Starbucks' Tazo Tea Brand Worth $1.4 Billion?
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Starbucks (NASDAQ: SBUX) is caffeinating the world with more than 17,000 stores in 55 countries. In October 2012 they plan to give us another place to get our morning energy boost. They will open their first Tazo Tea location. Starbucks sees an opportunity to get a hold on the $95 million industry. But is Tazo worth $1.4 billion as they claim?
SBUX bought Tazo in 1999 for $8.1 million and since then Tazo has become one of the most popular tea brands in North America. You can find Tazo in the Starbucks locations and in supermarkets everywhere. They are part of Starbucks' consumer products group, which made up 7% of Starbucks' net revenue for 2011. In the Starbucks 2011 annual report, they attribute $770 million in net revenue for this consumer products group. The consumer products group includes Starbucks packaged coffee beans sold in supermarkets, Seattle's Best Coffee packages, ready-to-drink Starbucks beverages (those little Frappuccino bottles), Tazo teas, and more. The big question when looking at the Tazo Tea valuation is how much of this $770 million in net revenue is Tazo making up? 10%? 20%? The packaged Starbucks coffee beans probably makes up for a large portion of this net revenue.
Say the Tazo business has a net revenue of $115 million (15% of $770 million) and a net income of $10ish to $30ish million. If this on-the-Starbucks-napkin thinking is somewhat true, Tazo, valued at $1.4 billion, has a massive PE multiple for a tea company!
However, if the Tazo stores are anything remotely as successful as the Starbucks locations, Tazo could very likely be a $1.4 billion company. In the past we have seen a restaurant giant take a small company and turn it into something huge. In 1998, McDonald's (NYSE: MCD) started investing in Chipotle Mexican Grill (NYSE: CMG) and helped the company grow from 8 locations to over 500 by 2005. Before McDonald's fully divested in 2006 it had used its tried and true fast food magic to make Chipotle into one of the biggest casual dining brands in the US. Plus investors still believe Chipotle will grow given its monster PE ratio of 57.
Maybe in 15 years Starbucks will look more like YUM! Brands than a coffee company. YUM! Brands has flourished by owning restaurant brands with amazing brand recognition. They have KFC, Pizza Hut, and Taco Bell. All three are huge around the world. Starbucks has bought a premium juice company, Tazo tea, and just recently a bread company. Maybe one day they will be the slightly healthier version of YUM!.
The current Tazo tea business may be a little steep, however, the growth prospects are huge. Starbucks just needs to follow the way of the Big Mac.
mthiessen has no positions in the stocks mentioned above. mthiessen runs a partnership that invests in public and private companies. The Motley Fool owns shares of Chipotle Mexican Grill and Starbucks. Motley Fool newsletter services recommend Chipotle Mexican Grill, McDonald's, Starbucks, and Yum! Brands. 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.