Why Starbucks is Closing its Teavana Tea Bars

Teavana generated almost $1 billion last year with in-store sales growing at a fast pace and a move to open overseas locations in India and the Middle East underway – so it may seem odd that Starbucks announced on Friday that it is closing its Teavana Fine Tea + Tea Bar locations.

The reason is strictly business: In comparison to standard retail metrics such as daily ticket and traffic count; average dollars earned per square foot of retail space and perhaps the most important metric—returning customers—the tea bar concept proved lacking.

Tea_Bar_LA_4_smThree New York City locations and the tea bar in Beverly Hills will be converted to Starbucks coffee shops and a fifth, in Seattle, will remain open to test Teavana retail concepts. None of Teavana’s mall locations are impacted. Tea bar workers will be invited to transfer to other Teavana or Starbucks stores.

“These changes to the Teavana specialty retail portfolio will allow the company to focus on new product innovation and elevating the Teavana tea experience through its Starbucks stores, reaching more customers with its expansive store footprint,” according to a company press release. “Additionally, Teavana will focus on evolving a customized tea experience throughout specialty retail by bringing exotic blends, great flavors, wellness and innovation to customers globally,” according to the company.

“The tea category in Starbucks stores is growing double-digits across the U.S. and Canada store portfolio, with Starbucks well on its way to building the Teavana business to over $3 billion over the next 5 years,” according to the company.

Comparable store sales

Teavana operates more than 350 specialty retail stores across North America. Metrics for each are carefully monitored. The most important metric for publicly held retailers is year-to-year same store comparisons known as “comps.”

Last fall when Starbucks announced it was closing its Chicago Tea Bar Teavana spokesperson Christina McPherson explained the decision “as part of the normal course of business. We’re always evaluating the stores’ portfolio, and we decided to close the Southport tea bar,” she said.

This is shorthand for “failing to meet performance minimums.” A typical chain tea store grosses between $850 and $1,000 per square foot of retail space. A Teavana store located in a Tier-1 mall with its small staff and limited shelf space earns $850,000 to $1 million annually. Starbucks drive-thru locations earn closer to $1.5 million per store. Expansive tea bars in pricy neighborhoods like those in New York and Chicago drag down the corporate average, performing well below the metrics necessary for Starbucks to please stockholders anticipating annual comparable same-store increases of 5% and 6%. No store in its second or third year of operation is permitted to underperform and even stores with envious 3% and 4% annual gains are marked for remedial attention.

Teavana_Fine_Teas_+_Tea_Bar_smLocal tea retailers competing in the Chicago market cited the tea bar’s low visibility location and poor food traffic along with somewhat dated offerings as reasons the store did not meet expectations. Chicago is big on tea and there are many, many specialty shops and chains locations such as DAVIDsTEA serving fine tea lovers. Teavana’s mall stores were doing just fine at the time, “we’ve been pleased with the performance of Teavana overall,” said McPherson.

“Teavana is an extremely successful tea retail brand – it would be ridiculous to close any of the retail stores, even if they do need a face lift to make them something more relevant to tea, beyond just aggressive sales powerhouses,” according to one retail expert who spoke off the record.

The reason for the closure is simple, “it likely doesn’t make any money!” writes a West Coast tea shop owner.

“With their approach becoming a little dated in these fast-moving times and with companies like DAVIDsTEA and T2 as the competition this is all the more apparent,” writes Camellia Sinensis co-founder Kevin Gascoyne. “I think they were due for some new transformative blood and serious innovation for this project.  They should have hit the market hard with more confidence, an inspired concept and impressed us with the product before they told us the game plan,” said Gascoyne, who added that promising a 1,000 units worldwide “was ambitious to say the least.”

“Personally, I didn’t think a tea bar concept on a grand scale would be as successful as they envision… However, it really doesn’t seem like they gave this concept store a fair try,” added an East Coast tea retailer. “Serving tea is tricky and not a fast process. Starbucks is in and out, a tea bar is in, wait, sit, enjoy. I think that too many customers want to enjoy the ritual of the leaf…which takes time. You know the drill. My customers range from young to old, but they all see tea as a ritual, not a fast food style item,” she said.

Expectations for stores in New York City and Beverly Hills are much higher than Chicago.

David Barenholtz, founder of American Tea Room in Beverly Hills, said that while the Teavana Tea Bar was located at a busy intersection, “Beverly Hills is actually a place where people walk and shop. When choosing the ideal location you don’t count the cars that go by, you count feet.”

Tea shops of that caliber, shops like Samovar (in San Francisco) are a destination, he explained. “There was nothing unique about their offerings. It was upscale food with low scale tea. People don’t like flavors and preservatives and sugar. It didn’t fit well,” he said.

While it is common for a shop to get off to a great start due to marketing and media—Oprah Winfrey certainly boosted sales the day she dropped into the Teavana Tea Bar in New York City, surprising customers and promoting her chai—but it is day-to-day returning customers that make the biggest impact. New brands and business models typically take years to reach true efficiency and profitability and Starbucks doesn’t have the appetite for building a new brand.

Last year Starbucks cited the same business rationale when it closed its La Boulange bakery cafes. When it purchased the 23-store bakery the company announced it would build 400 new stores in five years. Starbucks obtained recipes which helped drive a 16% increase in food sales. Three years later the shops were closed.

Stores selling dry tea and sampling wet tea continue to fare well. Australian chain T2, which is owned by Unilever (Lipton), recently opened a store in New York City following several successful launches near London. Tea bars operate on the assumption that returning customers will make their store a regular stop. That is why they must provide places to sit, table service, operate a kitchen and offer menu items during breakfast and lunch. That model seems scalable. It has served the coffee segment exceptionally well. Starbucks, which is valued at $85 billion, operates 23,571 retail stores in 70 countries. But even mighty Starbucks has not discovered the secret to scaling its beautiful and innovative tea bars and tea cafes.

Maybe its location: expanding overseas

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Starbucks is certainly not giving up. The global tea market is worth an estimated $125 billion. The Tazo brand is earning more than $1 billion in grocery. Teavana is on track to earn $3 billion in five years. Teavana recently introduced self-dispensing samples in its mall stores to speed up service but food and table service are not going to follow. It now appears that if Teavana is to achieve scale in the tea-forward café segment it will be in the tea lands overseas. On a recent trip to Mumbai Starbucks CEO Howard Schultz announced Teavana will launch in India next year.

“We see a major business opportunity here,” he told reporters, “In 2016, we intend to bring our specialty tea brand Teavana here.” According to a joint press release by Tata-Starbucks, the tea will be sold at the company’s 80 stores across India.

“Starbucks will have a major business in India that is much larger than what it is today. The number of stores will rival many of the large markets that we have around the world,” said Schultz, who previously announced his intent to open 500 new shops a year in China. The company currently operates 2,000 stores in 100 Chinese cities.

I have spent time in the India Starbucks locations and there is a much different vibe… people linger, the coffee shop is a destination… it just might work over there where land is cheap and labor is cheap and there is a tradition of tea…. analysts say the biggest thing next year in India will be “blended tea” which is relatively unknown. What they are describing is Teavana.

A flawed concept

There is no example in the history of retail of a successful small footprint chain of stores deriving half of their revenue from retail sales and half from foodservice. It’s never been done. Starbucks tried and ended up 95%+ foodservice. Teavana tried and ended up 95%+ retail. Many others have also taken a stab at it, and what we find consistently is that the two models are almost universally at odds, explains one retail consultant.

“In a café you want to see the same people over and over through the week. In retail you want to see people once every month or so to re-stock, or even less frequently for gifting. In foodservice you want seating in the window. In retail you want merchandise in the window,” he said.

“Put simply, the attempt to maximize both retail and foodservice resulted in a mediocre execution of each,” he said.

Teavana is doing just fine

Sales at Teavana increased an industry-leading 12% last year due to enthusiastic consumer response for Teavana’s shaken iced tea and some new hot tea flavors like Jade Citrus Mint and Peach Tranquility. The company recently introduced a promising line of wellness teas. Tea sold in Starbucks locations for the second year in a row accounted for a 1% increase in same-store comps at 14,000 stores, a remarkable testament to the importance of tea in the beverage mix of traditional coffee shops.

Closing the tea bars is less a commentary on the potential of tea and more on the realities of being a high growth public company.

Source: Teavana and Starbucks, Live Mint