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The Future of Starbucks Is Tea-licious

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The beauty of hot water is that it doesn't care what it heats up -- also it's pretty cheap. Starbucks (NASDAQ: SBUX  ) has started the heavy expansion of its newly acquired Teavana brand, and things are looking good. The company recently opened a flagship store in New York City and showed the world what it has in mind for the future of tea consumption. CEO Howard Schultz has already gone on record as saying that the brand will "do for tea what [Starbucks] has done for coffee." That's a bold, but completely achievable, claim.

Tea in the U.S. is weak
The global market for tea is absolutely massive. It's estimated that by 2021, the world will be consuming about 3.7 million tons of tea -- that's 82,000 Boston Tea Parties. In the U.S., we're not holding up our end of the bargain. Americans drink meaningfully less tea than the rest of the world, but even here consumption is back on the rise.

The Tea Association of the USA has forecast American tea consumption to rise steadily over the next five years. The association believes that much of this will be driven by an increase in ready-to-drink and convenience tea -- that's got Starbucks written all over it.

The Starbucks plan
Starbucks has an ace up its sleeve when it comes to making tea a big deal: People like tea. While the U.S. doesn't consume nearly as much as other countries in the world, we drink a decent bit. More than half of American households have some sort of tea product on their shelves. Outside the U.S., people clearly love tea, especially in European countries, where Starbucks has struggled.

In a presentation yesterday, Schultz referenced the growth potential for tea. Right now, it makes up just 8% of the company's store business, leaving plenty of room for people to get excited. The Teavana acquisition was a good jolt to get the company going with tea, and it came with more than 300 mall-based locations.

The new stand-alone locations are going to build the value of the Teavana brand, and give Starbucks even more pricing power. Already, Teavana is a good business. Before it was purchased by Starbucks, Teavana was pulling in an 18.8% annual operating margin, a few points above Starbucks' margin. If the business can build out that stand-alone business, it can increase its overall margin.

Internationally, tea offers Starbucks a way to succeed in weak markets. Europe is the world's leading per-capita consumer of tea, and Starbucks has all but struck out in the area. European, Middle East, and African sales were up just 2% this year. A new tea concept could offer the company a way to make a big impact in a short period of time.

The end game for Starbucks
The final benefit for Starbucks is that there is so little competition in the U.S. tea space. While everyone offers iced tea now, no one is making a push for hot tea. Starbucks has said that it wants to recreate the magic of its coffee business, and part of that magic came from no one else doing coffee in the way that Starbucks did. Tea is the same way, and it could easily grow quickly over the next few years.

Starbucks is certainly going to make a push for fast growth. The company is planning on opening 1,000 new Teavana stores over the next 10 years, so keep an eye out for one in your neighborhood. While many have focused on the new role of food at Starbucks, I think the bigger opportunity is in tea, and I'll be watching the story unfold with great anticipation.

You don't have to love tea to make money in the market
I think Starbucks has plenty of room to run over the next five years, but you don't have to agree with me to succeed. With the market storming out to huge gains in 2013, investors on the sidelines may feel left out. However, opportunistic investors can still find huge winners. The Motley Fool's chief investment officer has just hand-picked one such business for our new report, "The Motley Fool's Top Stock for 2014." To find out which company it is and read our free, in-depth report, simply click here.

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9/26/2016 4:00 PM
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Starbucks CAPS Rating: ****