When Starbucks Corporation (NASDAQ:SBUX) bought tea seller Teavana for $620 million at the end of 2012, the company had big plans to replicate the same success it had with its coffeehouses. In addition to selling Teavana tea in Starbucks stores, the company envisioned Teavana stores popping up on every corner. The plan was to change the way we drink tea like the way Starbucks changed how we drink coffee. Three years later, SBUX stock is up about 130%, but the rise had nothing to do with Teavana.
Before the acquisition, Teavana stores sold the idea of a tea experience by offering loose-leaf tea, tea sets, and tea accessories in malls. The business was doing pretty well too, generating about $189 million in revenue in its last four quarters as a public company. (Source: “What’s Starbucks REALLY Getting for $620M?” InvestorPlace, November 12, 2012.)
Starbucks tried to turn the concept into a tea bar, opening a few stores, but the plan failed. In January, Starbucks announced that it was closing four of the five Teavana Bars. The 350 Teavana retail stores will remain open.
Despite the news, the Teavana acquisition is not even close to being a disaster.
Starbucks also sells Teavana tea in Starbucks stores and it will continue to do so. In fact, Teavana sales in Starbucks stores are actually doing quite well. In January, Starbucks said that Teavana generated close to $1.0 billion in sales in Starbucks stores, or about five percent of total revenue. (Source: “Teavana sales spike, some stores close,” Business Journal, January 25, 2016.)
That represents a 12% increase in sales over the previous year. Starbucks also forecasts that Teavana tea will become a $3.0-billion business within the next five years.
Tea is the most consumed beverage in the world, with sales of about $125 billion globally. (Source: Ibid.) Unfortunately for Starbucks, the U.S. market just might not be that big on tea and that’s why the coffeehouse is taking its Teavana tea oversees.
More specifically, Starbucks is taking Teavana tea to China in the hopes that it can sell tea in a country that drinks the most of it on the planet, with retail sales of just over $10.0 billion. By comparison, retail sales of tea in the U.S. are about $2.0 billion. (Source: “Can Teavana Drive Revenue Growth For Starbucks In China?” Trefis, March 28, 2016.)
Starbucks plans to start selling Teavana tea in China sometime later this year, as the company believes it’s very complementary to their coffee business.
In China, Starbucks will be going head to head with many established local tea brands that dominate the country’s fragmented tea market.
Most of China’s leading domestic brands operate their own teashops. The Da Yi Tea Group is the largest player in Pu’erh tea. The Tenfu group, which is the fifth largest tea company in China, operates over 1,300 teashops across 31 provinces. (Source: Ibid.)
But Starbucks hopes to gain an upper hand on its competitors by becoming more visible. The coffeehouse currently operates 2,000 stores in over 100 Chinese cities. Starbucks also has plans to open another 500 stores this year with a goal of reaching 3,400 coffee shops in China by 2019.
The Bottom Line on SBUX Stock
Teavana tea may not have worked out as well in the U.S. for Starbucks as the company had hoped, but it’s still a nice complement to its coffee business.
However, Starbucks is introducing Teavana tea to the largest tea market in the world, which could present a huge growth opportunity for the company if it succeeds in penetrating the Chinese market. If Starbucks establishes itself as a premium brand of tea in China, look for SBUX stock to keep climbing.