[Main Text] While coffee shops are flourishing across China, Starbucks, the world's largest coffee chain giant, is shifting its focus towards tea beverages.
This shift by Starbucks highlights changes in the U.S. beverage market landscape: between 2003 and 2013, American coffee consumption grew by only 1.9%, while average tea consumption surged by 22.5%.
In an email response to the Daily Economic News, Starbucks headquarters stated that globally, the tea beverage market presents a $90 billion business opportunity annually, second only to water, indicating immense potential. According to internal company surveys, demand for tea beverages in the U.S. market has shown significant growth and is increasingly favored by the public.
In the recently concluded fiscal year 2013 (ending September 29, 2013), driven by sustained growth in coffee performance, Starbucks delivered its best-ever financial results. Over the five years since the financial crisis, Starbucks (NASDAQ: SBUX) stock price has accumulated an increase of over 700%, outperforming not only consumer stocks like McDonald's and Coca-Cola but also leading hot tech stocks like Apple and Google.
Currently, tea beverages account for only 1% of sales in Starbucks coffee shops. Can it become Starbucks' next growth driver?
Tapping into the $90 Billion Tea Beverage Market
In 1971, Starbucks Coffee, Tea, and Spice store, founded in Seattle, USA, first appeared in people's sight. Although tea is part of Starbucks' traditional culture from its name, after 42 years dedicated to coffee blending and retail, when people mention Starbucks, coffee undoubtedly comes to mind first.
According to the latest Starbucks Q4 FY2013 financial report, quarterly revenue increased 13% year-over-year to $3.8 billion, with comparable store sales growing 8% in both the U.S. and China/Asia Pacific markets. For FY2013, full-year revenue increased 12% compared to the previous year, reaching $14.9 billion, setting a new historical record for Starbucks.
As a traditional consumer stock, Starbucks' performance in the capital market is not inferior to today's most popular tech stocks. Daily Economic News calculations show that since the financial crisis (2009 to present), Apple (NASDAQ: AAPL) has gained about 490%, Google (NASDAQ: GOOG) over 200%, while the relatively low-profile Starbucks has risen 770%.
However, just as its coffee business is booming, Starbucks suddenly announced it would delve deeper into the tea beverage market, seeking beverage category diversification, marked by the birth of Starbucks' first global tea bar.
Explaining this decision to the Daily Economic News, Starbucks stated, "We see growing interest in tea in the U.S. market, where tea is more than just a beverage; it's becoming a daily experience. Current consumer trends also provide opportunities for this tea beverage segment."
Currently, the global tea beverage market offers a $90 billion opportunity, with hot tea alone accounting for 40% of that. Starbucks, with its mature beverage retail experience, sees potential here.
On October 23, Starbucks' first tea beverage store, named Teavana Fine Teas + Tea Bar, opened. The Teavana model emphasizes personalized experience, different from traditional tea bars. Besides offering various hot and iced teas, matcha lattes, and sparkling tea beverages, all loose-leaf or blended teas can be selected from the Teavana "Tea Wall," prepared on-site by Teavana partners (Starbucks' term for its staff), or taken away by consumers.
Starbucks has long been known for selling culture. It has successfully replicated Western coffee culture in the East, with China/Asia Pacific revenue growing 27.1% year-over-year in FY2013. This time, can it successfully introduce Eastern tea culture to the West?
When asked how the tea bar differs from previous coffee shops, Starbucks mentioned the concept of "tea ceremony," stating, "It's not just about tea ceremony, but also the sensory experience of tea culture. We even integrate tea leaves into the store's decorative elements and incorporate Teavana's 'Tea Wall,' which displays various high-quality loose-leaf and blended teas."
The new store is located at the intersection of 85th Street and Madison Avenue in Manhattan's Upper East Side. Regarding choosing this affluent area in New York, a top global consumption hub, Starbucks told the reporter, "The Upper East Side has a vibrant art and design scene and is itself a luxury retail destination, making it the perfect choice for Starbucks' first tea bar."
Early Layout: Acquiring Two Tea Companies
In fact, Starbucks' first close encounter with tea did not begin with Teavana Fine Teas + Tea Bar. As early as the late 1990s, Starbucks had started laying out its tea beverage market strategy.
Since acquiring the specialty tea retail brand Tazo in 1999, Starbucks' interest in tea has grown. Selling tea bags and bottled tea beverages through Starbucks stores, its website, and retailers expanded its product line and brought an additional $1 billion in annual sales.
To pave the way into the tea market, on November 15, 2012, Starbucks offered $620 million to acquire specialty loose-leaf tea retailer Teavana. This chain, selling both tea and tea accessories, had nearly 200 stores before Starbucks' interest. Data shows Teavana sold over 100 types of tea and related products and had listed on the NYSE in July 2011.
To better understand the overall U.S. tea market, the Daily Economic News reviewed Teavana's IPO prospectus. Its financial reports show that U.S. loose-leaf tea sales have significant seasonal fluctuations, increasing throughout the year, with Q4 being the annual peak, correlating with the higher number of U.S. holidays. Additionally, among Teavana's products, tea leaves had the highest profit margin.
After completing the Teavana acquisition, Starbucks CEO Howard Schultz revealed that the tea business is a once-in-a-lifetime opportunity, and tea beverages have reached a time for reinvention and rapid development.
Last year, Starbucks' first Tazo tea store opened in Seattle served as a laboratory for Teavana, offering over 80 different types of loose-leaf tea, matcha lattes, and iced tea.
Cultural industry expert Lin Wei stated that Starbucks built its first symbolic Tazo tea store as a Teavana laboratory, making it a user experience center for Starbucks' "tea culture," where tea enthusiasts can freely mix and DIY truly customized tea. This direction of closely combining tea with the experience economy might be the雏形 of "Starbucks' high-end tea culture."
After absorbing Tazo and Teavana, Starbucks' tea brand portfolio expanded. When attempting to offer tea drinkers premium and unique customized experiences, Starbucks already held a leading advantage over industry competitors.
The Daily Economic News noted that in Starbucks' Q4 report, the performance of other segments was separately listed to reflect sales from newly acquired brands like Teavana. This segment's revenue was $105.5 million for the quarter, a 102% year-over-year increase, mostly contributed by newly added Teavana retail stores.
Starbucks told the Daily Economic News that over the past 15 years, Teavana's growth reflects Americans seeking a more powerful tea beverage experience. "The vast and rich tea culture has given Starbucks the opportunity to exercise its footprint in tea retail. Just as Starbucks expanded the coffee market, we also hope to create a premium tea-tasting experience for consumers."
According to a Mintel analysis report on the U.S. tea beverage market, "As tea becomes more popular in the U.S. market, it opens a market for manufacturers to emphasize tea's natural flavors, varieties, and various pairing methods. Through training, tea merchants can make tea into premium beverages similar to coffee."
The Rise of the Ready-to-Drink Tea Market
In recent years, U.S. tea imports have surged, but compared to other global regions, tea consumption is still not high, providing more opportunities for beverage companies to explore this segment. Research firm Euromonitor International predicts that by 2017, U.S. on-trade tea consumption will grow 10% to 37,727 tons.
The reporter noted that not only Starbucks but also Lipton, the world's top-selling tea brand, is breaking into the tea beverage market by expanding its tea categories. Backed by Unilever, one of the world's largest consumer goods companies, Lipton gains huge advantages from its strong channels and bargaining power. In 2012, Unilever's tea sales grew 2% to $385 million.
Wu Xiduan, former Secretary-General of the China Tea Marketing Association and current Deputy General Manager of Xiangyuan Tea Industry, told the Daily Economic News, "Unlike Lipton's bagged tea, Teavana focuses on the high-end tea market, conveying tea culture to consumers beyond just drinking. Businesses like Teavana, besides operating tea beverages, also supply pastries, achieving comprehensive operations through extended services, organically integrating tasting, experience, and sales, making them mutually reinforcing."
Euromonitor's research report on the U.S. tea market pointed out, "Interest in the ready-to-drink tea market has spread to large-scale immediate consumption channels. As many consumers seek alternatives to carbonated drinks, canned/bottled tea has become popular in foodservice channels. From a health perspective, tea's advantages are unmatched by other soft drinks. To meet health-oriented consumers, foodservice outlets like McDonald's have started serving freshly made iced tea."
Discussing future tea beverage industry trends, Wu Xiduan said, "Although the internet has spawned sales methods like e-commerce, experiential consumption emphasizing communication and interaction cannot be replaced by the internet."
Regarding potential risks Starbucks might face in developing the tea beverage market, Wu Xiduan pointed out that Starbucks has years of coffee retail experience, so service isn't a major issue; the main risk lies in raw materials. Currently, Starbucks sources tea globally, and tea quality is easily affected by factors like climate and cultivation techniques, which might be the biggest risk for Starbucks' future tea business.
[Editor's Note]
Regarding business strategies in the commercial world, enterprises should understand how to extract the essence and discard the dross, avoiding blind copying or complete abandonment.