Rich pickings for Irish tea suppliers

DROP in the import price of tea has not been reflected in retail prices, a Competition Authority investigation has concluded. Average imported prices fell by 22.7 per cent between 1990 and 1995. However, the recommended retail price rose by 15.3 per cent.

This divergence in prices is not explained by increases in the cost of items other than raw materials, the report said.

Irish tea companies, however, submitted that the tea market in Ireland was competitive as tea was cheaper in Ireland and in Britain.

The study found that a barrier exists to entry by new suppliers into the lucrative Irish market. Nevertheless, it noted that Tetley, which has a large share of the British tea market, may be about to enter the market here.

The study also confirmed the view that above normal profits are being earned by the two main suppliers in the tea business.

Lyons and Barry's have more than 75 per cent of a market which, in 1995, had sales totalling £46.5 million at wholesale prices.

Two members of the authority, Mr Patrick Lyons, chairman and Mr Des Wall, said that the failure of the Lipton brand to enter the market successfully, despite very substantial promotion over two years, was due to the very entrenched position of Lyons and Barry's.

It was an indication that very significant entry barriers exist. There are signs that competition in the market is "relatively weak", the authority found.

The Minister for Enterprise and Employment, Mr Bruton, has accepted the majority conclusion of the three member authority, that the proposed acquisition by Unilever of Lyons, should be allowed to proceed.

The third member of the authority, Mr Patrick Massey, concluded that the proposed merger should not go ahead. This was the view of all three members of the authority prior to the announcement that the Lipton brand was being withdrawn from the Irish market.

The Lipton brand was being sold in Ireland by Unilever.

The authority found there was evidence to support the existence of a number of "strategic entry barriers" in the tea market.

Firms which were the first to enter a market often enjoyed permanent "first mover" advantage and this may be the case with Lyons, which was the first to realise the benefits of supplying the newly emerging multiple supermarket groups in the 1960s, the report finds. This recognition was combined with strong advertising campaigns backed by prize promotions. Barry's, in part at least, replicated the Lyons strategy.

Lyons's policy of brand proliferation helped protect its market share. High levels of advertising and promotion by the market leaders constituted a significant entry barrier as they represented a "sunk cost" which an unsuccessful entrant could not hope to recoup.

"The indications are that, at present, the threat of entry is perceived to be insufficient to cause the incumbent firms to set prices at or close to the competitive level."

An examination of profitability as a percentage of turnover of 27 Irish based food firms, found Lyons and Barry's ranked 2nd and 4th, at 23 per cent and 19 per cent respectively.