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).