Tea Retail: The Tortoise and the Hare

In May 2014 the Beverly Hills Teavana Fine Tea + Tea Bar opened to fanfare on the busiest corner in the city. Starbucks had literally cut the baby in half to create this shop, cleaving it from an existing and very successful Starbucks location. The company then gilded a towering architectural feature to brand the block Teavana.

The opening day crowd was enthusiastic, media coverage was strong and the selection of tea, teaware and accessories met the expectations of shoppers who left with bulging bags. Oprah Winfrey for the first time in her career had endorsed a namesake chai. Patronage was driven by more than novelty and marketing. Customers engaged the staff with questions, eagerly sampled the teas and seemed genuinely pleased at the choices.

Three blocks away rival tea retailer David Barenholtz predicted Teavana wouldn’t survive.

He wasn’t arrogant or defensive. He was right. Last month Starbucks announced it is closing all but one of its showcase tea bars. The Beverly Hills location will return to selling coffee (and Teavana tea).

The Tortoise and the Hare

WTN160215_AmericanTeaRoom_NewportBeachAmerican Tea Room sits on the corner of N. Canon Drive in Beverly Hills with nowhere near the traffic count Teavana enjoyed. Barenholtz founded the venture in 2003 and after a rocky start has for the past decade consistently been one of the highest grossing tea vendors in the US.

He certainly knows the neighborhood. Beverly Hills is one of the few places in Southern California where people actually prefer to stroll by, he observes. He pointed out that while hundreds of thousands of people whizzed by the Teavana each day hundreds dropped into American Tea Room.

“We compete within our own marketplace — not so much against tea vendors. That makes us unique,” explains Barenholtz, whose slow and steady approach makes it possible “to examine and embrace so many different aspects of tea and tea culture.”

American Tea Room's David Barenholtz

American Tea Room’s David Barenholtz

“It’s not so much that we have ideas on how to be competitive.  I have a vision and I try to stay faithful to that. It’s an internal rhythm – and I have been fortune that a lot of people enjoy what I enjoy.  I really do this for myself – so I take all aspects of our business into consideration and how they interact with each other,” said Barenholtz.

“It takes a greater commitment of time, energy, and resources to make a tea bar successful,” explains TeaSource founder Bill Waddington. “Once you turn that corner you can be very successful; with tea’s higher gross margins, and tea’s ability to build a customer base that will stay with you for life with a much higher degree of customer loyalty.  But it does take more time to get there,” he said.

A dated, unscientific survey of tea room owners at the start of the specialty tea boom showed that most grossed $250,000 to $350,000 per year with a few standouts topping $500,000.  Earnings reported in the S-10 declaration filed when Teavana announced its 2011 IPO surprised many consultants. Established mall locations were grossing $1+ million with a tiny retail footprint and a small low-wage staff. Seventy-five percent of profits came from the sale of lightweight, easy to stock, high-margin loose leaf tea.

A chorus of mall operations suddenly turned their heads: Tea shops show margins better than top performing Godiva Chocolate outlets?

The DAVIDsTEA IPO in 2015 indicated gross margins around 60% leaving 15% after taxes on sales of $650,000 to $850,000 store.

Amazingly that is a poor performance compared to the typical Starbucks where sales top $1.3 million per store and the company anticipates 20% profit after taxes.

“I think Starbucks closed its tea bars because they are an extremely profit/numbers driven company, and the Teavana tea bars weren’t hitting their numbers,” said Waddington. “The reality is there aren’t as many established tea drinkers as coffee drinkers.   Although I believe the rate of new people coming to tea is much higher than new people coming to coffee, the critical mass still weigh heavily on the coffee side,” he said.

Master marketer

American Tea Room, Fashion Island Mall

American Tea Room, Fashion Island Mall

Barenholtz is a veteran of the entertainment industry. A former vice president of Hanna-Barbera’s animation art division, from 1995 until 1997, he says that “marketing is crucial for any business.  “Only Cinderella has a prince seeking her out – everyone else has to work to build an audience – I know what many of our customers like – and try to constantly find amusing and delightful tea ware and food to accompany all the great tea,” he said.

“We edit and curate everything – and are constantly evolving to make our experience more relevant to our customers.  This is why we embrace social media and technology – both are highly concentrated in LA to begin with – so it’s a natural to relate to our base of customers – but it is essential for making new customers and creating awareness,” he said.

After years of deliberation Barenholtz is signaling a move into the fast lane.

He opened a tea emporium in the Los Angeles Art District in October, is remodeling the original shop and recently opened an expansive new tea room at Newport Beach’s Fashion Island mall where the menu choices are market fresh and seasonal and developed by a James Beard nominated chef. His selection of loose leaf teas is extensive, exotic and priced above Teavana for the most part, although Barenholtz is clear that the price differential is primarily because his tea is higher quality and his customers are willing to pay for better tea. His teaware is exclusive and appealing. His tea bar features a pair of expensive BKON brewers that attract tea geeks every bit as enthusiastic about what they sip as their peers in the high-end wine and whisky bars like Matt Molina’s Everson Royce Bar in this upscale neighborhood.

There is a lingering discussion about whether modern tea rooms can reach the scale enjoyed by rival coffee. Starbucks CEO Howard Shultz’s prediction that Teavana will reach 500 locations sounded at the time like a shot of adrenalin for the segment but DAVIDsTEA  and Teavana combined fall short of 500 US locations and barely top that by including Canada in the count.

Scale suggests speed as investors pump money into a format that delivers. DAVIDsTEA and Teavana certainly deliver but their stock price fell precipitously following their respective IPOs. Growth has been gradual — even with readily available cash for expansion it appears the tortoise has the edge in this race.

Meanwhile, Barenholtz signs off on his LinkedIN profile with mention that Chicago is next on his list, and then New York “and soon to a neighborhood near you.”