Friday December 21, 2012 | 7 comments
The news that Starbucks purchased Teavana for six hundred and twenty million dollars was stunning. The tea industry doesn’t seem to know what to make of it. There had been a very lively and interesting conversation on LinkedIn about the possibilities of the shift to focusing on artisanal teas in India and Africa, and whether or not it could become a profitable venture given the production variables there. But when Dan Bolton announced that the Starbucks deal had gone down in the LinkedIn discussion comments, the artisanal tea conversation came to a pretty abrupt end. It’s true that the conversation had been going on for a while and was due to fizzle out, but the Starbucks news did not spark any new comments from participants, as if the announcement had no impact on the trend toward better-quality tea. My feeling is that Starbucks buying Teavana will push the tea market to a tipping point, causing a significant shift toward better-quality tea in the market in general. I am not saying that they will have tea that is comparable to Seven Cups tea, but they will be offering better tea, at higher prices, that will shift the tea market in the same way that Starbucks shifted the coffee market.
It is interesting to speculate why Starbucks would make such a major financial commitment to tea, especially when they already had a very successful brand, Tazo. Why not just extend that brand? Starbucks certainly has no need for extra locations. Tazo opened a pilot teashop in Seattle just last week that a lot of work went into. I doubt that buying Teavana was an impulse buy; they must have been thinking about it for a while, and they paid cash. That could mean that investors will be more likely to bring capital to the industry.
Let me point out some things that could make the speculation more fun. Let’s talk about Charles Cain. He is the smartest corporate guy out there in my opinion and someone that I both respect and like, even though I am on the other side of the fence from him. We have debated about the market in private emails, and he has the best arguments for his side of anyone I know in the industry. I know that he has a very similar belief to mine that the future of the tea market will be defined by quality tea. Let me give some more background.
Charles started his career with TeaGschwendner, where he worked for five years. They are the Number 1 tea retailer in Europe, but struck out in their expansion into the US market. I believe it was because they came with the promise of quality tea, but couldn’t deliver and aren’t easy to Google. I know – it took me a few times to get close enough to the name for Google to figure out what I was asking for. Mr. Cain then went to Adagio, where he was certainly the tail wagging the dog when it came to quality tea. He opened three stores for Adagio in the Chicago area, but Adagio’s expansion into brick-and-mortar retail has stalled out since he left the company early this year and went to work for Starbucks.
Charles is a good enough analyst to recognize the potential in the market Teavana was demonstrating and that they were very vulnerable to competition. Teavana has been successful, but their customer retention is low. They use high-pressure sales techniques in malls where there is a lot of foot traffic and piss a lot of people off, and they offer very little value for the prices they are charging, from their teas to their outrageously priced Chinese knock-off Japanese pots. It is a business model I have never seen as sustainable, and I would never buy any of their stock or their tea.
There is no doubt that you can beat your competition by buying them out. I am sure Starbucks is going to make it a point to bring the Starbucks business culture to Teavana, which means well-trained staff and good customer service, making Teavana much harder to beat. The new Tazo store is geared toward trying to understand its customers. They even have a POS/video system that tracks customers through the store and makes a note of where they focus and what they buy. Gosh, it’s nice to have that kind of money. They are going to gather a lot of data on what customers want, and Charles is also someone who loves to crunch numbers. Making people happy rather that making them mad is surely a better idea.
Teavana has a decidedly Asian slant to its stores, which I think will stay. It doesn’t take a genius to figure out that as the demand for better-quality tea of wider variety increases, the only place to turn is to China. Both Starbucks and Teavana are very weak in their sourcing power in China, which is symptomatic of the industry. Starbucks is more likely to figure it out though, because they have a lot of experience working in China, and seem to be in a better position to raise the bar for sourcing since they have a much better understanding of Chinese business culture than Teavana. Mr Cain’s boss worked there for years. Rumor has it that Teavana lost a major supplier in Fujian because they acted arrogantly (like Walmart) and pushed the price down to the breaking point. Their suppliers just told them to take a walk. I doubt that Starbucks will make those kinds of cultural mistakes.
You can say what you want about Starbucks, but they are very good at growing a market. They are lucky to have Charles Cain, because ultimately he believes in quality and sees fine tea as being analogous to fine wine. So where does that leave small quality-oriented companies like Seven Cups? I think it leaves us in a great position. Having Teavana in Tucson has done nothing but help us, because they are growing the market, and they are never going to get to the level of quality tea that we have because they are too big and the teas we focus on are too limited in availability. Look at how Starbucks laid out the market so that private roasters could exist. It will allow other small tea businesses around the country to overcome the fear of charging the higher prices that come from better-quality tea. Right now everyone is scared, just like coffee shops were before Starbucks grew the market. They were tied tightly to the traditional cup of joe, priced between 25 to 50 cents. In order to survive, tea shops are going to have to have better-quality teas than whatever Starbucks/Teavana is offering. Customers will surely benefit, as will tea producers. The small tea businesses that survive will benefit greatly from the expanded market.