Weak Tea at Unilever Persists Amid Innovation at Rivals

Unilever CEO Paul Polman
Paul Polman, chief executive officer of Unilever. Photographer: Denis Doyle/Bloomberg

Unilever Chief Executive Officer Paul Polman has revived ice cream, skin care, and other parts of his company’s sprawling consumer-product business since taking the helm in 2009, yet one category remains a sore spot. Call it the tempest in tea.

Unilever’s tea business -- which includes Lipton, the world’s second-biggest beverage brand behind Coca-Cola -- has suffered from a lack of attention, investment and innovation compared with categories like deodorants and shampoos. The volume of sales for the business unit that includes tea has declined in three of the past four quarters.

Despite ads featuring hip-hop artist Eminem, Lipton has surrendered its top spot in the U.S. ready-to-drink tea market, where Unilever operates a joint venture with PepsiCo Inc. In the U.K., Unilever’s market-leading PG brand has suffered as Britons ditch black tea for coffeehouse lattes or green and herbal teas.

“Lipton’s almost become like a generic,” said David Turner, an analyst at Mintel. “Other brands have more energy and motivation, and a better story to tell.”

Polman has told analysts this year that “we need to do better” and he’s “disappointed” with the tea business, which has annual revenue of $2.7 billion, according to Sanford C. Bernstein research. He put ice-cream chief Kevin Havelock in charge of tea as well, and has introduced new products in the U.S., Britain and Russia. Some of the new teas have hit the mark while others have underperformed, according to Mintel.

Revenue Growth

A spokeswoman for Unilever, based in London and Rotterdam, declined to comment about efforts to bolster tea sales, citing a quiet period in advance of its Oct. 25 third-quarter results. The world’s second-largest maker of consumer products may report a 5.3 percent increase in underlying revenue in the quarter, a slowdown from the previous two quarters, according to the median estimate of 12 analysts surveyed by Bloomberg.

Unilever fell 0.1 percent to 27.52 euros at 11:08 a.m. in Amsterdam trading today. The stock has risen 3.5 percent this year, compared with an 11 percent jump in Zurich for Nestle SA, the world’s biggest food maker. Investors are now buying Unilever’s shares at a 2 percent premium over the STOXX Europe 600 Index. In December, the premium was 54 percent.

Unilever’s struggles contrast with growth throughout the $50 billion market for tea, the world’s most consumed beverage after water. Sales of Starbucks Corp.’s Tazo tea at U.S. retailers rose 43 percent last year, according to researcher Symphony IRI. Atlanta-based tea retailer Teavana Holdings Inc. has more than 280 stores and will soon open in Kuwait. Retail tea sales in China and India have grown at double-digit clips over the past five years.

Spate of Deals

That expansion has spurred a spate of deals. Coca-Cola Co. last year bought the remaining portion of Honest Tea, which makes low-calorie bottled teas. Nestle grabbed Sweet Leaf Tea Co. This year, smoothie chain Jamba Juice Co. and Sara Lee spinoff D.E Master Blenders 1753 NV have both acquired premium tea makers. Unilever hasn’t made a big tea acquisition since its 1996 purchase of Ireland’s Lyons brand.

In the U.S., Unilever is getting squeezed from all sides. McDonald’s Corp. chose little-known S&D Coffee to supply its restaurants with sweet tea, which some fans purchase three times a day, McDonald’s U.S. president Jan Fields told analysts last year. And higher-end brands such as Honest Tea and Sweet Leaf have each seen growth in excess of 25 percent, according to Symphony IRI data.

New Competition

Arizona bottled tea -- known for its opaque glass bottles - - surpassed Lipton last year thanks to new flavors like Arnold Palmer, a blend of iced tea and lemonade named after the golfer. Arizona, made by closely held Ferolito Vultaggio & Sons, has benefited from cash-strapped consumers seeking cheap refreshment, as its average price per bottle is almost 50 cents lower than Lipton’s, according to Symphony IRI.

“There’s been a clear trade down and the beneficiary has been Arizona,” Ali Dibadj, an analyst at Sanford C. Bernstein in New York, said in an e-mail.

Lipton is facing new competition from beverages like PepsiCo’s Tropicana, Campbell Soup Co.’s V8, and Coca-Cola’s Glaceau Vitaminwater, all of which have ventured onto Lipton’s turf with tea-infused varieties. Unilever’s response, an all-natural tea called Pure Leaf, is notable for the absence of the Lipton brand; it’s hidden at the bottom of the back of the bottle.

‘Britain’s Favorite Tea’

Unilever’s lead in the U.S. bagged and loose tea category, which is about one-third the size of the $2.5 billion bottled tea segment, is also coming under attack as Lipton cedes market share to pricier brands such as Tazo and Twinings, from Associated British Foods Plc. Twinings, whose founder opened London’s first tea room in 1706, sells blends like cherry with Madagascar cinnamon and also generates $25 million in annual sales from single-serve tea pods delivered through Green Mountain Coffee Roasters Inc.’s Keurig beverage machines.

Unilever has tried to stanch the bleeding by bringing its PG brand to the U.S. and pitching it as “Britain’s Favorite Tea.”

“That’s great, but so what?” said Turner, the Mintel analyst. “Asian-Americans drink the most tea in the U.S., and PG doesn’t appeal to them.” Almost half of Asian households drink loose tea, versus an average of 14 percent of all U.S. households, according to Mintel.

In tea-loving Britain, where nearly six in ten people drink “a cuppa” daily, tea sales have declined over the past year, Turner said, as flavored waters, carbonated drinks and coffee gain adherents. Black tea, the most processed of all types of tea and the most consumed in Britain, is also losing ground to healthier green, herbal and fruit teas, especially among younger consumers and women.

Earl Grey

Unilever has responded with a range of higher-end offerings such as a black tea infused with a “subtle hint” of Earl Grey. They’re made by pressing tea leaves at different stages after picking. Polman has said they have “great promise,” yet a Mintel analysis showed that after a strong start, both sales and distribution of the Earl Grey blend are now below other new tea products.

One way to generate some buzz for Unilever’s tea could be a chain of tea cafes. The company last year opened a coffee shop in Mumbai under its Bru brand, and pop-up Magnum shops have helped build awareness of its high-end ice cream, sales of which will surpass 1 billion euros this year.

In August, Marketing Week reported that Unilever was preparing to create a tea café concept, citing a job listing for a manager to lead the operation. Unilever declined to comment on its plans, and Starbucks has already beaten it to the punch, opening a Tazo tea bar near its Seattle headquarters this month.

‘Cool’ Concept

“The idea of a tea shop makes you think of elderly matrons and seaside towns,” Jon Cox, an analyst at Kepler Capital Markets, said in an e-mail. Still, a “cool” concept linked to tea’s health benefits “could work in some cities and get what is a bit of a dowdy category going again.”

Whether it’s a café, new products or an acquisition, Unilever needs to inject more life into Lipton. Earlier this month, the Anglo-Dutch company put its Skippy peanut butter brand up for sale, proof that Polman is willing to jettison units that don’t measure up.

“Lipton is a great brand and has conquered the world with its teas,” said Carl-Olof Skeppstedt, creative director of London tea and coffee consultancy Tatler & Brown Ltd. “But it does not have a clear identity. New brands, new flavors and a demand for something other than Lipton is growing.”

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