Why Starbucks is closing 379 Teavana stores as specialty tea sales rise

Starbucks’ recent announcement that they are closing all 379 of Teavana’s stand-alone stores was not a surprise to those close to the business. While tea has consistently been among the fastest growing categories within Starbucks stores, maintaining Teavana as a stand-alone chain dedicated to bulk-tea and accessories proved to be a less efficient and profitable strategy for driving tea consumption and revenue. In the end, Starbucks did not have the infrastructure to dominate tea-gifting the same way they have hand-crafted beverages, and Wall Street does not have the patience for investment in long-term shifts in consumer behaviors. This decision should please shareholders by allowing Starbucks to focus on their core business strategy and leverage existing stores to drive traffic and tea consumption.

The challenge

Teavana’s success was as a novelty gift shop in high-traffic, Class-A shopping malls. New stores saw dramatic early sales results, but sustained sales growth beyond seasonal gifting required consumers to shift their tea purchasing from the local grocery store to the regional mall. That’s not a behavior we see happening consistently in any other specialty food or beverage industry. As Teavana neared saturation in regional malls and the gifting novelty waned, sales stagnated and Starbucks saw the opportunity to acquire a brand and product they saw as complementary.

Starbucks had a three-pronged strategy to meeting Wall Street’s expectations for same-store sales growth and return on capital through the Teavana acquisition: 1) Leverage Teavana’s premium brand position to drive tea sales within Starbucks stores, 2) Open hundreds of new Teavana stores outside of the mall environment, and 3) Leverage their strength in handcrafted beverage to drive incremental traffic and sales in existing Teavana stores.

The results

The first strategy of leveraging Teavana’s brand to drive sales in Starbucks has been a tremendous success. Tea has consistently been among the fastest growing categories within Starbucks stores in the 4.5 years since the acquisition.

The second strategy to extend Teavana outside of the mall environment required significant changes to the Teavana business model. Rather than infrequently serving a very high number of customers from across a broad geography in a regional mall, street-front locations require more of a daily-use model and the ability to drive more frequent purchases among a smaller base of local customers. This required a shift in brand positioning, product assortment, retail model and customer expectations that proved too difficult within the short timeframe expected.

The third strategy, leveraging Starbucks strength in hand-crafted beverage to drive incremental sales within existing Teavana stores, also required a significant shift in business model and customer behavior. Teavana’s mall stores typically have one register, limited foodservice equipment, no seating, and no space to add either the infrastructure or lines of customers required to make beverage service profitable. Trying to add several hundred prepared beverage transactions per day on top of shoe-box sized stores that are built to process less than one hundred $50 retail transactions proved exceptionally messy.

The implications

In my opinion this move is not a reflection of weak or declining mall traffic. Large shopping centers continue to drive half of all US retail sales, 75% of Americans visit a mall at least once per month, and malls remain the number one site of impulse purchases in America. The most profitable tea shops in America today are in Class-A shopping malls, and that seems unlikely to change anytime soon. This announcement presents a tremendous opportunity for David’s Tea and other brands who may have been blocked out of the best locations by Teavana’s non-compete clauses with landlords.

I also don’t believe this announcement signals weakness in the market for Specialty Tea. 80% of Americans drink tea, and 50% do so on a daily basis. The Specialty Tea segment is growing at nearly twice the rate of the overall US tea business, and demographic trends suggest the industry has a long runway of expansion as younger consumers are more inclined to favor tea over coffee than their parents.

Starbucks is one of the greatest American success stories of the last 50 years because they managed to change consumer expectations and behaviors around premium coffee and create a new industry. The number of US coffee shops grew from 1,650 in 1991 to over 25,000 by 2006. That was possible only after Starbucks had already spent the first 20 years building a brand and refining the business model. The simple reality is that the expectations for Starbucks financial performance at this stage are too high for the company to invest in another decades-long effort to change consumer expectations and behavior in a new industry without more fully leveraging their existing portfolio to drive it.

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Charlie Cain served as Teavana’s Vice President of Concept Development and Franchising up until January of 2015. He is now a Principal and Executive Consultant with Building Oz (www.buildingoz.com).

Written by Charlie Cain

From startups to Starbucks I’ve led teams to re-imagine and revolutionize products and industries by delivering customer experiences that delight the senses while appealing to the head and the heart. Realizing the true potential of a business or market opportunity requires applying the strategies and best practices appropriate for each unique situation and business.

12 comments

    1. I hope this Brand doesnt die off. You disappointed over 500,000 people who love this brand. Wow you buy the brand to kill it off. Bad business. I’m boycotting starbucks yes small “s” Mad As Hell

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  1. Thanks for sharing the details of why, what, and when. I am truly saddened by Teavana’s departure as the Starbucks are used to make drink desserts (as I call them) vs. tea drinks. And that may be driven by the consumer demand. There are several independent small tea stores that I have discovered from east coast to the west coast who get exotic teas from all over the world – Dobra Team Rooms being one of them. Regardless, I will miss my local Teavana(s) in metro NY/NJ.

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  2. I think a lot of this analysis is spot-on, but I think you’re also missing another couple factors here, factors which could be huge. One is that Teavana’s prices are often not competitive. This is less of an issue when dealing with “gift” type purchases and the “novelty” factor you mention, but it becomes more of an issue for sustaining long-term, repeat customers and building customer loyalty.

    Another factor that has the same exact effect is the pushy sales practices (which Teavana is notorious for) and, perhaps to a lesser degree, the dubious, inflated health claims the company makes in their marketing (and teaches their sales agents to repeat). These sorts of behaviors tend to boost sales in the short-term, but lead people to feel icky about the company in the long-run.

    I also think both of these things are incompatible with Starbucks’ values and image. Back when Starbucks bought Teavana, I was surprised, because I think of Starbucks as a socially-responsible company that treats their employees and customers with great respect. Their often-higher-than-market prices for products are backed up not only by consistent quality, but by this atmosphere of respect. It’s a reason a lot of people are willing to pay the higher prices and be loyal customers. I hear many of my friends explicitly talk about this as a reason why they feel good about spending money at Starbucks.

    Teavana, on the other hand, seemed to frequently treat customers, and sometimes employees, with disrespect. I’ve experienced it firsthand as a customer, the annoyingly pushy sales. I’ve read articles about it, and also seen disgruntled Teavana employees post on various internet forums about how they were explicitly trained to act in this way, which caused many employees to quit (good for them!)

    I think on some level I’m happy to see Teavana close…the pushy sales were sleazy, more like what I’d associate with a used car dealership (and to be honest, worst than I’ve ever experienced personally, even at used car dealerships) than a specialty tea shop. I think this sort of behavior was off-putting and out of place among the rest of specialty tea culture. Whether or not that behavior was a factor in Teavana stores closing, I don’t know…but it’s a huge factor making me feel like this may actually be good for tea culture and the tea industry as a whole.

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    1. Thanks for the comment Alex. There’s a lot of truth in your comments. I saw the impacts of each of these on the Teavana brand, employee and customer relationship firsthand. I would only observe that all of these were within Starbucks’ power to change, and in some cases great progress was made. We’re the challenges limited to pricing and sales culture I don’t believe Starbucks would walk away from this opportunity.

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    1. Thanks for the comment. Your observation may have more to do with the preferences of the American public than anything else. Starbucks started as a premium roaster of whole beans, and even today they offer a broad range of products. What the consumer prefers to buy is less a reflection of Starbucks and more of the American palate. Even when it comes to tea you may be giving us too much credit. 80% of Americans drink tea, but only 8% ever brew loose tea, and only 10% of THEIR consumption is loose. By any measure, hot loose tea is less than 1% of the market, and even within that niche the majority of consumers add milk, honey, sugar or other additives. Many tea companies ignore reality and focus only on what their owners prefer, and this is why most American tea companies never make it to the $1 million annual sales threshold of a single decent Teavana store.

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      1. Charlie – I agree 100%. Provide the consumer with what they want and do not let one’s own prejudices and preferences throw one off course !

        I started in tea (and coffee) with Unilever in 1980, leaving them in 2007 after many years associated with Lipton and other giant tea brands. They were all well over $1 million in sales 😉 I recall moving to London in 1980 after university in Melbourne. Like many I imagined Twinings as a superior tea. In my first few weeks I asked my initial ‘mentor’ ‘what about Twinings”? He started his tea career with them. Nevertheless, he scoffed and said ‘our Manchester factory alone in one day produces what they sell in a year”. I do laugh when I reflect on that day.

        Similarly when I was i/c sales & marketing for Unilever’s various estates in East Africa I would yearn for higher quality teas to sell. But my boss, the regional CEO, would always throw back the ‘green leaf yield/average price’ formula at me. At the end of the day tea was a commercial vehicle…..and that is what interested the shareholders. And my bonus programme…ha ha.

        Mediocrity sells in big big volumes. And here in Australia, still being something of a British demographic, we drink 90% ‘breakfast’ type teas, a bit of Earl Grey…(anathema to a purist like myself) and a few green and herbal concoctions. I import bulk teas here, and I am 90% focussed on good Rwanda and Assam black tea…..wiry leaf in the main, as that is what the local consumers perceive as a quality cue. But on rising in the morning I make myself a Kitabi BP1 tea.. CTC leaf…who cares….or a Rwanda/Burundi/Ethiopia blend coffee 😉

        Starbucks – they sure got their ‘coffee’ offering right…..

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  3. If Starbucks locations make $1 million per, how come the 350 or so of Teavana locations only manage about $240 milllion of revenue? That seems like a big gap if some strores are making $1 million. And did Teavana stop investing in the stores? Starbucks only wrote down $33 millino of property, which is less than it bought from Teavana. Thanks

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    1. Thanks for the comment BJ. As I have no current affiliation with Starbucks I can’t speak to things like write downs or recent investments (though it makes sense that the purchase price for a company has little relationship to the write-off costs of leases).

      I also can’t speak to current Teavana revenues (and as far as I’m aware they’ve not made this public), but from a purely theoretical standpoint using your number, 100 stores averaging $1 million plus 279 stores averaging $500K would give you just shy of $240 million in revenue.

      Broadly I would just share that the Starbucks and Teavana businesses are nothing alike. Starbucks is ~95% prepared food and beverage with ~$5 average tickets. Teavana is ~95% retail (bulk tea and teaware) with a ~$50 average ticket. The average Starbucks has always grossed far more than the average Teavana.

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      1. You mention that Teavana was a mall novelty shop. Do you think one problem with the Teavana business model was that it focused on selling tea accessories (more than 40% of sales) and less on tea (both bulk and prepare)? Tea is a repeat purchase but a tea set or gift is a one-time purchase. It seems like the tea sets helped with margins (I think the accessories are higher margin than tea) but may have hurt the viability of the business longer term.

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      2. Actually, margins on tea (bulk or prepared) are significantly higher than margins on tea ware.

        I agree that bulk tea is a prime opportunity for driving repeat purchase, but I don’t see that being a logical strategy for the regional super-malls where Teavana saw their greatest success. There aren’t many consumers who will be willing to regularly visit the mall to stock up on daily consumables. Then add the fact that even loose tea drinkers only use loose tea for 10% of their tea drinking occasions and selling bulk tea in malls is an exceptionally niche business.

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