In 2013, when Starbucks (NASDAQ:SBUX) purchased Teavana, CEO Howard Schultz said the company wanted to "do for tea what [it's] done for coffee." That optimism is based on some interesting differences in American tea consumption. Simply, we don't drink much of the stuff. Maybe it's a holdover from Boston in 1773, or maybe we just got hooked on coffee too early. Either way, we're behind the pack.
That might give tea a chance to play catch-up, and to boost growth for the businesses pushing it. Starbucks isn't alone, and if it's right about the opportunity, there should be plenty of room for everybody. If not, it could turn into a slugfest, with companies dueling it out for the small slice of American teacake.
Americans shun tea
At its base level, the tea opportunity rests on the assumption that people around the world could like tea about the same amount. As it turns out, though, Americans drink about 7% as much hot tea as the British -- they have about 15 cups for each one of ours. While the Brits are on the highest end of the scale, even our northern neighbors consume more -- Canadians drink three cups for every one that touches American lips.
Starbucks thinks those gaps mean the potential for at least 1,000 Teavana locations in North America, up from the 400 or so that exist now. Right now, the company is focusing on integrating Teavana products into its Starbucks-branded locations and launching stand-alone tea bars, which offer a wider range of tea products. The company also believes that the 9% of revenue it earns in its Starbucks shops from tea can be dramatically increased.
Brew it cold and sell it quick
There's a flip side to the tea coin, though, that companies are already cashing in on -- iced tea. According to the Tea Association, 85% of Americans drink iced tea. That's helped the ready to drink iced tea market, which has increased its annual sales by 1,500% over the last decade, hitting almost $5 billion in 2012.
That rise is helping to fuel Americans' growing consumption of tea. Analysts say tea is outpacing coffee's growth, and it looks to stay that way. Of course, coffee is growing from a much larger base, and tea has a long way to go before it catches up.
The bet that Starbucks is making is that an investment in the hot tea market can generate substantial growth. Other companies are happy to just take part in the growing iced tea market. McDonald's (NYSE:MCD) has pushed its iced tea heavily in the summers, knowing Americans are hooked on the sweet, cool stuff.
But the business isn't taking its tea to the next level any more than it's pushing soda. McDonald's is instead hoping to fill in the gaps, and offer customers something that they may want. Starbucks is taking the more aggressive -- and risky -- approach of actively expanding tea's demand.
The big opportunity
It's the same tactic Starbucks took with coffee, which has helped push coffee prices up across America, as more people are willing to pay more money for coffee. If the company can recreate that success with tea, Starbucks could be rolling in tea cash.
Look at it this way. If tea accounts for 9% of North American sales now, and if Americans are drinking just 1/15th of what the British are drinking, where could Starbucks go? What if Starbucks could increase the amount of tea we drink to 1/10th of British consumption? That would be a 50% increase in consumption, amounting to a 4.5% increase in revenue for Starbucks. That's $125 million a year, just for getting us a tiny bit closer to the British.
Tea offers Starbucks and its investors a massive potential simply because of our lack of consumption right now. The company is in a better position than anyone to change that, and to make America mildly more receptive to tea. Watch what Teavana does over the next year, and don't be surprised if Starbucks puts the pedal down on its tea program.
Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends McDonald's and 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.