Starbucks bought Teavana for $620m in 2012 and plans to take tea upmarket in the States, but one investor warns the price of success may be depressed margins and earnings.
Skeptics include investor Tri Duong, who before speaking to us argued in a well-written article for SeekingAlpha that the American love of iced tea won’t stretch to the speciality loose leaf Teavana sells at a premium price, since consumers are “already getting what they want for little money”.
One thing that's no secret is Seattle-based Starbucks’ financial muscle, which enabled it to hitch its star to an Oprah Winfrey Chai Tea launch last month, as CEO Howard Schultz pins his hopes on premium tea uptake among well-traveled millennials with exposure to tea cultures abroad.
But Duong says Starbucks needs to invest heavily – too heavily, he thinks – in stores (New York and Seattle Teavana outlets only exist now, 1,000 stores are planned globally) and marketing to effect a seismic shift in tea drinking.
Target Baby Boomers, not Millennials!
He notes that only 24% of those who drinks coffee and/or tea several times a day are 24-35s, compared with 53% in the 55+ category.
“Rather than targeting the millennial generation, Starbucks and Teavana should cater towards this age group. But would they be willing to pay more for the Teavana experience?” he asks.
Duong thinks not: “Unless Starbucks and Teavana are able to successfully create a massive cultural shift in American tea consumption…I cannot envision Starbucks and Teavana being very successful at taking over the speciality tea market.”
With the global tea market now worth $90bn, Starbucks envisions upscale teas bars worldwide selling exotic oolong – but Duong warns that the market Teavana hopes to conquer in the US does not reflect the buying habits of most Americans.
This is because RTD tea sales in the US – dominated by Arizona, Lipton, Lipton Brisk, Pureleaf and Snapple – were worth an estimated $5.1bn in 2013 (Beverage World, IRI, The Beverage Almanac 2014) versus $1.73bn in the specialty segment where Starbucks and Teavana want to reside.
Only 36% of Americans bought iced tea at a coffee shop or tea café in 2011, while 28.2% of purchases come from supermarkets and 22.8% from Walmart, 19.9% from C-Stores.
“I love drinking tea. I am a millennial who has drunk tea from exotic cultures abroad, and I am in fact the target market Schulz describes for Teavana’s future plans,” Duong concludes.
“But I am still very skeptical that hot tea will transform American tea-drinking practices the same way that Starbucks was able to do for coffee,” he says, adding that he wanted specialty tea, he’d rather visit an old-fashioned tea salon than a chain like Teavana.
I put it to Duong that the tea opportunity was massive. As the world’s second favourite beverage after water, it is generally less caffeinated than coffee, more hydrating (less diuretic) and promises more health benefits. If anyone can create a new up-market for tea, surely Starbucks can?
Starbucks can change the US tea market, but at what price?
Starting with millennials, then moving on to boomers, might not Starbucks crack the US by encouraging more people to try high quality hot and iced teas, speeding up acceptance by marketing them within its established coffee culture and alongside well-known offerings?
“Starbucks can change the tea market in the US but it will take a massive marketing campaign,” Duong replied.
“You’re right that Starbucks is probably the most likely business able to effect a culture shift towards premium tea. However, at what cost and how long will it take? I think their targeting of millennials may not be the best idea,” he told BeverageDaily.com.
“Of course, I’m speaking my mind from an investor perspective. I care about margins, accretive acquisitions, earnings, etc. Conquering the American tea market may hurt their margins and earnings,” Duong said.