Teavana founder and Chairman Andrew Mack’s acquisition of 46-store Canadian retailer Teaopia is a match made in tea heaven.
The two mall-based retail chains share a common vision, common marketing themes, similar selections of premium loose-leaf tea and even the same point-of-sale system. Teaopia operates stores of nearly identical size located in malls generating the same $500 in retail sales per square feet in prime locations throughout Canada.
“Teaopia's prime mall locations, similar store branding and focus on premium loose-leaf teas, and great store employees and managers all make this opportunity a natural fit for us,” he said.
The biggest difference between the two turns out to be gross revenue per store. Teavana Holdings, Inc. stands to gain $22.9 million a year in additional sales simply by bringing Teaopia’s $435,000 average to its own $913,000 average sales per store. Teaopia earns 50 percent of its gross on tea with 7.6% from online sales. Teavana earns 55 percent of its gross on its proprietary blends and will drive online sales closer to 10%. Given the prime locations, Teavana will add efficiencies to cut the bottom line while driving the top line to $850,000 per store. Mack said the company is “taking a cautious approach” with revenue projections “but we have run the numbers.”
The two brands are so closely matched it will cost a mere $25,000 for Teavana to rebrand each store, CEO Mack said Monday during a conference call following the announcement. Analysts on the call had nothing but praise for the $26.9 million deal, a largely cash transaction with a potentially very big upside.
Teaopia founder and President David Bellisario was equally effusive "I am excited for Teaopia to become part of the Teavana family. Teaopia will represent a stellar addition to Teavana, arguably the largest and most successful specialty tea retailer in the world. I look forward to working with Andrew and his team on this transition and watching the Teaopia stores thrive as part of Teavana."
The strategic acquisition will “rapidly advance Teavana's expansion in Canada," said Mack who already operates in two Canadian cities. He said that he finds a lot to like in the Great White North where per capita consumption (245 cups) is double the United States and tea drinkers are more sophisticated in their choices. Teaopia has an expert management team in the field, distribution facilities, trained staff and a reputation for lean operations. Add to that a robust economy with Canadian loonies trading at parity with U.S. greenbacks.
Malls are a finite resource
In the United States the prolonged downturn bankrupted hundreds of large enclosed malls. Even though consumers are shopping again, nary a developer has ventured back into the abyss. Construction on the last enclosed mall at Turtle Creek in Jonesboro, Ark., ended in 2006 according to the International Council of Shopping Centers. Crystals at CityCenter in Las Vegas, a non-traditional mall, was constructed in 2010 but most now open-air lifestyle centers. There have been 381 lifestyle shopping centers constructed since 2006.
Teaopia’s “truly impressive real estate portfolio” was a big motivation to buy, said Mack. "We immediately establish a strong foothold in many of the best mall locations in Canada." The acquisition makes Teavana the undisputed ruler of these locations, many of which average $1000 per square foot in retail sales.
Teaopia first opened in 2005 in the Erin Mills Town Centre mall. It became apparent three years ago when Teaopia and DavidsTea crowded together with Tea Emporium in a Toronto Mall that there was no synergy from in clustering stores. Sales sagged there and even in booming Edmonton. Opening stores in close proximity has led this axiom: When two or more tea shops open in the same mall, even massive multi-storey locations, profits will drop proportionately.
Teavana is still on track to build 60 stores this year in the states and reach 500 company owned venues in 2015. Teopia has two under construction. Last September, Mack, a former Applebee’s manager, announced a deal to franchise the chain in the Middle East. “Extending Teavana’s reach beyond the U.S. and Mexico is a key pillar of our overall growth strategy,” he said at the time. His decision to locate in the large Edmonton Mall was a wake-up call to Teaopia which had expanded briskly from its Ontario headquarters westward. [MAP].
|Teaopia's 46 locations across Canada.|
In August 2008 DavidsTea opened at 336 Queen Street West and is now in several malls but Mack said only one location shares a mall with Teaopia. Davids, founded by David Segal and Herschel Segal has since expanded to 77 stores with shops in every province.
Last week the company received $14 million in minority funding from U.S.-based Highland Consumer Fund. Montreal-based DavidsTea will use its newfound investment to establish a U.S. headquarters (likely near Boston) and continue its southward expansion. The chain recently opened two New York City stores.
Chip Wilson, founder and former CEO of Lululemon Athletica and Tom Stemberg, Managing General Partner at Highland Consumer Fund and founder and former CEO of Staples, will also be joining the Board of Directors.
This week the company hired Luis Borgen as their CFO. Borgen, with Denver-based DaVita Inc., said in published accounts that he is returning to Boston to be closer to his family.
Highland has extensive experience founding, growing, operating and investing in successful consumer companies. It is known for its hands-on guidance and active involvement of its consumer domain experts with firms including City Sports, Guitar Center, J. McLaughlin, Pharmaca Integrative Pharmacy and Pinkberry.
While they continue to operate in some of the largest in Canada, the path of less resistance for DavidsTea favors urban storefronts where rents are more reasonable. Teaopia also has storefront locations, but they are not on side streets. Standalones are in visible locations, a tribute to Bellisario’s skill at selecting right-sized real estate at reasonable rents.
Gross Sales Gap
As a publicly traded company, Teavana’s stock remains around $20 per share, well above the IPO threshold of $17. It received a 2% boost Monday. The sale will cost $18 million in cash and the rest will come from the corporation’s line of credit. Teavana’s CFO estimates the acquisition's impact to earnings per share to be neutral in fiscal 2012, excluding transaction and integration expenses, and accretive by $0.03 – $0.04 in fiscal 2013. Earnings were $168 million at the end of the fiscal year, up 35%.
Teavana brings 15 years of experience maximizing mall sales and the buying power of 200 stores. The Connecticut distribution center will support eastern Canada and with 85 percent of its teas proprietary blends, the company can quickly differentiate its offerings.
Canada is competitive, fractured and small. The market for specialty teas is about $400 million but it is growing very fast with tonnage and value eroding traditional black tea imports.
This explains in part the discrepancy in average store sales.
Another answer lies in the nature of Canadian tea retail. In Canada a hard sell is considered rude and keeps older consumers from even venturing into a store. Teaopia was actually understaffed. Visitors browsed the stores, smelling, touching and sampling at a leisurely pace. Teavana has toned down the tenor of its pitch in Vancouver but counter staff there are motivated by incentives to move a lot of product, typically $35 per transaction.
Training is a key aspect of Teavana’s game plan. The company will bring the Canadian staff to Atlanta and both familiarize them with the company’s offerings and instill an approach for rigor and metrics. The best outcome however may be what the Americans learn from their new associates. In Canada tea sommeliers are trained in the community college system, they debate endlessly the merits of various teas and seek to educate customers, even if that takes a bit longer than the minimum number of allotted minutes to close a sale. It is good that Teavana has in place senior executives who know the Canadian market.
“Teaopia has done a tremendous job hiring an outstanding field team and has introduced higher quality loose leaf tea to the market,” said Mack. “As we integrate and rebrand the Teaopia stores, we look forward to leveraging our shared best practices and welcoming the Teaopia employees into the Teavana family."