12.22.09
The danger of navel gazing
posted by Charles Cain | 11 comments
I had a debate this evening with a commenter named Austin that got me thinking. A lot of people, like myself, shout from the rooftops that the U.S. tea industry is growing rapidly and full of opportunity. At the same time, tea shops across the country are going under. Are the industry insiders just blowing smoke and patting each other on the back?
I’ve talked to more than 100 retailers this year and at least a dozen wholesalers. My anecdotal evidence is that for most, same store sales are down roughly 10%. At the same time, most wholesalers are up more than 20%. This tells me that there is pain out there, but that the industry is still growing rapidly in spite of the down economy. The truth is that even though the last 50 years in the U.S. have been years of incredible growth and prosperity, we all have seen the statistics that two-thirds of new businesses fail. The tea industry is no different. MOST new tea ventures will fail. That’s scary when you realize that these start-ups represent the dreams and savings of a lot of individual entrepreneurs.
The solution is not to discourage people from trying, but to encourage people to pursue strategies that have the best chance of success. So why is it that people always give feedback on business plans based on what some theoretical “average person” would do?
“I’m sure there are A LOT of people that would love to spend lots of time and money at a cute, comfy little tea café. Granted, I’m far too busy to go myself but it just sounds so nice!”
Maybe it’s the same thing that drives people to tell their friends what they want to hear? “Do these pants make me look fat?”
I spoke at the 2009 World Tea Expo and asked the audience to raise their hands if they knew of a tea shop that they thought did a really good job. Nearly every hand went up. Then I asked them to leave their hand up if they KNEW that shop was actually profitable. ONE HAND remained raised.
I’m currently in the process of building a strategy to expand the Adagio Teas brand into a physical retail store. As part of this process, I’ve received feedback from hundreds of people. Some I know well; many are Twitter or Facebook acquaintances who share my love for tea.
Over and over, I hear people suggest that we open a warm, friendly tea café with good food and comfortable seating. I know, it just sounds so nice, but I have yet to see a business model built around the “perfect tea café” that excites me. Most tea drinkers love the IDEA of a café, but few actually frequent them when available. Why pay $4 for a cup of tea that costs me $0.25 at home? Why subject yourself to the attention span of a young server when you can get just the right amount of leaf, water temperature, and steeping time in the comfort of your own home?
I get the sense that between the feedback of friends (which is often irrationally positive) and the feedback of passionate tea connoisseurs (which is awesome but far from mainstream), too many people get sucked into ideas that just don’t have legs. Too many people make the decision to move forward based on vision and gut feel while ignoring the numbers.
For anyone considering getting into the tea business, I have this advice: Avoid navel gazing! Most ideas are bad ideas. Most advice is wrong. Most new businesses will fail. There really is A LOT of opportunity out there. I can tell you stories of incredible success achieved through good strategy and hard work. It IS possible. But be critical, be careful, and do your homework. Vision and passion and a romantic idea are simply not enough.
So as for me, I’m going to open a tea retail store – focused on selling loose-leaf teas. If anyone wants to open a warm, friendly café, I’d love to help you! I’ve opened a couple tea bistros and a handful of tea retail shops. I am glad to share what I’ve learned, am happy to sell you some tea, and would love a great tea café in my own neighborhood. I just know I’ll only visit a couple times a month. Hopefully that’s enough.
December 22nd, 2009 at 12:06 pm
I suspect that’s what Steve Smith has been doing with his new store that clearly focuses on selling loose leaf tea. How are you differentiating the warm friendly cafe from the tea retail store? Do you mean like Teavana’s model that doesn’t include food. The Tao of Tea in Portland Oregon, with multiple locations, has a retail whole leaf store located next door to their cafe - both seem to be doing a thriving business.
December 22nd, 2009 at 4:03 pm
Michelle,
Definitions are a million shades of gray, but I see the start of the slippery slope the addition of customer seating. At that point, the space ceases to be exclusively retail focused and takes on a service element. The addition of food further complicates. I am not suggesting that it is impossible to create a profitable tea cafe. I am stating my opinion that:
1. It is a lot harder to be successful than most people think
2. A tea cafe is more about service than tea
3. There is much more competition in the cafe space than the tea space
In my analysis, the “low hanging fruit”, or easiest path to a differentiated business model and profitability is to avoid the service element and focus on retail. The requirements for space, staffing and hours of operation are all significantly less. The overall complexity of this operation and competition in this space is significantly less.
I wold say definitively that if what you WANT is to go into the cafe and service business then tea is a fine hook. My impression is that a lot of “tea people” have unrealistic expectations about what that business looks like. As I’ve written elsewhere, the Tea Bistro I opened for TGUSA in the Lincoln Park neighborhood of Chicago “appeared” very successful and was named one of the Ten Great Tea Rooms in America by US News and World Report less than a month before we closed it.
December 22nd, 2009 at 4:25 pm
How ironic is that…..!
December 22nd, 2009 at 5:13 pm
I have read that the precentages of failure, especially in the food business was actually higher. Also, many people who go into retail don’t have enough experience of reallize how much really hard work is in front of them. A hude plus in the tea business for me as a consumer is knowledgeable, enthusiastic servers who act happy that you are there. Their attitude can mean a pass or fail for a business.
December 22nd, 2009 at 6:57 pm
Always stimulating posts, Charles. The argument about tea being so cheap and simple to brew at home also applies to coffee. I think the brewing and how it is served have alot to do with tea being not the huge success (so far) that coffee has been in the cafe concept arena. Can you imagine (and there are a few who let you brew your own coffee with sundry devices at the table but nothing mass or mainstream) brewing your own coffee as a cafe staple? Coffee is handed to you, hopefully, perfectly brewed and ready ‘to go’ or consume. The two choices in tea have been traditionally to be handed a hot cup of water and a bag or, more recently, some other kind of device you still deal with yourself. As well, I believe the cafe you opened in Chicago was really more of a restaurant wasn’t it? The coffeehouse model that has been most successful simply offers ‘goodies’ that don’t require prep with a decent markup. Teavana even was offering limited specialty blended drinks and may still be? Most coffee drinkers drink tea and most tea drinkers drink coffee..they are not exclusionary. There are failures in every kind of business. I just heard Ralph Rubio, a successful fast food owner out here in Cal., talk about how it took two full years in a good economy to get across the idea to consumers of ‘fish tacos’. You’ve got to have a ‘killer’ product and know how to market it for anything you want to build a business on. Retail space is expensive, whether you use it for shelves and displays filled with tea or half of it for ‘cafe’ space. Teavana is good at retailing and I suspect the owners could retail other things just as well as tea but they saw the opportunity they wanted there. If coffee houses, and even McD’s & Arby’s are offering ’specialty’ (argh) tea, then why can’t tea businesses offer coffee? Is there some reason they have to be ‘tea only’?
December 23rd, 2009 at 10:40 am
Two brief comments in response to Diane:
1. I agree that coffee is also easy and inexpensive to brew at home. That said, if the cafe’s only offered drip coffee most would have gone out of business long ago. They make a killing on blended drinks that cannot be easily reproduced.
2. I agree that most cafes should offer tea AND coffee. This feeds into my larger point. If you are going to do a cafe, a “third place”, the focus is service and giving the customer what they want. Tea people have a tendency to have a vision that drives them and search for profitability later. This is the danger of navel gazing.
I am not suggesting that there is no market for cafes, this would be foolish. I am suggesting that it is a crowded market, the business case for tea only is suspect, and the store model that is likely to be most successful is often different from the vision of the tea entrepreneur.
December 23rd, 2009 at 1:52 pm
Thanks for the responses. Actually, there are companies like Big Train that provide blended drinks to many independent coffee houses. Very few I’ve seen have original recipes for blended drinks, and that seems confirmed by reading websites that cater to independent coffee houses such as the SCAA forum(s). There is no point of differentiation thre. Dr. Smoothie and others provide easily made and good margined ’smoothies’ as well. If you break down sales in that venue, you still find drip coffee ‘gulping’ a large % of sales.
I think your comment that tea people have a vision that leaves profitability in the background could apply just as well to all the people whose dream is ‘to open a little coffee shop’ and believe theirs will somehow be different than the next guy’s. It’s certainly not an exclusive ‘tea fantasy’.
The coffee house cafe market is much more crowded than the tea concept one; which is what makes tea attractive to some entrepreneurs in that venue. And it would be hard for me to name one other chain than Teavana in this country that immediately jumps to mind as being
successful on any large scale in retail loose leaf tea sales. Their story begins with a commercial real estate ‘benefactor’/landlord who saw potential (as I remember reading the story)…that doesn’t happen too often.
December 23rd, 2009 at 2:15 pm
One correction: “Large %” should rather be that drip coffee is still a steady % of sales for any coffee house..and a profitable one by margin.
December 24th, 2009 at 2:29 pm
Charles, thanks so much for your articles–your insight lends a valuable message to the tea industry, and you’re really on-point with some of your observances.
A few points:
~the best ventures are founded to provide a solution to a problem or fill a void, NOT to indulge the entrepreneur’s passion/hobby/whim if they want it to be successful. Market development and new market creation can be a result of the inception of the business.
~thorough market analysis, including in-depth demographic analysis for branding, traffic, and forecasting, needs to be a part of the plan, along with an honest SWOT analysis and competitive intelligence report
~I’ve read several different reports on the state of the cafe & restaurant industry, and the overall consensus is that most fail within the first few years because the concepts are undercapitalized–I wonder how many fail due to poor execution/vision/quality delivery (much more difficult to explain). Build-it-and-they’ll-come will never sub for good marketing strategies.
Other notes you may find interesting:
~food paid most of our bills for the first 2 1/2 years of operations and helped float us while we spread the gospel of tea
~our tea sales are now equal to food sales (almost 4 years now), and eclipse food sales late Nov-Dec
~our labor costs are by far our biggest expense, but our turnover is much lower than the industry average
~we’re up this year, having met our goals for this year (and it’s not over); we’re grateful to our guests for the growth
~we only started serving coffee this year, but only because I finally found a coffee that the staff would actually get behind because its quality is at the same level of the tea; we only serve french press coffee and toddy cold brewed coffee (for iced)
It would be cool if someone could collect data from all the various cafes & retail stores, and compile this info. I know Sage does a great job and has a wonderful report, but it’d be great to see a more targeted and less expensive report for us [little cafes/shops].
All the best to all the hard-working people in this industry for a very successful new year!
December 28th, 2009 at 11:01 am
Tracy,
Many excellent points. Just a few rejoinders:
1. People are much more likely to blame a lack of money for failure than poor execution/vision/quality!
The results that are cited may have a rather strong reporting bias. I DO believe that most start-ups are under-capitalized, but I also believe that there is a strong correlation to the level of capital required and the quality of the business model. “Time-to-profitability” can be shortened by 9 months or more just based on the time of year you open!
2. Great to hear your success story. Maybe it’s something you could write up in more detail and submit to TChing! I’m sure many would benefit from hearing what has worked and what has not.
3. The World Tea News made an effort to collect meaningful statistical data over time from a large number of tea businesses ranging from cafes to retailers to wholesalers. They succeeded in getting quite a few people to participate, but the process broke down when it became clear that a large percentage of the participants could not accurately identify their own gross profit or differentiate between margin and mark-up.
Scary, I know.
December 28th, 2009 at 1:40 pm
So true, and yes, #3 is scary, but not particularly surprising.
Re: #2, I wouldn’t call us a success yet, as I have yet to make enough to make even a meager living on this little project after being in business almost 4 years!