Taking Tea Sales

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

What's the second most consumed beverage in the world behind water?

Tea.

Since the founding of Starbucks (NASDAQ: SBUX) over 40 years ago, the company has been committed to providing a broad selection of caffeinated beverages. What was the original name of the company, for you history buffs? "Starbucks Coffee, Tea and Spices."

Earlier last week at the Jefferies Global Consumer Conference, Starbucks management outlined the company's long term plan for global growth. At the conference Starbucks was very upbeat when it announced that it expects sustained revenue and earnings per share growth of 10%-15% every year. Chief Financial Officer, Troy Alstead, suggested over the coming years that increased focus will be placed on growing the company's tea category.

Last year, with the acquisition of Teavana, the company bought its way into the position of a market leader. During the conference Alstead gave us a description of the three pronged growth plan for the tea category. First, management is looking to expand the company's footprint through the traditional mall-based locations and more importantly through standalone neighborhood locations. At these new locations consumers will have the ability to order handmade tea offerings in a tea house setting. Later in the year the company plans to open its first tea house in New York, prior to a full scale launch over the next few years.

The second leg of growth for tea is to deepen the presence within the Starbucks stores and to really use tea as a driver of another customer occasion, another customer visit. In store the company plans to offer more innovative tea offerings in an attempt to attract the customer looking for a more relaxed, sit down environment. 

The third piece of the puzzle is to leverage the Teavana brand in the future. Once the company has established a strong following in the tea category it will be able to launch a line of at-home items. As of late the company has placed increased focus on the ready to drink line. I could see the company creating a line of luxury iced tea drinks barring the Teavana name and logo. In addition to Teavana, Starbucks maintains exposure through its long standing Tazo Tea brand. 

Let's take a look at another major tea player, Dr. Pepper Snapple Group (NYSE: DPS), whom I'm sure most of use all are familiar with. While Snapple may be more of a soft drink company, the company has worked hard to innovate and diversify its product line. Snapple now offers a broad selection of drinks including lightly sweetened, diet, all natural, and green. As of the last quarter, I was surprised hear from management that these products are performing exceptionally well in Latin America. By expanding its drink line in the region, the company has was able to steal market share and grow sales by 8.8% last quarter alone. The margins from these drinks are impressive at 57.2%. As with a Starbucks investor, a Snapple shareholder will reap the benefits of tea exposure while being diversified across a variety of non-tea products. 

Dunkin' Brands (NASDAQ: DNKN), the owner of the popular Dunkin' Donuts brand, may be Starbucks biggest competitor. However, Dunkin' is taking a completely different approach to pulling in more customers throughout the day. Dunkin' really couldn't care less about tea, and its completely fine as far as I'm concerned. Instead Dunkin' is looking for organic growth in its award winning food menu. Over the last years the company has launched over 100 new products to market and still hasn't made a dent in its product pipeline. Management has stated it believes it has a two year load of new offerings waiting to hit the markets. As a result of these new offerings, the company has benefited greatly on both the top and the bottom lines. Food products typically carry margins, over 75%, for the company has helped drive higher ticket sales. In the past management has found success by pairing its traditional drinks with the new foods in order to spur impulse purchases. Down the road, it would make logical sense for the company offer its food products alongside its coffee in grocery stores. By doing so, the company would improve brand recognition while creating an additional revenue stream.

Wrap-Up

Starbucks and Snapple both stand in unique positions to benefit from the growing tea category. Starbucks is in a great global position since its acquisition of Teavana last year. Snapple has designed a portfolio of teas to meet the demands of every consumer. All three of the companies mentioned in this article have diversified themselves across a variety of menu offerings which bodes well for consistent earnings growth year after year. 

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Nathaniel Matherson has a long position in Starbucks. The Motley Fool recommends Starbucks. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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