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The Starbucks of Tea Might Be Starbucks After All

Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Teavana (NYSE: TEA) bull argument offered investors a stake in the next Starbucks (NASDAQ: SBUX), but this time as a company that sold tea. Starbucks showed its own confidence in Teavana's potential with today's announcement. The Fool's Rich Smith explained that Starbucks just bought Teavana for $620 million cash. Starbucks made a good deal today for four reasons.

A Reasonable Price

Starbucks paid a premium for Teavana, but it would have paid a lot more for a buyout last year. The tea seller traded above $28 in August 2011, and fell to slightly above $10 before Starbucks made its $15.50 offer. Even though Teavana had a premium 21 forward P/E after the deal, the tea seller's .60 PEG suggests that Starbucks came out ahead here. Antoine Gara, at The Street, reports that the deal is accretive for Starbucks, and the coffee maker's 2013 earnings expectations are now a cent higher. Starbucks could profit from this acquisition even if it didn't do anything else with Teavana.

A Premium Brand

Teavana placed its tea shops inside malls in wealthy neighborhoods to attract shoppers who could afford to buy lots of high end tea. This expansion strategy gave Teavana an upscale cache that fits well with Starbucks' own premium brand. Starbucks didn't try to compete on price with generic coffee brands, so competing on price in the tea market doesn't make much sense either.

Products For Home Use

Starbucks' Verismo machines challenged Green Mountain, (NASDAQ: GMCR) but they also showcased a lucrative market. Green Mountain realized that a shopper who didn't want to visit a coffee shop for a pick me up might still be in the mood for high quality coffee. Even after Starbucks' challenge, Green Mountain has a PEG of .52, which suggests that the home high quality coffee market's potential hasn't been exhausted.

Teavana operated mall shops, but its real focus was home tea drinkers. The retailer sold high quality tea, in bulk, to wealthy mall shoppers who took the tea home and brewed it. The razor and blade model offers as much promise for tea sellers as it does for coffee sellers. Green Mountain's Keurig machines already make tea from Starbucks' Tazo K-Cups and Hain Celestial's (NASDAQ: HAIN) Celestial Seasonings K-Cups. Teavana's expertise could help Starbucks follow up Verismo with its own premium home tea brewing machine.

Better Competitive Position

Teavana's $620 million price was nowhere near Starbucks' $36.6 billion market cap. Starbucks even had enough money in the bank to pay cash for Teavana. Nevertheless, Teavana had more specialized tea shops than Starbucks. Yahoo! Finance states that Teavana had around 200 tea shops on Apr. 16, 2012, while Starbucks just opened up its first Tazo tea shop in October. Amy Friedman, at Time, reported that the Tazo tea shop lets a shopper test out custom tea blends and buy bulk tea. The Tazo store sounds much closer to a Teavana shop than a standard Starbucks coffee shop. The Teavana acquisition clears the runway for Tazo shops, because now Starbucks decides where to put new Teavana stores.

Starbucks' move into tea also challenges Hain Celestial. Starbucks already sold Tazo tea on grocery store shelves and its ever present Starbucks retail shops, and now Teavana blends could show up at these locations as well. Starbucks could afford to buy out Hain Celestial as well, although Hain's $2.7 billion market cap on Nov. 14 rules out an all cash bid. Starbucks investors shouldn't be surprised if Hain Celestial responds to the Teavana purchase with a move of its own, such as Celestial Seasonings retail stores.

Takeaway 

Teavana means higher earnings for Starbucks, but a quarter of a cent per quarter EPS boost isn't a big change for a company that reported diluted EPS of $1.79 last quarter. Starbucks' real gains involve taking over a chain that could have hindered its plans to expand into the international tea business and strengthening its appeal to home tea drinkers. Starbucks' decision shows that the coffee giant still sees more growth opportunities ahead, and that's good news for shareholders.


enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of Hain Celestial, Starbucks, and Teavana Holdings and has the following options: long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters, short DEC 2012 $21.00 calls on Green Mountain Coffee Roasters, and short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Green Mountain Coffee Roasters, Hain Celestial, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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