Teavana: The Tea Industry’s Tempest?

Starbucks’ decision Thursday to close every one of its 379 Teavana retail stores is like a powerful specialty tea magnet suddenly reversing polarity.

This is not about tea. Teavana teas remain profitable and popular online and at overseas locations, and the recently announced ready-to-drink Teavana-InBev partnership shows strong growth. Teavana sales topped $1 billion in 2016, and are on track to reach $1.6 billion on 2017, driven mainly by offerings at Starbucks locations. The company projects sales of $3 billion within five years, with much of the growth overseas.

The closings signal failure in dry tea retail despite what it had going for it:

  • Tea’s strong margins.
  • Great visibility in prime urban storefronts and tier-one malls.
  • Superb marketing.
  • And cutting-edge merchandising by one of the most successful beverage retailers on the planet.

Even Oprah Winfrey backed the concept.

“The company concluded that despite efforts to reverse the trend through creative merchandising and new store designs, the under performance was likely to continue,” Starbucks announced via press release.

CFO Scott Maw cited reduced foot traffic in mall locations. Operating losses were mounting. “The rate of the decline coming through last holiday and into Q2 is worse than we had forecast and we are expecting further declines at a number of at-risk Teavana mall stores,” he said.

The company will close its doors within the year with most shuttered by next spring. The company’s 56 Canadian locations will be the first to close.

The Mall-tea Relationship

During the past 20 years tea retailers in busy mall locations introduced specialty tea to millions of commodity tea drinkers. Large-scale sampling of fruit- and floral-flavored teas led the curious to local shops known to foster a tea culture that celebrates the health and social benefits of premium tea and feature single-origin teas that generate great margins and sales of $1,000 per retail square foot.

Where will consumers go now to sample teas? Those who have refined their tastes will remain loyal to suppliers online and will still frequent brick-and-mortar locations. Mall stores have long since faded as consumers’ “cup of tea.” The industry depends on new tea drinkers, especially the young, to continue growth, and mall stores often made that introduction.

Tea Business Prospects

Last year, Starbucks closed its premium Teavana Tea Bars and in February the last two of its Evolution Fresh juice stores. In June 2015, the company closed all of its 23 La Boulange bakeries three years after acquiring the chain saying the “stores were not sustainable for the company’s long-term growth.”

Who could invest a half billion in tea retail given the time and effort Starbucks expended? Nestle? Unilever? Perhaps a company like JAB Holding Company, owners of Peet’s Coffee & Tea, Caribou Coffee and Mighty Leaf Tea?

Teavana, founded in 1997, is a cautionary tale. The beginnings held great promise but a flat IPO (initial public offering) and investment following the $620 million 2012 acquisition didn’t pan out.

Teavana was one of the first of the loose-leaf specialty retailers to embrace sampling on a large scale. North American brands like Adagio (1999), global brands like Germany’s well-established TeaGschwendner (1978) and French Palais des Thés (1987) decided to enter the North American market, and Canadian retailers such as Tea Emporium (2000), Teaopia (2005) and DAVIDsTEA (2008) enthusiastically followed, opening stylish urban storefronts and suburban mall locations.

Capital Teas, founded in 2007 in Annapolis, Maryland, attracted significant capital investment, expanding to 23 locations by 2016. Last year it was listed as No. 1686 on the Inc. 5000 growth list. This month the firm filed for court protection while it closes half its locations and cuts staff by 49.

Teavana will try to reassign 3,300 workers, many well trained in the art of tea.