Beyond the Tea Garden

Merrill Fernando is a man with a vision – a vision in which poverty in the developing world is eradicated and replaced by wealth creating, self sustaining economies.

A hopeless vision, many might think, or at least one that will take decades – if not centuries – to become a reality.

 But Fernando is no feather-headed idealist.  He is a hard nosed businessman who has built the global brand Dilmah Tea out of the ashes of a business taken from him under nationalisation in Sri Lanka in the early 70’s into a tea brand sold in over 80 countries.

He has taken on the world’s largest multi-nationals, who are his jealous competitors, and now he is challenging the trendy Fairtrade concept which he claims is nothing more than a yet another marketing middleman standing between producer and consumer.

For Fernando’s vision is based on what he has himself achieved in a business career that is as long as it has been successful – building a brand that is sold direct to the consumer and reaping the rewards from the value added end of the tea trade.

No only has he done so – along the way establishing the first ever packaging plant in Sri Lanka – but he has ploughed back much of what he has achieved directly into the communities that have sustained his business through his Merrill J Fernando Foundation helping with education, accommodation and health care for his workers, their children and many others.

Fernando boils with a silent anger when he talks about the macro-economics of the world’s economy. He believes that within a generation the third world would no longer need aid handouts from the opulent West if their governments and the world bank made some simple but radical changes to the way they are tackle the problem.

His main target is the World Bank policy of only allowing aid to go into agri-businesses, essentially.  Into the production of more raw materials that Western companies can exploit still further and derive yet more profit from.  Instead, he insists, money should also be there to help companies in developing countries develop the value-added elements essential to national economies.   The profit made by the multi-national middle men like Proctor and Gamble, Nestle and Unilever should rightly be made by producer nations.

Fairtrade, the “conscience” brand established by a former Marxist priest in Latin America and now franchised across Europe, is little better than the multi-nationals, Fernando claims.  Western consumers are asked to pay a premium for “ethically sourced” products, only a tiny percentage of which finds its way back to the producer who pays a licence for the priviledge.  For Fernando Fairtrade is a triumph of PR spin over substance.


 After suffering a series of severe illnesses in the last year which have served only to reinforce his strong Christian faith, Fernando is examining ways in which he can more effectively campaign for and support the development of local businesses through his Foundation.

One approach is a direct one to Bill Gates and Warren Buffett who between them have donated over $50 billion to relieve world poverty.  But, Fernando fears, so much of this may be wasted unless it is used to build sustainable businesses that will inevitably seek to loosen the stranglehold of first world economies on their third world cousins.

The personal story of Merrill Fernando is both intriguing and inspiring.   He was born in May 1930, in Negombo, a fishing town on the coast of Sri Lanka. His father was a local trader and his family of very modest means. One of five children, he started life with an American Petroleum company, as an Inspector. Soon tiring of this, he was selected for training as a Tea Taster, the first batch of Sri Lankans to receive such training, and travelled to Mincing Lane, London, then the Mecca of the tea world.

Having worked in a UK tea company Fernando returned to Sri Lanka and joined A F Jones & Co., a British owned and managed tea business. He became its Managing Director within two years and eventually bought out the British shareholders and ran the business with another partner. He distinguished himself at a tender age by supplying the first ever consignment of Ceylon Tea direct to the then USSR. Merrill was still in his twenties and went on to establish Merrill J. Fernando & Co., Ltd., his own business.

 

This company supplied bulk tea to most of the world's major tea brands in the 1960s and 1970s. With a combination of outstanding service and value for money, Merrill rapidly gained a strongly supportive clientele, enabling his fledgling business to grow.
 Merrill J. Fernando & Co., soon became one of the top 10 tea exporters in Ceylon, and the only Sri Lankan owned one to enjoy this success. In the 1970s with the election of a Socialist government, Merrill lost his tea plantation to nationalisation, and with increasing regulation, sold his business with the intention of emigrating from Sri Lanka. However this was not to be and persuaded by friends he remained in Sri Lanka, forming another company, M J F Exports Ltd., in August, 1974 and in the early 1980s registering the trademark DILMAH with a dream of eventually supplying pre-packed, value added tea to his bulk tea clientele.
In the 1980s, Fernando imported the first teabagging machine into Sri Lanka in spite of discouragement and opposition from the Tea Board and his clients. The machines spent several years lying utilised below capacity as Merrill faced the wrath of bulk tea customers who believed that Sri Lanka should remain a raw material supply source and Europe, USA, Australia and New Zealand the value addition points.
His vision was based not on the politics of development but rather on the simple fact that, by supplying consumers direct from origin, the quality and freshness of tea could be improved without additional cost, in every market. Naturally the multinationals thought differently since their interests lay in sourcing product from multiple origins regardless of quality, and branding the commodity in a manner that the origin would not be of relevance.
With the assistance of a few amongst his old customers, Fernando gradually built up his new business, and in 1988 his vision became reality with the launch of DILMAH. Tea (now sporting an 'h' to balance out the appearance of the brand) in Australia. Shortly thereafter in New Zealand, and to date in 82 countries around the world. Fernando's sons have joined him in the business and Dilhan, graduated from London, and Malik, graduated from Boston, USA work with their father, sharing his vision to deliver fresher and better quality tea to consumers around the world.

Other tea growing countries are beginning to follow in Fernando's footsteps. His vision now is that the value adding industry he initiated, will change the economy of some Asian and African countries which place reliance on tea for their prosperity. He has changed a relic of exploitation to one of hope and promise of a better life in the third world.
Fernando has a philosophy of sharing his profits and his family wealth with others who are less fortunate. Even in a small way, his company will donate this year, over $500,000 dollars worth of tea pots and mugs to retailers to be sold and proceeds to be donated to local charities. Quite apart from benefiting thousands of underprivileged people in several countries, this has had the effect of creating an awareness among others to spare a thought to those deserving help. Dilmah Tea is proud to support the Ronald McDonald Houses and the Children's Leukaemia & Cancer Research Foundation in Australia as well as the Hospice movement in New Zealand.
This benevolence is reflected in the management of the MJF Group, with a strong emphasis on staff welfare – in house medical facilities with free or subsidised medication for staff, financial assistance for the education and basic needs of their children, and themselves. Since the inception of the Group, Merrill has maintained a tradition which continues to this day, of providing school clothing and books for children of staff who cannot afford them.
His philosophy goes further. As he says, we bring nothing with us and we take nothing with us. Therefore the wealth we acquire while we serve here, must be given to those who work with us, to the needy and towards alleviating poverty. He has set an example by establishing The Merrill J. Fernando Charitable Foundation. Some of his wealth has been transferred to the Foundation already, and all of it will be transferred over the next three years.

 

The Foundation began its work by assisting a major project to provide breast cancer screening facilities in Colombo, where these facilities are today, grossly inadequate. The Foundation will go on to build hospitals, orphanages, homes for the elderly and schools, in rural areas where such facilities are not provided by government. Scholarships and grants for educational purposes will be provided. Five Trustees will administer the Foundation which is outside his control now.


 
Millinda Moragoda, prominent Sri Lankan Businessman and political commentator, interviews Merrill J. Fernando, founder of Dilmah Tea and the Merrill J. Fernando Foundation.

According to reports, you changed your career from tea to oil.  Can you elaborate on this?
I was first involved with tea and was trained by Heath & Co. but at the time it was difficult for a Sri Lankan to find employment in the tea trade which was dominated by foreigners.  I received an exciting offer from an American Oil company to be one of their inspectors, which involved the opportunity to travel island-wide and I took it up.  After two years I decided that I witnessed all I wanted to see in the country and wanted to get back into the tea trade which I did, after a two year break.

You developed Dilmah into a premium tea brand.  Today's brands such as IBM, Pizza Hut, etc.,  dominate the world.  In Sri Lanka you have gained a reputation as a renowned brand, what are the challenges you faced and how long did it take to develop this brand?
These challenges were enormous and were intimidating.  When I became involved in the tea trade as a boy of 22 years I realized all the activities in the tea trade was upside down.  I couldn't understand the reason why a country which produces one the worlds finest teas could not market it's own product.  I observed how tea was exported as a raw material worldwide.  How it was blended, branded, packaged and sold at a comparatively higher price.

I recall that you mentioned in a seminar that Rs. 130 per kilo at the auction sells at Rs. 750 to the retailer.  Can you comment?
There are costs between the CIF price and the retail price.  My concern lies in the fact that while our industry was suffering instability and the prices of our teas were below the cost of production at the same time, the consumers bore high prices.  It was my wild dream – being the proprietor of my own brand of tea which I wanted to make sure will be the best Ceylon tea in history.  At that time I was 24 years of age.  Thus it took me until 1988 to launch my own brand into the market, the challenges were enormous.  At that time I was contemplating on owning my own brand of tea, it was considered sacrilege as the industry was dominated by foreigners.  There was nothing Sri Lankan about it. 

Thus steadily and slowly the business conducted by foreigners was transferred to local companies and local companies established themselves.  However, what they eventually did was supply raw material or bulk tea, which never offered a future for our tea industry.  In my own experience I have exported tea in raw material form to most of the renowned international tea brands worldwide through brokers/middle men in the country.

I managed a competent and successful business when I supplied bulk tea.  We achieved the status of being the fourth largest exporter from Sri Lanka, for bulk tea worldwide during that particular period and I competed with many multi nationals
How many years did this trend last?
From 1954 to 1977.  It is interesting to note that after 25 years of trying to launch my own brand I did approach the government in hope of them providing assistance concerning investment and machinery.  However, the questions I was subjected to by the bureaucracy shattered my hopes.

Did this occur in the 70s. ?
In the early 70s when there existed central control and a shortage of foreign exchange, I attempted to request an import license to purchase two foreign tea bagging machines.  However, I was discovered by a particular individual who asked me why I was attempting to waste foreign exchange on this type of activity when big players such as Brooke Bond had not requested this.

However, I attempted to explain that the multi nationals will never consider Sri Lanka as a base, they will have their own bases concerning value addition but it was of no use.  When the free market policies were implemented I took my opportunity to purchase the two tea bagging machines and having purchased this I felt it was the correct thing to do.  I was unaware of how to go about it.  What raw material to expect.  The packaging material I had to import from Japan and if there was something incorrect about it, it would be approximately four months before I could rectify it.  However, with two machines, along with a colleague I established a small tea packing business.
You mentioned previously the beginning of your fascinating career, could you continue your story?
When I had two tea bagging machines and not understanding what to do, it seemed ridiculous to want a printing machine to print tags and envelopes as well.  But as time progressed I realized that it was one of the sanest things to do in the tea packaging industry.
What is the reason for this?
Within our country no one was available to facilitate the tea packaging industry for printing tea bags and envelopes as the process involved a different kind of printing technique from the usual offset process.  I previously relied on my shipments from Japan but out-sourcing absorbs time.  If a problem occurs it takes up another three or four months, which proved to be very costly.  So I set up a printing and packaging company.  I gained my first break after knocking at many doors. 
People still ask the reason for my close links with Australia, the reason being when I was supplying bulk tea I established myself as the second largest supplier of bulk tea to Australia. And it was in Australia that I got my first break as a supplier of tea in value added form

What percentage of the tea market do you possess in Australia?
We possess 12 percent after ten years of the market share while the brand leader after around a century has about 18 percent.  That in itself speaks very highly of Ceylon tea, needless to state that our brand proved to be the vehicle to establish Ceylon tea into the markets worldwide.  Once we entered the markets, according to the market environment, our success lay in the high quality of tea.  I got my break when the very large retailer, Coles, responded and visited my factory.  They inspected the factory, made certain recommendations, sent their quality control staff, and provided me with useful knowledge.  I had to make certain adjustments and they gave their first order to pack their house brand Farmland and to this day I continue to pack that.  This proved to be my first opening.  I offered them high quality Ceylon tea at a competitive price.  Therefore Ceylon tea was born and launched in Australia in 1979 or 1980 and that was the beginning of Dilmah Pure Ceylon tea.
I understand the brand named Dilmah comprises a combination of the names of your two sons, can you comment on this?
Dilhan and Malik are the names of my two sons and I did this in 1974, when I confirmed that I was going to establish my own brand name of tea.  I later decided to register a brand name after my two sons were born and I did so.  I decided that I must demonstrate my dedication for my tea and what more than naming it after my two sons. That decision has been excellently received by the consumers.

On observing your present status globally, you possess a large business in locations from Singapore to Australia and Russia?  What is your relative position?  I understand in Australia you hold 12% of the market share?
Australia is close to my heart because it is where I launched Dilmah tea.  It has proven to be Australia's fastest growing brand concerning tea and the Australians have adopted Dilmah tea as a member of the expanding family.

I am told that you undertake your own advertising on television and that people recognize you as a celebrity?
It is true that I advertise Dilmah; the idea was first put forth by our advertising agent in New Zealand who said "You maintain a quality product, possess an honest face and consumers want to be identified with what they eat and drink."   He attempted to persuade me to relate my story on television, which I refused because I could not consider myself a salesman or display my face on television to sell my tea.  Eventually he convinced me. The person who undertook this was Daron Curtis, the Managing Director of Waves Advertising.  At present he is with me shooting some new commercials for the coming year and that recommendation brought tremendous integrity to the brand, for people say, "look that tea belongs to that man and we have faith in his ability". There is a responsibility that goes with this for I cannot under any circumstance compromise the quality of my tea – because I give consumers my personal assurance
How are the other markets you have penetrated?  Can you comment more on this?
I always discuss Australia because I am directly involved with it.  In New Zealand we began two years after Australia with 17.2% market share which is substantial.  We recognize ourselves as being the second brand, but the No.1 for Quality which to us, is more important.  The most recent market we penetrated is Singapore which is strongly oriented towards multinational brands which have been there for a long time. I personally felt that this venture would not be successful but my son Dilhan was very persistent and we decided to carry on the launch.  We have a very good partner there and our first six months have been encouraging. We were amazed at the reception we have had.  Singapore Airlines wanted Dilmah for the Business and First Class Lounges, and they discarded their old product and have adopted Dilmah, recognizing its quality.  It gave me a tremendous sense of satisfaction, to identify Ceylon tea as an accepted brand in the First and Business Class Lounge of Singapore Airlines.  We are hoping to supply Qantas and already supply Emirates Airline.  At present we are supplying to about 15 or 20 airlines and we have penetrated the Russian market in which Dilmah was established as the second most popular brand up to 1997.

 What happened after that time?
Our brand grew immensely popular and we were shipping over 100 container loads of tea per month, and that was a tremendous quantity of tea.  The Mafia possessed their own tactics to deal with successful brands.  They directly approached our distributor and requested for a share of the business, which they refused.  Later they requested twelve million dollars and we refused. Two weeks later they entered the office under the pretext that they were officials and removed about eight and a half million dollars worth of tea from our distributor's warehouse. This affected us and our distributor and created an unfavourable impact on Dilmah.  They dumped the tea in the market at 50% below our selling price.  However, it was a blessing in disguise although an expensive one, for everyone who could not afford to purchase Dilmah could do so now.  The next year we faced another obstacle which was the Rouble crisis, we took this also with good spirit and I have been cautious, when undertaking business, always expecting shortfalls to occur.  We saved, built up our reserves and we were able to withstand that blow.

You supply to McDonalds which is a huge challenge, how did that happen?
Yes, we have supplied McDonalds in 21 or 22 countries.  In Australia they called for offers and they decided on us some 13 years ago, because of the quality of our tea.  I am proud to say this not only because of Dilmah but for Ceylon tea too.

McDonalds possess two products which are co-branded. One is Coca Cola, and second is Dilmah.  On every bag of McDonalds tea there is a Dilmah logo of which we are proud, because it is also Ceylon tea. Our relationship is strong because we meet and exceed McDonald's exacting quality standards, and also provide them with a fine cup of tea. They in turn assist us and offer us opportunities to widen our association with them where possible.

Considering the tea sector as a whole I was reading in the paper that you now have gone into looking at the broking sector such as Forbes and Walker as well.  Can you comment on this?
Forbes and Walker is a very old firm and I was aware they were searching for investors.  Brokerage was never in our agenda but I felt that a company like this should be directed from the people who are involved in the company and it is virtually a management buy – out because the management had a large stake while we went in purely as investors.  However, I recognized this as an opportunity to break the walls that exist between the plantations, planters, produces, brokers and exporters.  If I undertake activities in my own way, discuss these with brokers, planters, etc., and suggest we amalgamate and build a successful brand together there is  tremendous opportunity. But as long as we continue to assume we are this, we are that, it will not be the case.  The old values will never change.  When I tried to set up my own value added business, none supported me - that is only because people are used to the beaten track. 
In the tea industry, I have observed that the moment someone attempts to bring change and innovative ideas someone pushes them back to the original position.  I would not abide by this and I did it my way; you create many enemies in the sense that they do not understand your mission, position or what your intentions are.
Is the reason based on jealousy or competition?
do not think this has anything to do with jealousy.  The reason I feel is that being in the tea industry we inherited old customs and traditions. These proved to be imported at that stage where one dictated and decided who is going to undertake what, but today no longer.  When that era passed we had no replacement but there were many people, planters and traders at that time who lacked substance to maintain their arrogance and position.
Why have we failed in building other brands?
In the first place we have no mission or vision, we have solely been training to accommodate the supply of the raw material market.  I was involved in this too, if I had not traveled so extensively, met my customers, gained knowledge I would have continued this trend of supplying bulk tea or filed for bankruptcy ten or twelve years ago.  We possess job satisfaction, having this view that if you earn a profit we do not want to invest further, you can observe many people in the tea industry although I am sad to say so who did well out of tea, never expanded the tea base they venture into other industries such as, hotels and various other things because tea had an old style establishment.  It was not seen as innovative or progressive, and continued without any excitement providing the bread and butter to the individuals in the business.

Coffee such as Columbian coffee has had a success story right down to the retailer for e.g. Starbucks.  Do you see tea moving in that direction too?
Tea is a attempting to move in that direction too.  But I feel that it is unfortunate for the producers because it is only the middlemen who are involved in these operations.  There are people owning teashops who intend to add enormous value to the tea because tea is comparatively cheap.  People do not take it seriously despite the large amount of benefits confirmed by researchers who have stated that the tea is a medicine.  It is only the health consciousness and the presence of antioxidants in tea that makes people want to consume it to maintain sound health.  There is awareness of this specific value of tea but that is not going to benefit us but the middlemen, who are the ones who will ultimately cash in on that.  If I can convince ten other people to join and amalgamate in order to function as a team, set up their own brands the tea industry will begin to boom.  It is difficult because individuals do not realize that it is not envy or jealousy but lack of understanding.  If someone accomplishes a great feat we are not accustomed to acknowledge this but rather to discredit that person stating that this has happened because of so and so.
Very often companies like yours are built up by entrepreneurs like you.  Does succession develop into an issue in order to continue the possess forward, what is your view?
With a great deal of satisfaction I can state that I have two sons and they are my greatest assets in life.  I planned a brand name after them and I have confidence they will perform better than I have done because they possess the vision, the education and the discipline that I have instilled in them and they have the talent.

How do you divide the responsibilities?
Malik is an intellectual. However he undertakes responsibility well, he has proven to be an excellent manager, and possesses the ability to handle difficult situations extremely satisfactorily.  Dilhan is an honest and sincere salesman, he has the ability to interact and get along with people therefore he is the Marketing Director and Malik is an Executive Director.  Between the two I possess an excellent team, they have built their own teams for marketing and management.  I am proud of their achievements, which I could never have accomplished because I am too involved in my work and they are getting involved in the business although I never pushed them to it. 
I am aware whether it is in our country or elsewhere, all you can give your children is to provide a decent education.  At the time when I was building my business, I could not look beyond the next three years or whether I will have a business or not.  I decided that I would provide them with a good education and permit them to follow whatever field they decide on.
Does this mean you have more time to spend on relaxation and leisure?
I should because the business is stable and is performing well.  We have diversified and are exploring new markets that requires years of my experience to blend in with the vision of my two sons; they have a great marketing team to guide and direct.  For instance I say we should go into this market, often we disagree and come to a conclusion then attention is focused on the decision.  I have nothing to do with the management of the company, I am only undertaking marketing and I am having fun doing graphic work and designs, I love doing that and I work maybe 16 or 18 hours a day and I enjoy it.

Your website states that you are in the process of transferring the better part of your wealth or have already performed this to a foundation?
Yes, I have done so.  About a third of my wealth is for my foundation, the Merrill J. Fernando Charitable Foundation. This entity formally commenced operation recently although has supported various charitable programmes since 1998.
Within three years of my death all my wealth will be transferred and my children progressively will transfer some of their wealth.  I did that because I was brought up in a middle-class family and I had a lot of wealthy relatives and friends and I find I have performed better than some of them even those who were wealthier than I.  I continue to work hard, even harder in the present day and age.  I have wealth acquired through the co-operation and the assistance of many other people who worked with me. I realize and I strongly believe that we come into this world with nothing and go with nothing.  I have added to this philosophy that the wealth should return to those who helped us to acquire it while we are still around.  Although I have confidence that my children will handle this situation appropriately I am giving it back before I go in tribute and thanks to consumers, workers and others who helped me along the way. We help children and the elderly or infirm in several countries where we also sell our tea.

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