product allocation and distribution amounts. As these disputes resolve themselves, and the price Index of raw material continues to increase, the stock in trade will be higher, too. Agents will certainly be forced to sell off their stocked products, which may or may not impact the whole market.

There are several other second-grade firms that are important in the market. I have focused on Chang Tai because of their greater general influence on the overall market, due mostly to the success of the 1999 Yi Chang Hao. I think that in the next two years, many of the second-grade factories will also offer unique products that will make the market that much more competitive.

2006 was a key year in the overall history of Puerh production. The changes in market strategy and the shifting distribution pipelines will affect the entire market forever. Increased competition between large firms, and between the firms and their own agents, will eliminate some factories, product lines and agents in the near future. The bigger firms' superiority, reputation and established pipelines will lessen their risk. I predict that, on the other hand, the more they control the distribution pipelines, the greater their profit margin will be, which means that they will also expand. If the larger factories find a more stable niche in the market, it will allow for the smaller production of the precious and rare, wild mao cha. These higher-quality productions will then occupy their own position in the market. Otherwise, it's difficult for them to fetch a price that makes production worthwhile, since the raw material is significantly more expensive. It's easier for them to become a part of a famous brand than to fetch the price of one. If consumers and producers both stabilize production and consumption, focusing supply and demand into a neater hierarchy, the various kinds of tea and quality levels will each have their own space to grow successfully. When consumers get what they want, everyone wins.