Declines in retail foot traffic and fewer outlets for specialty tea slowed growth to a crawl despite full employment and strong consumer sentiment. Uncertainties in 2019 point to a challenging trade in tea compounded by oversupply, rising production costs, and falling prices.
- Botanicals are booming as innovative non-alcoholic plant-based beverages gain share (e.g. sparkling turmeric/ginger lemonade)
- Functional teas and condition-specific blends have established a mainstream niche distinct from medicinals and beverage supplements
- Artisan whole-leaf teas retain their allure, enhanced by single-origin credentials and meaningful certifications.
- Convenient ready-to-drink tea earned $10.7 billion in 2018, leading all tea categories in growth in value and volume
- Amazon’s aggressive Whole Foods Market expansion and prime pickup in 2019 will transform a stodgy tea aisle in grocery
In the days of sail sea captains crossing the Atlantic encountered the doldrums, periods of calm that usually passed as an inconvenience.
So it is with the tea trade in 2019.
The tea industry enters the new year in the doldrums. Unit volume and retail sales are flat for commodity and orthodox loose-leaf tea. There are hundreds fewer specialty tea outlets in operation. Chain expansion has stalled. Local shops are stressed.
A case in point: In 2012 Billy Corgan, lead singer and songwriter for The Smashing Pumpkins, opened Madame Zuzu’s Tea Shop and Art Studio, a tea shop located in suburban Chicago. The shop was doing a “robust and steady business” according to Corgan when it closed in March. He cited “various reasons which involve tenancy” and intends to reopen.
More typical is The Fresh Tea Shop on Erin Mills Pkwy, in Mississauga, Ontario, Canada a fine tea and shop and bar that opened in April 2017 and closed in 2018 with hopes reopen.
The 379 Teavana storefronts abandoned last year, often in prime locations, were mostly leased by non-tea retailers. Expansion slowed at DAVIDsTEA, now the largest tea chain in North America. The number of specialty shops that closed is anecdotal but high compared to previous years, according to wholesalers who complain many established ventures are experiencing financial stress.
Retail foot traffic, which is vital for tea cafés, declined 5 percent at stores and malls despite a rare holiday season with full employment and a strong economy. Holiday sales hit $850 billion, a 6-year high, growing 5.1 percent year-over-year.
Unit sales of tea bags, loose leaf tea, iced tea mixes, and single-serve pods and capsules all declined in 2018, according to estimates by the Beverage Marketing Corp. (BMC). Tea bags registered a gain in sales value, indicating consumer preference for more expensive sachets over conventional tea bags, but the only major category to show meaningful growth was ready-to-drink iced tea which grew 3.9 percent in value on 1.1 percent increase in volume. RTD retains its rank as one of the top liquid refreshment beverages in the $180 billion category, eroding share held by carbonated soda and juice but far outpaced by bottled water which grew 284 percent between 1994 and 2017 (and now averages 42 gallons per person per year).
Still, there are powerful winds building to propel the industry:
Burst of Botanicals
Taste matters and flavorful tea reigns. Floral and botanical blends in convenient sachets are experiencing a strong surge. Hibiscus, used primarily in tea and iced teas, juices, and beverage mixes was named flavor of the year. Market research firm NPD reported a 55 percent increase in the use of hibiscus in tea globally since 2014 and a 62 percent increase use in iced tea, both growth rates compounded (CAGR) through 2018, according to Food Ingredients First.
Herb and extracts giant Martin Bauer Group is enthusiastic about the future of tea and herbs. Head of sales Christian Dinkler said the company has developed certified sustainable sourcing, organic, Fairtrade and Rainforest Alliance credentials for herbs originating with hundreds of suppliers in 80 countries and is now creating 5,000 blends per year. “Although so far a small niche, specialty tea is very fashionable for young people,” said Dinkler who says mixing herbs adds value to tea, a commonly held view in Europe. Martin Bauer is developing “clean” raw materials to improve tea’s health properties including vitamins, enhanced extracts along with herbs and fruits to spur innovation, said Dinkler.
A telling sign of change is that Rishi Tea is now Rishi Tea & Botanicals with an expanded line that includes ingredients quince, and eucalyptus, mushroom, hibiscus, omija, valerian, a White Ginseng Detox, and Turmeric Chai. QTrade Tea & Herbs, North America’s largest importer of organic herbs for blending in tea, reports strong demand for botanicals in both iced and hot tea categories.
Donna Tokugawa, founder of Chado-En, categorizes these teas into five functions: “Stay balanced, stay beautiful, stay calm, stay clear, stay energized, stay fit, stay focused, and stay strong.”
Traditional Medicinals, founded in 1974, Yogi Tea, and Hain Celestial (Celestial Seasonings) led the way in grocery and drug stores with teas that promised to calm children, aid in relaxation and help induce sleep, ease colds, and improve digestion but fell short of health claims that require FDA approvals. Grocery aisle competitor Bigelow introduced probiotic tea in 2009 and the Bigelow Benefits line in 2017 to “define the life you want to live” with ingredients echinacea, cinnamon, ginger, lavender, and turmeric and a beauty tea with aloe, rosehips, acerola, and elderberries. That same year Harney & Sons introduced athletic teas with electrolytes and antioxidants “to give you the balance, energy, and focus you need to achieve peak athletic performance.”
Bigelow increased its share to 14 percent of the teabag market in 2018, earning $170 million on 6.7 percent growth in grocery, drug and department stores according to IRI. Hain Celestial, founded in 1993, is now a $125 million brand and No. 3 in grocery. Traditional Medicinals grew its brand 19.3 percent, according to IRI with Smooth Move Tea up 8 percent, earning $15 million and Throat Coat Tea up 10.3 percent, earning $12 million in the 52 weeks ending Nov. 4.
Maria Uspenski founder of Tea Spot in Boulder, Colo., explains “the main reasons we see customers looking for functional teas are to help with inflammation, digestion, and cleansing, energy management (either for a lift to aid in sleep) and to release stress. Probiotic teas make up a very small fraction of this category, but they are growing rapidly.”
“Plant power is going strong, with new herbs and even vegetable ingredients being added as well as ayurvedic and adaptogenic blends using moringa, ashwagandha, maca and funghi,” she says.
Online sales of groceries more than tripled between 2013 and 2018, according Packaged Fact’s Online Grocery Shopping in the U.S., 2nd Edition. Amazon and Walmart together account for 28 percent of online grocery sales. While 80 percent of tea is purchased at mass market outlets, 14 percent of tea drinkers buy online, according to a 2017 U.S. consumer survey by Statista, a German market research firm.
The channel appeals to suppliers at origin who retain greater percentage of revenue spent on traditional distribution. Luxmi Tea, for example, owners of the prestigious Makaibari brand in Darjeeling, is now marketing these premium teas in 250g and 500g packages on Amazon and Flipkart in addition to www.makaibari.com. Silver Tips Imperial, a semifermented handmade fullmoon oolong, sells for $30 for 50g (equivalent to $600 per kilo). Services like Amazon get a share of sales but attract billions of transactions and handle last-mile delivery to customers.
Tea gifting presents a bright opportunity for brands in the online channel. When surveyed by market research firm Packaged Facts, 15 percent of respondents said they purchased coffee/tea/chocolate as gifts in the past year, second only to boxed chocolates and candies (27 percent). This summer Tea Forté partnered with Amazon on Prime Day to offer tea samplers, an iced tea pitcher set and rock sugar.
“Prime Day has already been our biggest day ever. During our peak hour, customers were purchasing one Tea Forte product every two seconds,” said Tea Forte’s Jurgen Nebelung, vice president of e-commerce and digital.
The convenience channel is another bright spot. Packaged beverages account for 16 percent of sales and 20 percent of the profit earned by convenience stores according to the National Association of Convenience Stores (NACS).
Sales margins for refreshment beverages averaged 42 percent last year and are higher for waters and tea — nearly double the 22 percent earned on beer. Liquid refreshment beverages accounted for $128 million in convenience stores sales in 2017, according to NACS.
Several iced tea brands now generate more than $1 billion in annual sales. The trend is to premium, better tasting tea with sufficient suspended solids to be considered equivalent to Fresh brewed tea.
In fact, it is the convenience of cans and bottles that propels sales of seasonal, artisanal and in some instances, extraordinary tea. Elegant limited offer seasonal greens from Ito En, First Flush Gyokuro from Japan’s Yamaguchi Tea Estate and single-origin (Ambootia) cold brewed Darjeeling from Argo found a following. Kollo is a Los Angeles brand in 500 ml spirit-grade French glass bottles. It is made without sugar, preservatives or pasteurization and includes a kabusecha (Japanese green tea), a Vietnamese oolong and Chinese black tea that sell for $10-$12 per bottle.
Bottled Pu’er from Numi Tea and Republic of Tea faded after a few years but premium tea lines flourish with flavors like Turmeric Sun.
Grocery Tea Transformed
It is too early for a final tally of 2018 sales but in grocery, department, big box and drug stores sales are down across every category except ready-to-drink, according to market research firm IRI. Major U.S. grocers stock few specialty brands, and fewer still offer a meaningful selection of quality loose-leaf teas. Center-aisle sluggishness in evident in discounted 100-count tagless commodity teas priced at $4.47 a box ($0.05 per 2-gram tea bag in grocery and $0.03 per teabag at Walmart). Unilever is reformulating and spritzing up the look of TAZO following its purchase from Starbucks. The brand earned $32 million from sales of dry tea, up 9.8 percent according to IRI. Teavana is poised to take a big share of the premium RTD section now that roll-out is complete. Sales were $25 million in 2018 on 11 million units averaging $2.30 per bottle, according to IRI.
The situation is not so dire in Canada where Wissotzky, STASH, and Tea Squared sit above the Red Rose, Tetley, Twinings in Safeway, Sobeys and IGA. Loblaws teamed with specialty tea retailer DAVIDsTEA this year in a bet that national distribution will boost the chain’s profitability.
The upper shelf is not barren in the U.S., but premium teas are few. Mighty Leaf has its premium whole leaf pouches in Kroger. Republic of Tea, Numi Organic and Rishi Tea & Botanicals are in all the natural stores and mainstream outlets, but hundreds of fine quality brands favored by specialty tea drinkers do not sell fast enough to compete for shelf space.
Grocery is in transition and ripe for disruption. Tea is a high-margin, fast-moving consumable like premium coffee that is largely underperforming compared to tea sold in specialty grocery stores where the selection is broad. More critically, there are few of these locations. Whole Foods Markets, for example, operates 479 stores. Kroger operates 2,782 in 35 states.
This is why Amazon’s decision to build hundreds, perhaps thousands of Whole Foods Markets, is such a great opportunity. Click Instacart and search tea to see for yourself.
Uspenski at Tea Spot offers Meditative Mind, a white tea with rosebuds & jasmine in 3oz. tins, one of five blends delivered free (on your first order). Searching 25 pages revealed the following brands stocked by Whole Foods and delivered by Instacart to a Chicago address: Village Tea, TAZO, GT’s Kombucha, Twinings, Honest Tea, Yogi, Tetley, PG Tips, Yorkshire, Steaz, Bigelow, Argo, Numi Organic, Guayaki Yerba Mate, Mighty Leaf, Sweet Leaf Tea, Pukka, Bolthouse, Health-Ade, Runa, Ito En, Kevita, Inko’s Organic, XINGtea, Choice Tea, YOUR BRAND HERE.
Look for Amazon to next purchase a major distributor to stock hundreds of new storefronts that will put tea with two-hour delivery (or store-pickup) in front of millions of new customers. Retail consultant Brittain Ladd, writing in Forbes, estimates Amazon could build 2,000 Whole Foods Markets and 1,500 AmazonFresh Pickup locations. AmazonGo can successfully expand to 5,000 locations, according to Ladd.
Tea responds to human touch. Mechanical mass production is driving down prices for black cut, tear and curl (CTC) tea that is out of sync with what consumers seek in both producing countries and export destinations. Green teas, driven by significant increase in production in China, are gaining popularity worldwide. The tea industry is returning to its roots where smaller well-tended farms take full advantage of terroir. This does not require a return to inconsistent, cottage production, but rather a scale that takes into account the land, end-user and production style. The Tea Studio project in South India is an experiment that foretells the future of sustainable tea. Sales slowed in 2018 but artisan whole-leaf teas retain their allure, enhanced by single-origin credentials and meaningful certifications.
Related: Tea Trends Flowing into 2018
Sources: Packaged Facts, Beverage Marketing Corp., Forbes