FACTORS HINDERING SUCCESSFUL VALUE ADDITION OF KENYA TEAS

DAVID MURIUKI

BUS-3-5843-3/08

A Thesis Submitted in Partial Fulfillment of the Requirements for the Award of Masters of

Business Administration (MBA) Degree of Kenya Methodist University

October 2012

i

DECLARATION

I declare that this is my original work and has not been presented in any other university or

college for examination purpose.

Sign ______________________________Date ______________________________

David Muriuki

Bus-3-5843-3/08

This research thesis has been submitted for examination with our approval as university

supervisors

1st supervisor

Sign _____________________________Date _____________________________

2nd supervisor

Sign Date

The Kenya Methodist University

Nairobi Campus

P.O. Box 45240 – 00100

Nairobi

ii

DEDICATION

This is dedicated to my family, relatives and all well-wishers who have worked tirelessly to

ensure that all requirements are met.

iii

ACKNOWLEDGEMENT

Planning and preparing this thesis has been a six month effort. A great number of people helped

me in the development of this project on relevant information and emotional support. I discussed

among my supervisor, friends, workmates and college mates. To my Supervisors, I want to say

thank you for the guidance and assistance, your effort and encouragement gave me more effort

towards accomplishment of this proposal. I also thank my employer for allowing me time for

out of job training. To my family for their endless support and mentors, I say big thanks for the

moral and emotional support. Thank you always for your encouragements and positive attitude

towards academics; this has made me be positive, confident and courage to conqueror life

achievements.

To my mum, I thank you always for your support in every aspect, your patience and

encouragement. Finally I say thanks to Almighty God for He alone knows the plans He has for

you.

God bless you all.

iv

ABSTRACT

Since 2005 Kenya has been the world leading exporter of Black CTC in terms of quality and

quantity. As such, it’s expected that Kenya is the world largest earner from tea exports. The

research problem statement arises from the intensification of competition in the international tea

business and the extensive consolidation of value addition among Kenya’s competitors namely

Sri Lanka and India. What is emerging from this competition is that value addition is an essential

prerequisite for the achievement of a sustainable competitive advantage and, hence Kenya’s tea

export overall success. The purpose of this research paper was to establish the factors affecting

successful value addition of Kenya teas.

The researcher used a descriptive type of research design. The target populations for this study

are the primary and secondary tea industry stakeholders. A sample of 22 respondents from Top

management was targeted from representative stakeholders. The primary data was collected

using the questionnaires. Secondary data was collected through desk research from previous

publications and websites. The quantitative responses were then coded into the SPSS version

17.0 and the data analyzed using descriptive statistics. In addition the study used Karl Pearson’s

product moment correlation analysis and multivariate regression was applied to determine the

relative importance of each of the four variables with respect to tea value addition.

From the study findings, the study concludes that poor infrastructure affect tea value addition in

Kenya since there is unreliable and costly cost for energy and congestion at the Mombasa Port

affects tea exports. The study also deduced that cost/quality affect value addition since packaging

v

materials locally are very expensive. The study further concluded that government related levies

and taxes effect value addition since V.A.T. levied on tea increases the cost of tea yet tea is food

and like other foods should not attract V.A.T. Marketing related factors also affect value addition

as there is a risk of overreliance on a few markets for Kenya tea. The study recommends that to

enhance the infrastructure for value-addition, the study recommends that the Government should

be more involved through funding/resource mobilization and provision of incentives such as

credit lines/financial assistance and improve road network.

vi

TABLE OF CONTENTS

DECLARATION ii

DEDICATION iii

ACKNOWLEDGEMENT iv

ABSTRACT v

TABLE OF CONTENTS viii

LIST OF TABLES xi

LIST OF FIGURES xii

LIST OF ABBREVIATIONS AND ACRONYMS xiii

CHAPTER ONE

1.1 Background of the Study...........................................................................................................1

1.1.1 Market Dynamics in the Global Tea Industry........................................................................1

1.1.2 Market Forecasts for The Global Tea Trade...........................................................................3

1.1.3 Tea Industry in Kenya............................................................................................................3

1.1.4 Value-Addition.......................................................................................................................4

1.1.5 Global Perspective of Tea Value-Addition.............................................................................4

1.1.6 Tea Value Addition in Kenya.................................................................................................8

1.2 Problem Statement.....................................................................................................................9

1.3 Research Objectives.................................................................................................................10

1.3.1 General Objectives................................................................................................................10

1.3.2 Specific Objectives...............................................................................................................10

1.4 Research Questions..................................................................................................................11

vii

1.5 Justification of the Study.........................................................................................................11

1.6 Significance of the Study.........................................................................................................11

1.7 Delimitations and Scope of the Study.....................................................................................12

1.7 Assumptions of the Study........................................................................................................12

1.8 Definition of Operational Terms.............................................................................................13

LITERATURE REVIEW 14

2.1 Introduction..............................................................................................................................14

2.2 Theoretical Review..................................................................................................................14

2.3.1 Marketing Related Factors....................................................................................................23

2.3.2 Government Related Levies And Taxes...............................................................................25

2.3.3 Cost/Quality Factors.............................................................................................................26

2.3.4 Poor Infrastructure................................................................................................................28

2.4 Conceptualization....................................................................................................................29

2.3.1 Marketing Related Factors....................................................................................................29

2.3.3 Cost/Quality Factors............................................................................................................30

2.3.2 Government Related Levies And Taxes...............................................................................30

2.3.4 Poor Infrastructure................................................................................................................30

2.5 Operationalization....................................................................................................................31

2.6 Research Gaps.........................................................................................................................32

RESEARCH METHODOLOGY 33

3.1 Introduction..............................................................................................................................33

3.2 Research Design......................................................................................................................33

viii

3.3 Study Population......................................................................................................................33

3.4 Sampling Design......................................................................................................................34

3.5 Types and Sources Of Data.....................................................................................................36

3.6 Data Collection Procedure.......................................................................................................36

3.7 Pilot Study...............................................................................................................................37

3.8 Data Analysis and Reporting...................................................................................................37

3.9 Ethical Issues...........................................................................................................................39

3.10 Limitation of the Study..........................................................................................................40

CHAPTER FOUR

RESULTS AND DISCUSSION ..41

4.1 Introduction..............................................................................................................................41

4.1.1 Reliability Analysis..........................................................................................................41

4.2 Factors Hindering Successful Value Addition to Kenya Teas................................................42

4.3 Descriptive Analysis............................................................................................................42

4.3.1 Infrastructure.........................................................................................................................44

4.3.2 Government Related Levies and Taxes effects on value addition........................................47

4.3.3 Cost/Quality..........................................................................................................................48

4.3.4 Marketing..............................................................................................................................48

4.4 Inferential Statistics.................................................................................................................49

4.4.1 Correlation Analysis.............................................................................................................49

4.4.2 Regression Analysis..............................................................................................................52

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS 55

ix

5.1 Introduction..............................................................................................................................55

5.2 Summary of Finding................................................................................................................55

5.3 Conclusion.............................................................................................................................556

5.4 Recommendations....................................................................................................................56

REFERENCES 57

APPENDIX I: DATA COLLECTION INTRUMENT: QUESTIONNAIRE 59

APPENDIX II: TEA INDUSTRY STAKEHOLDERS 64

LIST OF TABLES

Table 1.1: Analysis of Ten Packaging Countries........................................................................5

Table 3.1: Sampling frame: Tea industry Sampling Frame...........................................................35

Table 4.1: Reliability Analysis......................................................................................................41

Table 4.2: Overall rating by stakeholders......................................................................................43

Table 4.3: Pearson Correlation Analysis ......................................................................................50

Table 4.4: Model Summary...........................................................................................................51

x

Table 4.5: ANOVA........................................................................................................................52

Table 4.6: Coefficient of determination.........................................................................................53

LIST OF FIGURES

Figure 2.1: Theoretical Framework..........................................................................................19

Figure 2.2: Conceptual Framework...............................................................................................28

Figure 2.3: Operationalization Framework....................................................................................31

Figure 4.1: Rating on Infrastructure Amongst the Stakeholders...................................................45

Figure 4.2: Rating on Government Related Levies and Taxes amongst the Stakeholders............46

Figure 4.3: Rating on Cost/Quality Related factors amongst the Stakeholders............................47

xi

Figure 4.4: Rating on Marketing/Marketing Related factors amongst the Stakeholders..............48

xii

LIST OF ABBREVIATIONS AND ACRONMS

APC Agricultural Produce Cess

CTC Cut, Tear and Curl

DTTC Dubai Tea Trade Centre

EATTA East African Tea Trade Association

EIA

EFTA

Environmental Impact Assessment

European Fair Trade Association

EPZ Export Promotion Zone

FAO-IGG Food and Agricultural Organization- Inter Governmental Group

FAOSTAT

FDI

Food and Agricultural Organization Statistics

Foreign Direct Investment

GAP Good Agricultural Practice

GI Geographical Indication

GMP Good Manufacturing Practice

ISO International Organization for Standardization

KAM Kenya Association of Manufacturers

KEBS Kenya Bureau of Standards

KEPHIS Kenya Plant Health Inspectorate Services

KETEPA Kenya Tea Packers Limited

KGS

KRA

Kilograms

Kenya Revenue Authority

KRB Kenya Roads Board

KSH Kenya Shillings

xiii

KTDA Kenya Tea Development Agency Limited

KTGA Kenya Tea Growers Association

LATF Local Authority Transfer Fund

MC Manufacturing Cess

MoA Ministry of Agriculture

NSE Nairobi Stock Exchange

NTZDC Nyayo Tea Zones Development Corporation

RTD

R&D

TBK

Ready To Drink

Research and Development

Tea Board of Kenya

TD&VAF Tea Development and Value Addition Fund

TREO Tax Remission Export Office

TRFK Tea Research Foundation of Kenya

VAT Value Added Tax

xiv