Starbucks Is Looking for the 'Oprah Effect'

To help boost its tea sales, Starbucks (NASDAQ: SBUX  ) is turning to Oprah Winfrey. Starbucks and Oprah have partnered to create Teavana Oprah Chai Tea. This comes as Starbucks is looking to capitalize on its $620 million purchase of Teavana made in 2012. Starbucks aims to do for tea sales what it did for coffee sales.

Starbucks is also returning to its roots from when it was founded as Starbucks Coffee, Tea and Spices in 1971. As for Oprah, by partnering with Starbucks, she is snubbing her Chicago neighbor McDonald's (NYSE: MCD  ) and its CEO Don Thompson. It looks like McDonald's will have to play catch-up to Starbucks again.

What is Teavana Oprah Chai Tea?
Starting April 29, Teavana Oprah Chai Tea will be sold at Starbucks and Teavana stores in the U.S. and Canada. The reason for the name is that Oprah personally helped develop the unique blend by working with Teavana's chief teaologist. The flavors in the tea include cinnamon, ginger, cardamom, and cloves. These ingredients are then blended with loose-leaf black tea and rooibos, which is a type of herbal tea. Teavana Oprah Chai Tea will be sold as either a latte or as a loose-leaf tea.

The 'Oprah Effect' is a big deal
There's perhaps no better way for Starbucks to boost awareness of Teavana teas at Starbucks than by partnering with Oprah Winfrey. She is beloved by millions and is known for the 'Oprah Effect.' The "Oprah Effect' refers to the boost in sales that a business or product receives by the mere mention or endorsement by Winfrey.

Source: Starbucks

The biggest impact Winfrey had was on book sales with the Oprah Book Club. Oprah started the book club in 1996 and would select books for her viewers to read and discuss on "The Oprah Winfrey Show." The book club turned many books into best-sellers. Fordham University Professor Al Greco estimates that the 70 books Oprah recommended led to 55 million books being sold. Many of these recommendations were by authors whom many had never heard of before. These authors went from being no-names to making the best-seller list.

Can the 'Oprah Effect' happen for Starbucks?
Starbucks CEO Howard Schultz is looking for the 'Oprah Effect' to boost awareness of Teavana teas at Starbucks. When Starbucks announced the partnership, CEO Howard Schultz said

With the introduction of Teavana Oprah Chai, we are going to elevate the tea experience in the same way we did for coffee. Partnering with Oprah Winfrey in the creation of this distinctive and remarkable tea is a strong next step forward in accomplishing this objective, while also giving back in a meaningful way through the Oprah Winfrey Leadership Academy Foundation. I am personally humbled to work with such an inspirational leader and visionary who shares so many of our core values and beliefs. I truly believe that, together, we will set the bar for a world-class tea experience at Starbucks and Teavana.

McDonald's will have to play catch-up
McDonald's has been trying to be more like Starbucks with its McCafes. McCafes have been selling McDonald's coffee, lattes, mochas, frappes, smoothies, and shakes. McDonald's tea selection has been limited to orange pekoe, earl grey, peppermint tea, and green tea.

Source: McDonald's

Starbucks' move into tea will be watched closely by McDonald's. After all, tea is the most widely consumed beverage in the world after water. In dollar terms, however, tea sales still lag coffee sales. In 2012, global coffee retail sales were $75.7 billion compared to $40.7 billion for tea.

So far, McDonald's has no plans to boost its tea sales but instead has been focused on boosting its coffee and breakfast sales. To help drive traffic and boost sales of its McCafe coffee, McDonald's just finished its inaugural nationwide free-coffee promotion. This promotion should boost same-store sales as guests came in for the free coffee and bought breakfast as well.

 

Market Cap

Forward P/E

Revenue

1-Year Return

Dividend Yield

Starbucks

$53.03 B

22.13

$15.34 B

21.54%

1.5%

McDonald's

$99.24 B

15.89

$28.11 B

(1.63%)

3.2%

Source: Yahoo! Finance

Foolish assessment
Starbucks' partnership with Oprah Winfrey is a big deal. She's a tremendous businesswoman and has a loyal following. It's also a coup for Starbucks' Schultz to get Oprah to lend her name to one of Starbucks' teas. While McDonald's is the largest restaurant chain in the world, the company is having to do a lot of catch-up as its competition continues to steal away business. Teavana Oprah Chai Tea is just the latest example of the competition being one step ahead of McDonald's.

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