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Starbucks Corp.'s Coffeehouse Magic Doesn't Rub Off on Tea

By Rich Duprey - Feb 7, 2016 at 2:02PM

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Tea's popularity may be growing, but people still prefer to hang out in coffee shops rather than tea bars.

Starbucks put the kettle on for growth in tea, but tea bars aren't coffeehouses, and it is once again killing an idea for branching out into other retail concepts. 

Starbucks (SBUX 0.12%) is finding the coffeehouse experience is hard to beat. With over 12,000 restaurants open worldwide, and 7,500 in the U.S. alone, it has extensive experience in knowing the, well, experience its customers are looking for. It's running retail concepts outside that circle of competence that seems difficult for the chain.

All the tea in China
When the coffee maven bought tea seller Teavana for $620 million at the end of 2012, it was taken as a given Starbucks would quickly replicate the success it enjoyed with its coffee houses, and the company touted its plan to "reinvent the way the world enjoys tea." Not only would Teavana tea appear in Starbucks stores, but you would soon see Teavana stores popping up everywhere, beyond just malls as you'd be able to enjoy a hot cup of tea at tea bars, just as you do with coffee at Starbucks.

It certainly seemed a prescient purchase. The market researchers at brand intelligence firm YouGov say that while coffee remains the preferred drink of Americans, a closer examination reveals it's really adults over 30 who have a clear preference for coffee; those under 30 actually prefer tea just as much.

Tea is a $125 billion global market opportunity, and Starbucks has only just begun to scratch the surface of it with its Teavana-branded teas, which generated almost $1 billion in sales through Starbucks U.S. stores last year. That's a 12% increase from the year before and the brand also helped add a whole percentage point to comparable-store sales in the current fiscal year's first quarter. In fact, the category as a whole is growing at a double-digit rate, which should allow it to become a $3 billion business for Starbucks within the next five years, as the company forecasts.

Starbucks spent a lot of time and money building its Tazo brand of tea into a billion-dollar business only to throw it aside in favor of Teavana.

Putting tea on ice
But drinking tea and hanging out in a tea bar are apparently two very different things, and Starbucks says it's had a change of heart on how to build out the Teavana brand. Instead of a tea bar on every corner as exists for the coffee house chain, it will focus on developing products that it can sell in Starbucks stores. The 350 or so specialty retail outlets it operates largely in malls will remain, but feels it can reach more customers in more countries by selling tea in its coffee shops rather than duplicating its efforts and building out tea bars, too.

Not reinventing the wheel is a smart move, but it also suggests Starbucks wasted more than a half-billion dollars in buying the tea maker, the largest acquisition in its history, while at the same time squandering the growing reputation of its Tazo brand that it had built up into a $1 billion business.

And this isn't the first time Starbucks' grandiose retail plans have come to naught.   It bought juice maker Evolution Fresh in 2011 for $30 million, with an eye on breaking into the $1.6 billion super-premium juice segment represented by Jamba (JMBA). It envisioned developing "a new health and wellness retail concept which will further redefine the super-premium juice category and experience for consumers unlike any prior existing juice retail."  Turns out that was just pie-in-the-sky daydreaming that never went anywhere beyond three stores in the Seattle area.

Similarly, it bought the La Boulange chain of bakeries and cafes in 2012 for $100 million to take on Panera Bread (PNRA), whose fresh bread, sandwiches, and salads were seen as a threat at the time. Instead of building them out, it closed down all of the restaurants last September though the brand still supplies goods to Starbucks locations.  

Coffee is still king
Now we're seeing it again with tea. While the drink's popularity may be growing, it's not about to break coffee's stranglehold on the morning routine, which often includes buying coffee on the go:

  • 64% of U.S. adults say they drink at least one cup of coffee per day.
  • More than 10% of adults consume at least four cups per day.
  • 50% of adults 18 to 34 drink coffee while three-quarters of those 55 and older do.

So just like Evolution Fresh and La Boulange, Teavana tea is here to stay, but the retail concept is not. Starbucks is converting the three tea bars it currently operates in New York into Starbucks stores and it will completely close the one it runs in Beverly Hills because it's right next to an existing Starbucks store. However, the one Teavana tea bar that operates in Seattle will remain open and serve as a laboratory of sorts to "bring innovation to the tea category and to Starbucks beverage pipeline."

Tea may be a thing among young adults, but not even Starbucks can break the addiction Americans have with coffee. And maybe even CEO Howard Schultz finally realizes he ought  to stick with what he knows best: building out a coffeehouse chain. That is, until he makes his next acquisition with starry-eyed plans for growth.

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