Starbucks Bolsters Tazo Tea for Retail Growth

SEATTLE, Wash. 

Starbucks Coffee Co. is positioning its Tazo brand for aggressive growth in 2012.

Last week Starbucks (NASDAQ: SBUX) hired tea retail expert Charles Cain as Vice President, Tazo Merchant and Operations. Recent moves inside the Starbucks corporate offices and the accelerating growth of highly profitable tea retail chains such as Teavana Holdings, suggests Starbucks executives believe the time is right to boost their investment in Tazo.

Cain, the former business development director at Adagio Teas, will report to Annie Young-Scrivner, global chief of marketing for Starbucks since September 2009 and Tazo president since July.

In announcing Young-Scrivner’s promotion the company said it intends to build Tazo into a globally-recognized multi-billion dollar brand in pursuit of the $87 billion global tea market.

On Tuesday a Starbucks company spokesman said that “although we cannot disclose specific growth information, the Starbucks Global Consumer Products Group, which includes Tazo tea, is a large priority for the company.”

“The Starbucks CPG business is one of the driving forces behind the company’s long-term strategy to extend high-quality coffee and tea products beyond Starbucks retail stores and has experienced significant growth — reaching 200,000 points of distribution in the U.S. Tazo is the only premium global tea brand that is available cross-channel,” according to the Starbucks spokesperson.

Adagio, founded in 1999, built its reputation in online sales and now grosses several million annually. During the past two years Cain opened two brick and mortar showcases in Naperville and Skokie, Ill. with a third Adagio store to open in downtown Chicago later this month.

Cain is expected to initially concentrate his attention on Tazo’s operations. He says “the impact of even minor improvements in product, packaging, marketing, merchandising, sales and service techniques across 17,000 Starbucks locations globally plus all of the other distribution channels could be tremendous.”

“As for strategy, all options are on the table but no formal decisions have been made,” he told World Tea News.

“In the past few years, we have seen a massive surge of major retail chain concepts emerge and I have often been asked the question of who will be the Starbuck’s of tea,” says World Tea Media President George Jage, “My response has always been Starbucks. It is exciting to see them fulfill their destiny.”

Tazo earned $1.3 billion in 2010. This represents about 12 percent of the $10.7 billion in revenue Starbucks reported at the close of the fiscal year ending Sept. 30, 2010. In the ten years since it was acquired, Tazo sales have grown rapidly. In 2001 the division was responsible for 3 percent of Starbucks $2.6 billion net revenue.

Tazo earns half its revenue in the grocery channel and the remainder in retail sales at Starbucks’ 10,957 domestic locations (7,000 more overseas) as well as thousands of restaurants and coffee shops. Revenue from international business rose 20 percent in the last fiscal year to equal $2.3 billion while sales in Starbucks’ domestic cafes grew 7 percent to $7.6 billion.

Tazo® is now available in 46 countries and at more than 17,200 Starbucks stores and Seattle’s Best Coffee Café’s worldwide, as well as grocery stores both in the U.S. and Canada, according to the spokesman.

Tazo began exploring the merchant expansion in earnest with the appointment of Young-Scrivner. In June the company sent a contingent of eight Starbucks and Tazo staff to the World Tea Expo including Catherine Cheung, Director of Global Tea and R&D Director Michael De La Cruz.

During the summer Young-Scrivner put renewed emphasis on consumers customizing Tazo’s Shaken Teas, described in marketing materials as “artfully blended from some of the world’s most delicious teas and botanicals, handcrafted, shaken and poured over ice. Customize any Tazo® Iced Tea beverage by selecting a tea (Black, Zen™ or Passion™), add lemonade and determine a level of sweetness and flavors.”

Recent innovations include:

• Well Being Teas: Tazo added an enticing selection of Well-Being teas that are thoughtfully crafted to provide everyday balance, and offer a sense of well-being. Tazo® Well Being Teas are available in three varieties: Tazo® Rest, Tazo® Thrive and Tazo® Focus
• Full leaf tea Sachets: Tazo introduced a complete line of full leaf tea sachets to our Starbucks Cafes, as well as four full-leaf tea blends that are available where customers buy groceries — Jasmine Pearls, Vanilla Rooibos, Orange Blossom and Ti Kwan Yin.
• Expansion of Ready to drink offerings: Since launching in spring 2010, the popular line of Tazo® Zero Calorie Iced Tea has grown more than 20 percent in the natural channels.* Following this success, Tazo introduced a new flavor to the line, Zero Calorie Tazo® Chai.

Starbucks has experienced record earnings in recent quarters. Its stock has climbed 350 percent in the last two and a half years providing ample funds for expansion.

Once the brand is polished in conventional retail, a mix of tea-centric shops in choice locations currently leased by Starbucks is one possible configuration. Starbucks continued to close domestic cafes through the end of last year while adding several hundred overseas. Overseas shops are likely to be included in its planning but it is unclear whether Tazo will retain its quirky new age branding in Old World countries.

In Taiwan and Japan Starbucks sells Tazo loose leaf tea sourced from local gardens. The Taiwanese supplier of Oriental Beautysells to 235 Starbucks outlets operated as a joint venture known as President Starbucks with partners Uni-President Enterprises and President Chain Store Corp. Taipei is served by more than 2,000 coffee shops of which half are independents. Most offer tea. President Starbucks is the largest off-shore chain with about 20 percent market share. In addition, Starbucks has more than 400 coffee shops in mainland China where it has announced plans to eventually build "thousands" of stores according to Starbucks CEO Howard Schultz.

Starbucks began serving White Peony, Oriental Beauty, Bi Luo Chun and Fancy Black tea early in 2010. In Japan the menu includes Hojicha as a latte, hot tea or iced beverage.

“Final decisions haven't been made on how to take Tazo to the next level, but it's exciting to be playing with a full deck — capital, resources, expertise and the freedom to take whatever strategic path offers the best long term ROI,” says Cain.

Young-Scrivner is a former chief marketing officer and vice president of sales with Quaker Foods & Snacks (PepsiCo); she has extensive background in product management and has successfully brought to market several brands. She was named president China Foods for Pepsico in October 2006. She is a 1991 graduate of the University of Washington and holds an MBA from the University of Minnesota.

Cain is also well versed in marketing. He worked two years for Adagio and five years previous to that as director of U.S. operations for TeaGschwendner, USA. The German-based firm owns 150 European tea shops. It began U.S. operations in Chicago with two stores under Cain’s direction. TSG later constructed two shops in Manhattan, New York under the direction of Joe Capp including a flagship in Rockefeller Square but pulled back from the North American market in 2010 following the death of the firm’s founder.

Cain frequently speaks in public on tea retail.

“About 10 percent of the U.S. population drinks loose leaf tea,” he said recently. “These people are aficionados, and they know their preferences. But that is not a large enough group to support our business. In order to succeed, we need to create converts, and we do this via exposure and education. When an inexperienced customer comes in, we need to make suggestions and point out products that are being featured.”In 2009 Cain observed in his Tea Retail blog that “for years Starbucks has been watching and waiting for the moment that tea offered a significant enough opportunity for profits to warrant the investment.”

“After seven years on the front lines and in the trenches opening and managing tea stores, I'm thrilled to have the opportunity to apply the resources and expertise of a world class organization to the passion and vision I have for introducing the consumer to a better tea experience,” says Cain. 

Prize acquisition

Starbucks acquired Tazo Tea Company for $8.1 million in early 1999. The Portland, Ore. brand, already available in 5,000 locations, quickly replaced Starbucks own Infusia in-house tea. Tazo, which employs 50, now generates approximately $1.3 billion in sales.

Tazo's expected expansion into retail is part of a larger initiative. Tea has played an increasingly important role as one of the company's billion dollar brands. Starbucks moved Tazo away from CTC blends (cut, tear curl) to pyramid bags. Loose leaf tea was tested in Starbucks 15th Ave. Coffee & Tea concept store beginning in 2009. The store serves a large selection of blends including Jasmine Pearl and favorites such as Ti Kwan Yin, Dragonwell, Silver Needle and even Pu-erh. The indie-concept store was changed to a conventional Starbucks early this year but a similar concept at Roy Street which also features Tazo tea remains “a learning environment” according to the company.

“Our company performance over the past two years has positioned Starbucks for the significant international opportunities ahead,” says Howard Schultz, chairman, president and chief executive officer.

In July Starbucks restructured its corporate operations into three regions to “accelerate its growth strategy.” The changes were finalized Oct. 1. Notable is the decision to name Young-Scrivner President of Tazo operations.

“We are successfully executing our multi-brand, multi-channel strategy and we believe the leadership and organizational moves announced today (July 11) will optimize our speed and focus going forward,” Schultz announced at the time. 

 The Retail Race

Atlanta-based Teavana, a 191-store retail chain rapidly expanding to 500 locations, will compete with Tazo in many of its mall stores. Mallseeker.com lists 301 Starbucks locations in the 50 states with 48 located in California malls, 38 in Florida malls and 11 in Georgia malls. Starbucks operates 100 stores in Atlanta alone. Teavana operates in 37 states with plans to expand rapidly following a favorably-received initial public offering in July. The company has also announced overseas licensing agreements to place stores throughout the Middle East. Net sales were up 36 percent in the last quarter and net income up 74 percent to $4.4 million. The firm estimates revenue of $164 million in FY2011.

Shares of Teavana Holdings, Inc. fell to a 52-week low of $18.29 Oct. 11 but have since recovered and recently traded in the low $20s. The high was $29.35 per share which was set shortly after the July 28 IPO and has not been exceeded. At $25 per share it briefly enjoyed a market capitalization greater than the much larger and better-known Peet's Coffee and Tea.

There are 1,300 malls in North America but expansion is limited. Since 2006 only one enclosed mall has opened in the United States and only two in Canada since 1992. Closures are documented at www.deadmalls.com. The rate of decline is increasing. General Growth Properties, the second largest mall developer in the country with 169 regional malls in 43 states and $3.5 billion in revenue declared bankruptcy in 2009. GGP restructured and emerged from bankruptcy last year after shedding 30 malls. Starbucks will likely be able to strike attractive deals in mall locations but unlike coffee shops, when two or more specialty tea outlets open in the same mall both report diminish sales.

Argo Tea with 20 locations in Chicago and stores in New York City and St. Louis, is the tea-centric chain that most closely resembles Starbucks. Urban locations make lattes and other steamed-milk variations with an all-natural tea concentrate. These shops also serve premium coffee.

North of the border Starbucks also has a strong mall presence but coffee retailer Tim Hortons is far and away the largest coffee & tea retailer with 3,014 outlets and sales of $4.9 billion. Starbucks operates 1,052 stores in Canada. Fast-growing DavidsTea, founded in 2008, is the largest specialty tea retailer in the country with 52 locations. Concord, Ont.-based Teaopia has constructed a mix of mall and stand-alone cafes. Currently there are 40 in operation with plans to construct five more shops in 2011, 10 to 20 in 2012 and expand internationally beginning in 2013.

“For the past year or so, tea has been the hottest thing in coffee. With stellar market growth projected for tea and a slowing of coffee, SBX has the management, tools, and experience to build a highly profitable and successful tea retail chain,” says Jage.

Tazo is not Lipton

While it rests on the same shelf in grocery stores as Lipton and Tetley, Tazo has a specialty tea pedigree. Blenders use only single-estate teas rather than teas blended at origin. Tazo’s founders marketed to brokers who warehouse the tea and sold to Natural Foods stores where distinctive teas are big sellers thanks to a health-conscious clientele. Tazo was an early member of the Ethical Tea Partnership (ETP), a non-commercial alliance of tea companies founded in 1997 to improve the social and environmental conditions of producers and raise the quality of the world’s tea.

The company routinely introduces innovative blends in their premium tea. For example, every blender lists an Earl Grey but Tazo sources their product from established gardens in Nilgiri, Assam and Ceylon. The company’s blends include expensive Darjeeling teas and sophisticated herbals. They rely on a high-pressure liquid CO2 process for decaffeinating both green and black tea to avoid introducing solvents.

Keith Hutjens has been Tazo’s director of tea for the past eight years. He cites three reasons for Tazo’s success. “I think what puts Tazo in this category is firstly, our creative blends. For example, our mint blend is not just peppermint, but has peppermint, spearmint and also a little bit of tarragon,” says Hutjens. “If you look at the wide range of our blends, they are creative.”

“It’s also how we buy,” he told organizers of the Hong Kong International Tea Fair in August. “We are always looking at quality and travel to origin. Third is our formulation, everything varies a little bit, but you keep it familiar and keep the quality there.”

Tazo is building a strong team. Catherine Cheung is Director of Global Beverage at Tazo. Cheung, a seasoned strategist who joined Tazo last September, has been with Starbucks since 2005 and is a former Dunn & Bradstreet and Mercer analyst and Wharton economics graduate. Tazo employs several buyers and formulators including Chris Palmer, a Tazo purchasing specialist since 2007 who worked at Tetley Tea as a blending specialist and was product development and quality assurance manager for Neighbors Coffee & Tea. Palmer travels extensively, evaluating hundreds of teas (thousands of sips) annually and purchasing in quantity to lower costs.

Single-serve segment

Tazo brands include ready-to-drink and juiced tea and tea lattes, iced tea pouches, packaged tea, loose leaf tins and single-serve tea as well as the familiar envelope and filterbag found in foodservice locations and coffee shops.

In March Starbucks signed a deal with Green Mountain Coffee Roasters to supply Starbucks coffee and Tazo tea in the firm’s patented K-Cup®.

The agreement was primarily to guarantee Starbucks didn’t miss out on the extraordinary growth of the $2 billion single-serve coffee market, but Tazo also benefits as its branded K-Cup® will further find its way onto grocery and big-box retailers. Starbucks outlets began selling K-Cups this fall and will offer K-Cups online in 2012.

Tazo will sell its Awake and Zen teas in 10-count and 16-count packs beginning in November and in Canadian grocery stores by March.

The majority of tea and coffee is still prepared at home and Starbucks research found that more than 80 percent of current Starbucks customers in the U.S. do not yet own a single-cup brewer.

Brewers with Keurig Brewed® technology were the top five selling coffeemakers in the U.S. on a dollar basis for the period of October through December 2010 and represented an estimated 49 percent of total coffeemaker dollar sales for that period according to The NPD Group.