Coffee gigantor Starbucks (SBUX +4.88%) continued its 2012 announcement bombardment yesterday with news that it's going to purchase Teavana (NYSE: TEA) for $620 million in cash. Starbucks shares dipped slightly on the news, while Teavana jumped 50%. The move was phrased as a way for Starbucks to "disrupt and lead" the tea category in the same way that it did with coffee at its inception. Let's take a deeper look at the opportunity and the potential for Starbucks to really make something of tea.
The opportunity
Before we get into the details, we should first acknowledge the weirdness of Starbucks' announcement. It contains the phrases "reinvention and rapid growth," "elevated tea experience," and "elevated platform of tea experience and education." Those are big goals to be tossing out there from day one, but this year has been the year of Starbucks dreaming big.
Teavana is a tea retailer that has been in operation since 1997. The company has over 300 retail locations in North America, and an online distribution service. Last quarter, it earned $43 million in revenue and the company had a bottom-line loss of $0.1 million. That loss was largely driven by costs associated with the acquisition of Teaopia (who names these things?) earlier in the year. Including $2.3 million in costs from the acquisition, Teavana has booked income of $5.9 million year to date.
The Teaopia acquisition is now complete, and Teavana is confident that the brand should start adding to the bottom line for the rest of the year. The brand helped Teavana, and now Starbucks, move into Canada. The international opportunity is the biggest one that I see for Starbucks.
Starbucks and the Seven Seas
Starbucks has done well in the U.S. and internationally, but international sales are still lagging, especially in Europe. In fact, just this month, Starbucks testified in front of a special committee in the U.K. that it had turned a profit there only once, in 2006. As a result, it has paid a mere 8.6 million pounds in tax since 1998 -- hence the special committee hearing. Starbucks has denied any wrongdoing, and highlighted the weakness that it faces in the U.K. market. While it's selling coffee, it's not selling enough to cover its costs.
Tea might be the solution to that problem. According to the U.K. Tea Council, British consumers drink about 2.4 times more tea than they do coffee. Starbucks is also hoping that the tea business is higher-margin. The company posted an operating margin of 15% during the last fiscal year; Teavana hit 18.8%. The combination of increased overseas sales and higher margins could be just what the doctor ordered.
Lest we forget: synergy
Let's look at the last few wins that Starbucks gets out of the acquisition. It now has an additional range of teas that could be prepackaged for its new Via brewing system, which competes with Green Mountain Coffee Roasters' (GMCR +0.00%) brewers. While Starbucks already owns the Tazo brand, it also already produces Tazo K-Cups for Green Mountain. By adding Teavana cups to its Via line, it can offer a unique tea product.
Starbucks has also increased its prepared cold-drink offerings this year, adding green coffee drinks to its menu. That technology should allow it to easily create a line of Teavana prepared bottled teas without incurring too many extra costs.
The bottom line
Last week, in desperation, I knocked back a Starbucks latte in the U.K. -- I do not recommend this approach. The company has yet to find its footing in Blighty, and a tea infusion could be the thing that helps it out. I was surprised yesterday to see the stock dip on the acquisition news. I think the Teavana brand is going to be a very big winner for Starbucks, and I'd be shocked if locations didn't start popping up overseas by the middle of next year. This is a good move, and one more reason to consider adding Starbucks to your portfolio.
