Unilever: Is Creating its Own Tea Pod Machine a Risk Worth Taking?

As fresh coffee manufacturers look for growth opportunities from pod machines, tea giant Unilever can also consider creating its own branded system. In a Q1 2013 financial release, Unilever reported improved tea revenues, achieving mid-single digit growth. The company attributed its good results to “improved product quality, stronger mixes and improved in-market execution”. Analysts are asking if these factors are sufficient to maintain the long-term growth of its tea business. In a recent conference, Unilever’s Executive VP of Global Beverages was reported as saying that tea capsules and the out-of-home market offer a premium opportunity. Tea, a minor business for the FMCG giant, could make a positive contribution to its corporate financial objective of achieving revenues worth €80 billion by 2020 if this premium opportunity is seized at the right time.

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Source: Euromonitor International

JAB’s DE Master Blenders Proposal

In 2012, Unilever maintained its strong leadership in global tea with no immediate challenger, holding around an 11.7% share, way ahead of second-placed Tata Global Beverages Ltd (TGBL) with 3.1%. This strong gap in share likely means that Unilever feels relatively secure. Acquisitions have been used to reshape and restructure its business divisions in recent years. The company has spent substantial resources on acquisitions and the disposal of its personal care and packaged food business, leaving little left for tea acquisitions. It may be that the company does not see the urgency or necessity of a major tea acquisition while other business areas require more attention and investment due to stronger rivals. Thus, the organic growth of its core Lipton brand continues to be the company’s main strategy in tea. Nevertheless, any company, large or small, should try to avoid stagnation.

JAB’s potential takeover of DE Master Blenders would likely give DE Master Blenders a boost in terms of capital and exposure to JAB’s other FMCG partners. JAB could use DE Master Blenders as an acquisition platform to purchase tea companies and help these companies grow so as to better compete with Unilever. Given the fragmented nature of the tea market, acquisition targets are indeed available. JAB might have already cast its net over its next prey before Unilever even wakes up. Some private family businesses such as Ahmad Tea London may be worth looking at.

Considering its Own Tea Pod Machine

In March 2013, the tea giant announced a partnership with Green Mountain Coffee Roasters (GMCR) with regard to the use of Lipton capsules in Keurig machines, with this being a good opportunity for the leading tea brand to reach Keurig users. GMCR has a dominant position in the US single-serve machine market, with the company also enabling the compatibility of its machines with other mainstream brands, such as those from Hain Celestial. Thus, Lipton will have to compete with other brands for Keurig users. Agreements between machine brand owners and actual beverage suppliers do not always have a happy ending, with Kraft Foods Inc’s dispute with Starbucks being one example.

Euromonitor International believes that to secure long-term premium growth opportunities, Unilever could consider partnering an appliance producer to create its own tea machines, either under the Lipton brand or another luxury-sounding name. In developed markets, Unilever recorded just under 2% growth in retail value sales of tea in 2012, compared with 12% in emerging markets. Adding value to tea and creating premium demand could help boost the category. The benefits of having a system in its own right may well outweigh the hassle involved in operating it. Euromonitor International has researched the retail sales of tea pods in 54 countries, with these reaching a combined value of US$300 million in 2012, tripling the sales registered in 2007. Major tea pod markets include the US, the UK and Canada. The global tea pod market is expected to continue to grow strongly over the next few years and so Unilever should consider acting now to avoid missing out on a growth opportunity.

Currently, the single-serve tea beverage system market is not as crowded as the coffee market. Nestlé launched Special T in 2010 in France and is now rolling out the brand in a growing number of European markets. Compared with Unilever, Nestlé can claim to have more experience with hot drinks systems, although Nestlé’s experience in tea is minimal compared to that of Unilever. That said, if Nestlé was brave enough to enter a brand new field, Unilever should also have the capability and courage to take the risk. The main issue here is how much Unilever believes in the future of capsules and their potential. Euromonitor International will keep a watchful eye on any developments.