Will Starbucks Commit to Tea?
Chase is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Starbucks (NASDAQ: SBUX) is making some confusing decisions lately. After re-designing their logo to stray away from being known specifically as a "coffee" company, they seem to be offloading their tea concept, Tazo, to a tea-only retail location. It seemed by re-designing the logo and promoting non-coffee items, Starbucks paved the way to seriously build out their other offerings (tea). But by planning to open a tea only store, they are segmenting their current stores further into coffee. Food has made up a steady 19% of sales at company-owned stores (82% of overall 2011 revenue) for the past three years. In other words, food isn't growing. How about tea? What opportunity does Starbucks see in opening a location devoted only to tea? Because Starbucks doesn't break out their beverage sales by product, we have to extrapolate a bit. Coffee consumption in the US is expected to increase 2.7% through 2015, and tea is expected to grow 3.1%. Given the lack of real tea promotion going on at Starbucks, we have to assume consumption growth will follow national trends.
So, rather than jumping on the non-existent tea explosion in the US, it is safe to assume Starbucks thinks they will be able to do the same thing they did for tea as they did for coffee. I wasn't alive at the time, but from what I understand, before Starbucks Americans really only had the options of black, with cream, with sugar, or with cream and sugar. Starbucks made espresso popular, and in turn opened up serious coffee to the masses. Right now, it seems like American tea options are hot or iced. This can change. But Starbucks is going to need to make a serious commitment to get it off the ground. The Tazo store vision seems to echo the original "third place" concept, as described by sweetly-named Starbucks spokeswoman Holly Hart, "You're not going to walk in, get your tea and leave. It's about the interaction, talking about the flavor and the blend of the tea." They are planning on creating a culture around the tea, just as they did with coffee.
Although the store model sounds suspiciously like Teavana (NYSE: TEA), with the ability for the customer to interact with the tea and make special blends, Starbucks insists it's not (without mentioning Teavana of course). Where Starbucks plans to emphasize in-store consumption, Teavana derives 96% of sales from merchandise (41%) and tea to brew at home (55%). If anything, Starbucks will enhance Teavana by educating customers so that they know what to buy and aren't as intimidated as I am by Teavana's "wall of tea." Said Holly Hart, "It's very much about personalization and interaction and immersing yourself in all-things tea."
This concept is going to take time. It took Starbucks 20 years to build up the specialty coffee category. Although Starbucks does have a solid $1.4 billion in cash and no current debt, Starbucks will need to get behind this like they did with coffee. A more prudent strategy, I think, would have been to promote tea within the current locations. But, as Starbucks is so fond of, the experience is important and it is exciting to watch how Starbucks will implement it.
TheLaowai has no positions in the stocks mentioned above. The Motley Fool owns shares of Starbucks and Teavana Holdings. Motley Fool newsletter services recommend 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.