Starbucks buying Teavana will lead to better quality tea

Sweeping Lu Yu's Tomb

The news that Starbucks purchased Teavana for six hundred and twenty million dollars was stunning. The tea industry doesn’t seem to know what to make of it. There had been a very lively and interesting conversation on Linkedin about the possibilities of the shift to focusing on artisanal teas in India and Africa, and whether or not it could become a profitable venture having economic viability given the production variables there. When Dan Bolton announced that the Starbucks deal went down in the discussion comments, it came to a pretty abrupt end. It’s true that the discussion had been going on for a while and was due to fizzle out, but the news did not spark any new comments from the participants, as if the announcement had no impact on the discussion of the trend towards better quality tea. My feelings are that Starbucks buying Teavana will push the tea market to a tipping point causing a significant shift towards better quality tea in the market in general. I am not saying that they will have tea that is comparable to Seven Cups tea, but they will be offering better tea, at higher prices, that will shift the tea market in the same way that Starbucks shifted the coffee market.

It is interesting to speculate why Starbucks would make such a major financial commitment to tea, especially when they already had a very successful brand, Tazo. Why not just extend that brand? Starbucks certainly has no need for extra locations. Tazo opened a pilot tea shop in Seattle just last week that a lot of work went into. I doubt that buying Teavana was an impulse buy, they must have been thinking about it for a while, and they paid cash.

Let me just point out some things that can make the speculation more fun. Let’s talk about Charles Cain. He is the smartest corporate guy out there in my opinion and someone that I both respect and like, even though I am on the other side of the fence from him. We have debated about the market in private emails, and he has the best arguments for his side of anyone I know in the industry. I know that he has a very similar belief to mine that the future of the tea market will be defined by quality tea. Let me give some mare background. He started his career with TeaGschwendner where he worked for 5 years. They are the number one tea retailer in Europe but struck out in their expansion into the US market. I believe it was because they came with the promise of quality tea, and certainly Americans believed the quality of tea was better in Europe than here, (duh, not really), but they couldn’t deliver and they aren’t easy to Google. (I know, I just tried and it took me a few times for me to get close enough to the name for Google to figure out what I was asking). Mr. Cain then went to Adagio, where he was certainly the tail wagging the dog when it came to quality tea. He opened three store for Adagio in the Chicago area, but Adagio’s expansion into brick  and mortar retail has stalled out since he left the company early this year and went to work for Starbucks.

Charles is a good enough analyst to recognize the potential in the market Teavana was demonstrating and recognized also that they were very vulnerable to competition. Teavana has been very successful, but their customer retention is low; they use high pressure sales techniques in malls where there is a lot of foot traffic and piss a lot of people off, and they offer very little value for the prices they are charging, from their teas to their outrageously priced Chinese knock-off Japanese pots. It is a business model I have never seen as sustainable, and would never buy any of their stock or their tea.

There is no doubt that you can beat your competition by buying them out. I am sure Starbucks is  going to make it a point to bring the Starbucks business culture to Teavana, which means well trained staff and good customer service, making Teavana much harder to beat. The new Tazo store is geared towards trying to understand it’s customers.They even have a POS/video systems that tracks customers through the store, makes a note of where they focus, and what they buy. Gosh, it’s nice to have that kind of money. They are going to gather a lot of data on what customers want, and Charles is also someone that loves to crunch numbers. Making people happy rather that making them mad is surely a better idea.

Teavana has a decidedly Asian slant to it’s stores, which I think will stay. It doesn’t take a genius to figure out that as the demand for better quality tea of wider variety increases, the only place to turn is to China.  Both Starbucks and Teavana are very weak in their sourcing power in China, which is systematic of the industry. Starbucks is more likely to figure it out though, because they have a lot of experience working in China, and seem to be in a better position to raise the bar for sourcing since they have a much better understanding of Chinese business culture than Teavana. (Mr Cain’s boss worked there for years.) Rumor has it that Teavana lost a major supplier in Fujian because they tried to arrogantly act like Walmart and push the price down to the breaking point, and their suppliers just told them to take a walk. I doubt that Starbucks will make those kind of cultural mistakes.

You can say what you want about Starbucks, but they are very good at growing a market. They are lucky to have Charles Cain, because ultimately he believes in quality and sees fine tea as being analogous to fine wine. So where does that leave small quality oriented companies like Seven Cups? I think it leaves us in a great position. Having Teavana in Tucson has done nothing but help us, because they are growing the market, and they are never going to get to the level of quality tea that we have because they are too big and the teas we focus on are too limited in availability. Look at how Starbucks laid out the market so that private roasters could exist. It will allow other small tea businesses around the country to overcome the fear of charging the higher prices that come from better quality tea. Right now everyone is so scared, just like coffee shops were before Starbucks grew the market. They were tied tightly to the traditional cup of Joe, priced between 25 to 50 cents. Tea shops in order to survive are going to have to have better quality teas than whatever Starbucks/Teavana is offering. Customers will surely benefit, as will tea producers.. The small tea businesses that survive will benefit greatly from the expanded market.