Wednesday, March 15, 2006

"Capturing the Retail Tea Market"

Part 3: Lipton Enters the Tea Market

In Part 2 of this series, we observed how the two-man team of Gilman and Hartford created The Great Atlantic & Pacific Tea Company with a combination of skillful promotion and hard work. The flamboyant George Francis Gilman handled promotions, and the serious George Huntington Hartford rolled up his shirtsleeves and handled daily operations. This harmonious blend of talents created one of the most successful chains in the history of grocery retailing.

By contrast, Thomas Lipton was strictly a one-man show, but his gregarious personality and innate work ethic made him a single-handed force that rivaled the Gilman-Hartford team. The parallel developments of the A&P in the U.S. and the global Lipton empire are interesting for their similarities as well as for their contrasts.

Lipton came from a family of modest means. His parents left Ireland during the Potato Famine and settled in Glasgow, where industrial expansion provided ample work at modest wages. The frugal Liptons saved a small amount every week, and within a few years saved enough to open a tiny provisions shop in their neighborhood. Their selection was limited to a few local products, mostly hams, eggs, and butter. In his memoirs, Lipton referred to his parents store as a “tiny, wee shop … so small that half a dozen people would have had to jostle to get inside it at the same time.”

Thomas took a keen interest in his parents' venture, and soon revealed a precocious knack for salesmanship. When he observed his father counting out six eggs for a customer, and noticed that the eggs looked rather small in his father's large hands, he later suggested, “Why don't you let mother serve the eggs … [her] hands are much smaller than yours and the eggs would look much bigger in her hands …”.

Lipton attended school for a brief time, but he was never much interested in his classes, and was, by his own admission, an undistinguished student. By the age of nine he quit school, took his first job, and became a contributor to the family fortunes. No matter how busy he kept himself at various jobs, Lipton found himself drawn to the docks where ships were constantly arriving from and departing to places that promised adventure and fortune. Almost on a whim, he booked steerage passage on a ship bound for New York and, at the age of fourteen, announced to his parents that he was leaving for America. It was a bit of a shock to his parents, but he was determined and would not be dissuaded.

Upon arriving in New York, Lipton found that the thirty shillings he had left in his pocket would not last long if he had to pay for lodging. Innkeepers were waiting at the docks, trying to lure passengers who would need accommodations upon their arrival. Lipton quickly hatched a brilliant scheme. He approached one of the innkeepers who had a familiar Irish accent and bargained a free week's rent in exchange for delivering a dozen paying guests. He had made many friends during the long passage, and was easily able to deliver thirteen on the promised twelve guests. This transaction was of the sort that would become classic Lipton over the decades to come. He was able to seize upon opportunities that others would not see, make decisions quickly, and utilize his wits and outgoing personality to close a deal in short order.

Jobs were not as plentiful in New York as Lipton had expected. Civil War soldiers returning from war were hired preferentially over new immigrants, and the economy was in disarray. Prospects were rumored to be better in the devastated South, so, with a few dimes left in his pocket, young Lipton headed for Virginia, where he found work harvesting tobacco.

The first few years of Lipton's adventures in America are poorly documented. In Leaves from the Lipton Logs, Lipton provides a few anecdotes, but mostly glosses over this period with a single sentence: “I feel I could go on indefinitely recalling these youthful experiences in different parts of the States, but I must really pass on to the chain of events which had so much influence in moulding my whole future career.”

After a few years of exploring the South, Lipton was compelled to return to the excitement and commerce of New York. This time he found a job in a prosperous grocery store, where his natural salesmanship and quick wit brought rapid promotions and financial stability. There was a dynamic to New York merchandising that galvanized young Lipton, especially in contrast to what he remembered from the traditional marketing that was prevalent back home.

It is certain that Lipton would have done well had he stayed in the U.S. He loved retail, especially on the grander scale of New York, compared to that of his native country. But after four years’ absence, Lipton longed to see “the old folks at home”. He returned to Glasgow in 1869, anxious to see his family and eager to apply “New World” marketing ideas to the family business.

He did what he could with the tiny shop, decorating the windows, setting out the provisions in attractive displays, and relating to the customers in a more sociable style. In a short time he was able to shore up the struggling business and before long the bank account had a balance that it had never seen before — just over 100 pounds! For Thomas, it was time to expand and open another store, but the elder Lipton was far more cautious than his impetuous son. He would have none of it.

Frustrated and impatient, young Tom Lipton decided that he would have to embark on his own. At the age of twenty-one, Lipton outfitted a small shop on Stobcross Street with half of his savings, keeping the rest as reserves for unforeseen expenses, as well as to tide him over until he started to turn a profit. This did not take long, for on his first day the tiny shop had proceeds of two pounds, six shillings. It was far more than his parent's shop had ever sold in a single day.

Lipton's store stood out among others in the area. He kept it spotlessly clean inside and out. At night he kept the gas lights ablaze, making sure that everyone would notice attractive displays in the brightly lit windows as they passed. He advertised frequently and in novel ways to widen the audience for his store. Lipton was one of the first retailers in the U.K. to realize that a store could be a destination and attract customers from miles away, rather than simply providing for the immediate neighborhood. Judicious advertising and bold promotions were tools that Lipton utilized throughout his career.

Three years after the opening of his first store, a second shop was opened, to be followed by a third a few months later. Each store was profitable from the start, and since Lipton did not extend credit, the profits were realized as cash in the bank. Lipton was never comfortable with debt, either from his customers or for himself, so he never extended credit and never borrowed to open a new store.

In spite of this conservative approach, he became the sole proprietor of twenty stores after five brief years, and each was hugely profitable. Expansion continued at an escalating pace, and Lipton's reputation began to spread throughout the United Kingdom. Landlords were quick to offer properties to Lipton as soon as they became vacant, for everyone knew Lipton would keep the property in top condition and the rent would be paid promptly. He had his pick of real estate and was quick to sign a lease when a location was right. He was just as quick to walk away if an offer did not appeal to him.

For decades to follow, Lipton was focused entirely on expansion. The strategy was simple: new stores would open as fast as cash flow permitted, and as long as attractive locations were available. Once, when asked by a member of Parliament for his political convictions, his reply was simply, “My politics are to open a new shop every week!”

Having hundreds of shops to provision soon became a challenge, as local farmers could not keep up with the demands of his growing list of loyal customers. At the height of his empire, the chain of Lipton stores sold tons of butter and thousands of hams per day. He turned to Denmark and Sweden for butter and other supplies. Sales of Lipton hams eventually outstripped the capacity of all of his European sources.

Lipton's solution was to purchase meat processing plants in Chicago and Omaha, where he would be able to ensure adequate supplies at very competitive prices. Acquisitions and product purchases were always paid for in cash, except for one occasion, which Lipton documents in his autobiography:
"… there was one occasion in my early career when I did put my name to a bill for a comparatively trifling amount … probably I had been buying goods in fairly large quantities and had not sufficient money at the moment to foot the bill…. At any rate, the thought of this bill became a mill-stone round my neck from the moment I had put my signature to it. I went off my sleep. I couldn't eat. I couldn't work. … Three days after arranging the bill I redeemed it and so restored my peace of mind. I remember to this day the feeling of intense relief with which I tore up the dread document!"
And so it went, for several decades, without any serious involvement in tea! Today Lipton's name is synonymous with tea, but few people realize that Lipton's empire was in full operation well before he entered the tea trade. As Lipton, himself, stated in his memoirs:
"My name has become so inextricably associated with the merchandising of tea in the minds of nine out of every ten persons that I feel I must make this point clear -- my entry into the tea business only took place after I had more or less achieved all I originally set out to do in the general provision trade. Not till then did I begin to see the tremendous possibilities of tea as an adjunct to the other commodities in which I was dealing."
The precise time at which Lipton entered the tea market could not have been better chosen. Tea from the British-owned tea plantations in India were rapidly replacing the China teas that had long dominated the market. As prices drifted lower, demand began to increase at an exponential rate. The tea market was very inefficient at the time. Wholesalers purchased tea from brokers on Mincing Lane, London’s center for commercial tea trading since 1834. Wholesalers would sell to distributors who would add their profits and sell to retail merchants. This distribution model was comparable to the one Gilman and Hartford circumvented in their A&P operation, which allowed them to sell teas significantly cheaper than the competition. Lipton would take an even bolder approach and become a tea planter!

Around the time Lipton was evaluating alternatives to purchasing tea from brokers on Mincing Lane, he uncharacteristically announced plans to take a pleasure trip to Australia. More than likely, Lipton, whose motto was “there’s no fun like work”, had another agenda in mind. This became obvious when he cut his pleasure trip short with a stop in Ceylon, which at the time was in the midst of a financial crisis due to the failure if it’s principal export crop — coffee.

In the November 6, 1869 issue of The Gardeners’ Chronicle and Agricultural Gazette, mycologist M. J. Berkeley reported on a previously unidentified fungus that was just beginning to attack certain coffee plantations in Ceylon. No existing fungus treatment seemed to work.

Recall that 1869 was also the year that Lipton returned to Scotland to work in the family store. Less than two decades later, Lipton had hundreds of stores that were perfect outlets for tea. In that same period, the tenacious coffee fungus, documented by Berkeley in 1869, devastated nearly every coffee plantation in Ceylon.

In the next issue of the Quarterly, we conclude our series with an account of how Thomas Lipton became the largest tea planter in Ceylon. The period between 1888 and 1898 was considered by him “to be the most significant in [his] career”.


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

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