The Specialty Tea Industry is at the same time more competitive and profitable than ever. More than 5 years after writing the first TeaRetailer article and opening Adagio’s first brick-and-mortar retail location, the landscape has definitely changed, but the opportunity in tea is larger than ever. This is the first in a three-part series detailing the evolution I’ve seen in the industry and the lessons learned along the way.
Allow me to start by going back to the beginning; or at least my beginning in tea. I joined the industry in 2004 with TeaGschwendner. They were, at the time, the largest specialty tea retailer in the world with 150 stores in 9 countries on 4 continents. After opening a number of concept retail stores for them, I joined Adagio in 2009 to apply what I had learned about the industry to the leading online retailer in the US. Adagio offered a more current product collection and more relevant brand for the US market. In 2011 I was recruited by Starbucks to lead the Tazo Tea brand (> $1 billion in consumer sales) into brick-and-mortar retail. Starting in 2013, following Starbucks’ $620 million acquisition of Teavana, I led Concept Development and International Franchising for what is now the world’s largest specialty tea retailer with 350+ stores in 8 countries.
Over the past decade I’ve seen the competitive landscape change dramatically, but the underlying mission of introducing higher quality teas to the US consumer has remained. In this first article I’ll dive into some of the macroeconomic trends that are changing the face and future of the US Tea Industry. In part 2 I’ll explore the “lessons learned” as they relate to building a tea retail brand. In part 3 I’ll share my thoughts on where the industry is headed, and the strategies I would recommend for anyone looking to build a dominant consumer tea brand.
Part 1: State of the Industry
The US Tea Industry is growing rapidly and attracting considerable investment. Existing specialty tea competitors (as differentiated from the traditional commodity tea bag brands) are moving quickly, but none have significant market share or consumer awareness.
When I joined the industry in 2004 it was independent tea shops that dominated the front lines of retail growth. Today, capital investment is driving the growth of much larger operations.
- David’s Tea completed $90 million+ IPO in 2015
- Peet’s Coffee and Tea acquired Mighty Leaf in 2014
- Unilever acquired T2 ($57mm in revenue) in 2014
- Starbucks acquires Teavana for $621 million in 2013
- Jamba Juice acquired Talbot Teas in 2012
- Teavana acquired Teaopia for $26 million in 2012
- Multiple smaller regional chains (including American Tea Room and Capital Teas) received several million in funding each in 2015
And the trend is far from exhausted. In the past year alone I’ve been retained by two different private equity companies to assist in due diligence for significant (~$50 million) potential investments into the expansion plans of existing tea retail brands, and I’ve been contacted by more than a dozen entrepreneurs looking to enter the industry.
Institutional investors typically get excited only by opportunities for outsized returns, so what is it that they are seeing? In addition to the considerable profits being generated by Teavana, David’s Tea and smaller chains, there is a clear shift on consumer behavior away from unhealthy sodas and calorie laden juices and into “functional beverages” like tea. In addition, a 2015 study by YouGov shows younger Americans are trending increasingly towards tea and away from coffee.
The explosion of capital investment in the past few years bears a lot of similarities to the early years of the specialty coffee explosion that drove the number of US coffee shops from 1,650 in 1991 to over 25,000 by 2006. I don’t believe we’ll see 25,000 tea shops in the US, but the proven profitability of tea retailing is attracting unprecedented investment and exponentially increasing competitive pressures.
This is both good and bad news for existing and prospective players. It’s clear that there is significant money to be made in tea, but just as apparent that any retailer not providing excellent value to the customer and operating at peak efficiency risks being put out of business by a more disciplined and skilled competitor.
Competitive pressure on tea retailers is also being applied by the increasing range of options and quality found in specialty and grocery stores. Bagged teas still dominate the mass market, but the quality of teas in those bags is changing (old paper tea bags are being replaced by sachets and pyramids filled with whole leaf teas) and new loose leaf SKUs appear on the shelves every month. The quality of teas served by the tens of thousands of cafes is also rising. The improved availability of quality tea is good for overall consumption and consumer perception of the product, but it also forces tea retailers to work even harder to differentiate themselves from what’s available elsewhere.
It’s often said that “retail is detail”, and that holds true in specialty tea. Many (dare I say most) tea shops today have the basics in place, but don’t really shine in store design, packaging, merchandising, service, or even product freshness and quality. They succeed (or survive) thanks to a relative lack of competition, not because they are delivering an exceptional customer experience. They’ll need to step up their game to compete with the oncoming wave of investment… or better yet step up their game to get a piece of the action and expand themselves!
In part 2 I’ll share the key lessons I’ve learned that differentiate the most successful tea retailers from all the rest.