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 (

State of the US Tea Industry

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.

TeaGschwendner’s first US store on State Street in Chicago – 2005

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.

Infographic: Younger Americans Are Ditching Coffee For Tea | Statista

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.

The changing landscape of innovation

Consumer food and beverage innovation is shifting from multinational companies to small businesses and changing the balance of power in the industry. We formed Building Oz, in part, because we believe there is an exciting opportunity to help food and beverage companies leverage industry best-practices to scale their operations and capitalize on market trends.