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Summer, 2006 Newsletter: "Capturing the Retail Tea Market"
 

Part IV: Sir Thomas Lipton's Crowning Achievement

   The age of industrialization was well underway when Thomas Lipton opened his first provisioning shop in 1871. Nearly one-third of the world’s industrial production was based in the growing urban areas of the United Kingdom. Wages were modest, and there was no demand for luxury items among the working class. If there was money left over at the end of the week, it would likely be spent on simple provisions, such as butter, eggs, and ham, precisely the items that sold well in the Lipton family’s shop on Crown Street in Glasgow, where Lipton spent his earliest years. When Tom Lipton opened his own shop, he took great care to make it attractive, clean, and well-stocked. He was outgoing and friendly, and had a way of connecting with his customers. Above all else, Lipton knew that a modest profit on a large scale would eventually make him more money than selling at high prices, no matter how much attention was paid to the other details. As Lipton stated in Leaves from the Lipton Logs:
I worked tremendously hard to have the shop spick and span ... but it was to the stock I paid most attention. Most of it came direct from Ireland, and it was purchased at such keen rates that on my opening day I was announcing prices which quickly caused a sensation among my competitors all over the district. ... My first day’s drawings were two pounds, six shillings — considerably more than we had ever drawn in a single day at the wee shop in Crown Street.
   Lipton advertised heavily, and had a flair for orchestrating press-worthy events that local newspapers, always hungry for a good story, found irresistible. One of his most successful stunts was the commissioning of giant, “monster” cheeses, the likes of which had never been seen before.

   Lipton’s first giant cheese was ordered from America in 1881, to be sold at his largest store on Christmas Eve. He advertised every detail of the production and shipment of the cheese. Everyone in Glasgow knew the name of the ship carrying the cheese, as well as the day and hour of its arrival. Thousands lined up to witness the unloading and transport, by steam tractor, of the giant cheese to Lipton’s market. Lipton was delighted with the publicity, and in true Lipton style, he upped the ante by adding even more excitement to the stunt.

   A popular custom at Christmas was to bake a sixpence coin into the Christmas pudding. The lucky person at the Christmas table who found the hidden coin could expect financial rewards in the coming year. In a moment of inspiration, Lipton hastily placed an ad, proclaiming that “a large quantity” of gold sovereigns and half-sovereigns would be embedded into the giant cheese before it was cut up for sale on Christmas Eve.

   Lipton had arranged for a dozen policemen to be present, ostensibly to keep order, but, in Lipton’s own words, “it was more of an advertising dodge than anything else”. As the sale commenced, the policemen queued up with the crowd to get their own portions of cheese, and pandemonium soon erupted. Two hundred dairymaids milked eight hundred cows for six days to produce the milk for the giant cheese. It sold out in less than two hours! The newspapers gave Lipton “columns of free publicity” the next day. It was a stunt that he would repeat several times.

   Lipton’s reputation spread throughout the U.K., and soon crossed the Atlantic. Unable to supply his stores with enough bacon and hams from European sources, in 1883 Lipton established a packing plant in Chicago, further lowering his costs and widening his competitive edge. A few years later he needed more capacity, and built a huge meat packing plant in South Omaha, which at the time was a very small town with minimal rail service, virtually no industry, and cheap land. His South Omaha operation was large enough to supply his stores handily, with excess capacity for him to expand sales within the U.S.

   South Omaha is 400 miles closer to the west coast than Chicago, and Lipton easily competed with his Chicago-based rivals for business in that rapidly-growing area of the U.S., attracting orders from all over the west. One order, for 500 tons of smoked bacon destined for Klondike miners in Alaska, was delivered to San Francisco by a special Lipton train carrying nothing but his bacon.

   Philip Danforth Armour (of Chicago) was keen to buy Lipton’s South Omaha operation, and finally made him an offer “on ... a handsome and generous scale”, which Lipton could not refuse. It was a well-timed transaction, for Lipton had discovered that his U.K. customers preferred leaner pork than that of grain-fattened Nebraska hogs. He promptly expanded his Chicago operation to more than compensate for the South Omaha sale, and did so on quite favorable terms. Such were the stakes of Lipton’s business, and all transactions were done without leverage or partnerships.

   Tea merchants from Mincing Lane had been approaching Lipton for years, hoping to put their tea blends into his hundreds of stores. Tea prices had been declining ever since he opened his first store, and by 1888 Lipton realized that tea was now a beverage for the average Lipton customer. What was especially interesting to Lipton, however, was that the lowered costs of tea had not been fully passed on to the consumer, and herein lay a great opportunity for a man who had already made a fortune by selling provisions to the modest wage-earner. Why not give his customers the opportunity to buy their tea at the same store where they purchased their ham, butter, and eggs?

   Lipton had learned to do his homework before entering into any business venture. Mincing Lane merchants tried to convince Lipton that it would be folly for him to try blending his own teas, and that he should leave it up to the professionals to do it for him. After all, this was how everyone else was doing it. However Lipton didn’t do anything the way everyone else did. Instead of buying blended teas, he “enlisted the services of one or two men who had big reputations as expert tea-judges in London” to create his own distinctive blends from inexpensive teas. After several failed attempts, he had his first Lipton Tea blend.

   Almost overnight, Lipton became a major purveyor of tea, selling at “tea-prices unheard of in the world up till that time”. Ever the promoter, Lipton added a unique twist to his marketing of tea. Recognizing that tea steeped in different waters would taste different in the cup, he began blending according to water samples drawn from the districts to which he shipped. He was the first to advertise “the perfect tea to suit the water of your own town.”

   Much to his delight, tea sales soon overshadowed the sales of other provisions, even as sales of all provisions increased due to the bustling tea traffic. In Lipton’s words, “In tea alone a branch which didn’t sell a ton at least every week was held at headquarters to be securing poor results!”

   Lipton was working non-stop, but he loved the dynamics of large-scale business. The game of it excited him more than the financial rewards, yet he, as much as anyone, knew that the game was sweeter when the stakes were high and a win likely. Lipton was nearing the top of his game, but he had one more card to play.

   Now famous for its tea, coffee was once the the most important crop of Ceylon (now Sri Lanka). Coffee was first planted in Ceylon by the Dutch in 1740. When the British took control of the island in 1796, they expanded the effort, and, before long, Ceylon was the world’s largest exporter of coffee. With coffee prices relatively high, the price of land in Ceylon increased rapidly. Speculators, with no interest in planting coffee, bought land with the hopes of making a quick profit. Typical of real-estate speculation, many of the transactions were highly leveraged and by 1845 there was a buying frenzy. Soon the price of coffee began to fall, and land prices started to soften. Before long there were more sellers than buyers, and the buying frenzy turned into a selling panic. Banks found themselves with collateral that was worth a fraction of the loan amount.

   Those who held out were given new hope as coffee prices slowly recovered. However, their hopes soon fell on the wayside when a fungus began to attack the coffee plants. The fungus was first discovered in 1869, and for at least a decade many growers believed that it could be contained or controlled, and continued planting new fields. Yet every known fungicide was ineffective, and experimentation proved fruitless. Within 20 years every coffee plantation in Ceylon was destroyed.

   Tea was a relative newcomer to Ceylon. The first commercial export of tea was a paltry 23 pounds in 1873. But when it was discovered that the tea plants would thrive in the same soil from which coffee plants were uprooted, many plantation owners began the transition to tea. By 1883 a million pounds were exported to the U.K., and exports nearly doubled every year until 1888, when Lipton first entered the tea market.

   Bankers had been approaching Lipton for years, hoping that he would buy some of the Ceylon estates that they held under foreclosure, or that had uncollectable debts. It was a group of London bankers who proposed Lipton’s most successful venture! Although Lipton had eliminated the middlemen in his tea business of just two years, he quickly saw the opportunity at hand. He was producing his own bacon and hams in the U.S., so why not grow his own tea in Ceylon?

   On the pretext of taking a leisure trip to Australia, Lipton made an unscheduled stop in Ceylon to explore his prospects. That he did this without announcing his intentions is not surprising. By this time, Lipton had learned to keep his cards close to his chest. Any competitor who could foresee a Lipton investment might try to outbid him. If nothing else, he might end up paying a higher price than necessary.

   Bankers are seldom speculators, and by now most held little hope for a recovery of land values in Ceylon. When Lipton made “a very low offer”, their only response was, “Can’t you do better?”. Lipton knew he didn’t have to, and he landed several estates at his price. He made such good purchases that someone offered him a £10,000 profit the next morning. But Lipton had no interest in selling, and instead set out to purchase several more estates. Overnight, Lipton became a major tea planter. “Direct from the tea garden to the teapot” was immediately added to his label.

   Lipton’s customers now numbered in the millions and, even at full capacity, he was never able to keep up with demand for his tea. He sold mostly through his own stores in the U.K., and exclusively wholesale in the rest of the world. Attempts to sell wholesale in the U.K. were largely unsuccessful, since merchants were reluctant to stock a brand that they had to buy from a direct competitor. And so it went for decades, as Lipton Tea became an international brand. The concept of a global market was in its infancy, and Lipton was delighted to be one of the pioneers.

   When Lipton finally took his company public with an initial stock offering in 1893, people rushed to purchase shares, hoping, in some way, to share in both the Lipton legend and the Lipton fortune. While still retaining major control of the Company, Lipton raised twelve million dollars, and could have raised even more; Stock applications valued at more than twice the amount of the initial offering were returned to disappointed applicants after the allocated shares had sold out.

   For years the Lipton magic continued, and the shares usually paid a handsome dividend. But from the first stockholders’ meeting onward, a cloud began to form above the Thomas J. Lipton Company. Stockholders asked questions and demanded answers, which occasionally put Lipton in a contentious mood. For decades Lipton had answered to no man. He relied on his wits and spent money where and how he saw fit. Quarterly profits were of no concern as long as the bills were paid and there was money in the bank for the next venture. Being the head of a public company was the first challenge that Thomas Lipton was not prepared to face head-on.

   Lipton’s phenomenal success came at a time when there were no governmental regulations and few taxes. There was no minimum wage, and the only employee benefit was that you kept your job as long as you toed the line. However, by the end of the 19th century, values were changing. The average worker was better educated and possessed a greater sense of self-worth. Unrest among the working class was fomenting, and managers were less compliant. Lipton could no longer give an order and expect unquestioning execution.

   As the 20th century unfolded, Lipton was enjoying good health and had powerful friends on two continents. He was as welcome among British Royalty as he was among the poor. His likeness graced millions of tea packets sold daily throughout the world. He devoted much of his time to yachting, and is perhaps best known by many as the greatest single challenger for the America’s Cup. In later years, his most pleasurable moments were spent at the helm of one of his many world-class racing yachts. As captain of a ship, Lipton was once again in complete control. It was something that he must have missed at the helm of a 20th century, publicly held company.

   The similarities between the A&P story and that of the Lipton markets are abundant, but there is an interesting contrast. A&P’s original goal was to sell tea in the growing urban centers of the United States. Only after they opened several stores did they venture into other groceries. Lipton had approximately 300 stores before he sold his first pound of tea. While The Great Atlantic and Pacific Tea Company still exists, they are out of the tea market. Ironically, all that remains of the Lipton empire is his final venture, the Lipton Tea brand, which is still recognized worldwide.

   Lipton Tea, along with P.G. Tips, is now owned by Unilever. The Lipton brand is sold in over 110 countries, and accounts for nearly ten percent of the global tea-based beverage market.


References:

Sir Thomas Lipton, Bt. Leaves from the Lipton Logs. Hutchinson & Co., 1931.

Alec Waugh, The Lipton Story. Doubleday, 1950.

 Related Information:
   Part I: Setting the Stage
   Part II: From Mail-Order to Retail Giant
   Part III: Lipton Enters the Tea Market
   This current newsletter's homepage
   Sir Thomas Lipton (at Wikipedia.org)
   Show me more topics

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