Lipton is one of most well known brands in the world of tea, so why did Unilever decide to stop investing in the brand?
Lipton is an integral part of the world of the tea enthusiast, until they transition to niche tea of local mom and pop shops, transcending to the hipster lifestyle of tea leaves. Lipton is an age-old brand owned by Pepsi and Unilever, enjoying popularity around the world, so it’s a peculiar move from Unilever to divest in the brand during an earnings presentation in July 2020.
The American dream
I’ll be honest, I only know Lipton as a brand, but not so much about its history. It’s hard to miss at your local supermarket. Lipton today is the largest tea manufacturer in the world, having around 50 percent market share in the brewed-tea business in the mid-1990’s. The story of Lipton starts in the 19th century, when it was established in 1871. The 15-year old Irish lad Thomas J. Lipton arrived in the United States in 1865, just like many other Irish who fled the poor country that was plagued by many famines in the 19th century. A few years later after his arrival, Lipton landed himself a job as store clerk in a department store in New York, where he would witness entrepreneurship the American way. Life for immigrants was not easy in the bustling city. When Thomas arrived in the city, it was rapidly growing, exceeding over 800,000 inhabitants. The immigrants that arrived were mostly impoverished and levied on the Lower East Side of Manhattan where living conditions were subpar with citizens living in crowded apartment buildings. Some complexes housed 20 families with only basic necessities, lacking a bathroom and electricity
When he went back to Glasgow a year later to work at his father’s shop, he missed the opportunistic spirit and opened his own shop in 1871, named after himself, Lipton. One of its products was tea which he deemed fit to further expand upon. He bought several tea farms in Sri Lanka. After a short decade Lipton’s entrepreneurial spirit paid off as he opened up 20 stores, becoming a well-known local franchise. Just like counterparts of his time like George Vuitton, he would lay the foundations of what we would today call marketing, but back then were experimental and groundbreaking. Lipton would introduce the ‘Lipton Currency Notes’. Just like Henry Ford believed that the vehicle should not remain a luxury good for the wealthy, so did Lipton believe that tea should be available to the masses.
Thomas Sullivan would help Lipton revolutionize how tea would be served. He created silk bags in which the tea could be placed and dipped in water.
He established the Thomas J. Lipton tea packaging company in New Jersey to cut out the middleman and decrease the price of the packaging, transporting tea in smaller light weight variants. He would be the first to sell tea directly to the consumer. Thomas Sullivan would help Lipton revolutionize how tea would be served. He created silk bags in which the tea could be placed and dipped in water. Lipton would be the first to sell his tea in this breakthrough manner, including instructions on how to brew tea through the tag attached to the tea bag. From this day on, around the world people use this tried and tested tea bag to create a warm beverage for themselves.
Welcome to the Unilever family and the coffee surge
In 1971 Lipton International was acquired by Unilever. With this acquisition Unilever became the largest distributor of ready-to-drink tea in the world. The 1970s were a challenging time for Unilever as the world was dealing with the 1973 oil crisis. Economies were struggling to maintain growth during periods of rising inflation. Supermarkets began to acquire more purchasing power, creating another dynamic in the pricing of consumer goods. The economic hardships did not stop Unilever from expanding its business. Whilst acquiring Lipton, it acquired Frigo Ice Cream in Spain in 1973. In 1977 Unilever had a strong European presence, with 177,000 employees across 200 offices and factories.
But already the tea market was showing signs of decline. The consumption of tea had declined by 20 percent from the mid 1970s and into 1980s in the United Kingdom, making room for coffee. To understand why, we have to go back to when coffee was making its big debut. For coffee, the 70s were a period of fast growth. In 1971, Starbucks opened its first location in Seattle. One year later the first automatic home drip coffee maker came onto the market, which would revolutionize coffee consumption, under the name Mr. Coffee. The coffee maker was an instant hit, selling 40,000 units per day during the 1970s, becoming a staple of American living. No coffee machine would ever reach the popularity that Mr. Coffee was able to achieve. Another coffee defining moment was the appointment of Howard Schulz who joined Starbucks as the marketing director. He wanted to refocus Starbucks to only aim on selling coffee, but the owner did not approve. So Schulz went his merry way and opened his own coffee chain in 1985 which saw massive success. He proved it could be done and convinced the owners of Starbucks to let him take the wheel. This defining moment for Starbucks would turn it into the corporate powerhouse we know today.
Over 10 years later in 2019 Unilever dominated the tea global market with 143 billion servings per year, equating to 270,000 cups every minute.
Twenty years after its acquisition, in 1991 Unilever and Pepsi created the North-American Pepsi Lipton Tea Partnership, expanding Lipton to the dominant force in ready-to-drink tea in the United States. In 2003, the partnership was expanded through Pepsi Lipton International, which would have a market reach of over 40 countries. In 2007 Unilever and Pepsi would work more closely together to expand their international market share even more. They would add eleven more countries to the read-to-drink Lipton product. The companies would keep their 50/50 stake in the joint venture.
The CEO of PepsiCo Michael White said, ‘This is a wonderful opportunity to strengthen our position in one of the fastest-growing beverage categories. Lipton is one of the world’s great beverage brands, and will continue to be a key pillar of our strategy to offer international consumers a portfolio of convenient beverages to address a wide range of needs.’ And the prospects looked good for PepsiCo and Unilever as the tea market was showing promising signs of growth. Food Dive noted, based on a report by BevNet, that demand for tea by the Millennial generation was soaring in the United States. PepsiCo’s Pure Leaf premium Tea House collection was seeing impressive growth reaching up to $50.7 million. Food Dive observed that the higher segments in the market had room for more, premium, alternatives.
Over 10 years later in 2019 Unilever dominated the tea global market with 143 billion servings per year, equating to 270,000 cups every minute. That’s some serious amount of cups. So after all the successes and joint ventures, it was a surprising move for industry outsiders when in January 2020 Unilever announced it would review its tea strategy despite strong growth of its tea business in regions such as India which saw strong growth in 2019.
Not long after, in July 2020 Unilever confirmed suspicions and announced it would spin-off some of its tea into smaller franchises or as Alan Jope of Unilever described it at Seeking Alpha, ‘The balance of Unilever’s tea brands and geographies and all of our tea estates have a very exciting future, but this potential can be best achieved we believe as a separate entity, and a process will now begin to achieve this separation, which is expected to conclude by the end of 2021.’ In August 2020, Unilever began selling parts of its tea business, valued at about $5.6 billion. Unilever would still keep the brand in India and Indonesia where sales were still strong.
The loose-leaf and bagged teas market in the United States has nearly flat-lined in 2019 and even decreased for the Lipton brand. While still being the biggest, Lipton saw a decrease of 5.2% in revenue and decrease in market share to 18%, a decrease of 1.1%. It’s biggest competitor Bigelow with a market share of 14.4% saw an increase in market share of 0.7%. Other well known brands like Celestial Seasonings and Twinings of London did not experience a change in market share. In the same product category, the canned and bottled teas, Unilever seems to have more success, with a market share of 18.1% and 2.0% growth in sales. But other competitors are fighting for the same shelf space, like Monster with its Rehab product. Statista reported that the global ready-to-drink tea market was expected to grow to $29.7 billion in 2024, coming from $23.8 billion in 2020. An interesting growth market to tap into.
Whilst the premium loose-leaf market was showing promising signs, regular household brands like Lipton would not fit well in this segment. The rise of ready-to-drink tea also indicated that consumer attitudes towards tea were changing. Instead of the traditional approach to drinking tea, consumers wanted on the go, fruity alternatives which nearly mimic the chemical make-up of energy drinks, which are a lucrative market for companies like Coca-Cola, but losing appeal due to their sugar content.
A risky bet
Attitudes towards tea were already rapidly changing when Unilever stepped into the market of tea. We can only guess why Unilever bought Lipton when the cards were drawn against them. Given, Lipton as a brand had strong recognition among consumers and maybe it was searching to compensate for losses it made in other segments that were feeling the pinch of the economic crisis caused by the oil crisis. But the tea market was showing signs of decline during the 70s already with the rise of Starbucks. Tea itself was falling out of fashion in the United Kingdom.
In 2021 it was finally time for Unilever to part ways with Lipton, passing over the torch to another company who can rejuvenate the brand in a changing market. The old fashion tea leaf business wasn’t as profitable as it once was, making room for ready to drink alternatives which are taking the world by storm. The global tea business, ekaterra, was sold to CVC Capital Partners Fund VIII in a $4.5 billion cash-free acquisition in November 2021.
