The past 12 months have been paramount for the retail expansion for tea. With dramatic changes in consumer demands, increased focus on health & wellness, and the percolating psychological need for people to unplug in exchange for human interaction, I forecast that there will be nearly 8,000 tea-specific retail outlets in the U.S. by 2018; moreover, an estimated 40,000 traditional coffee retailers will generate more than 30% of their beverage sales from tea. This expansion will drive double-digit sales growth (high teens – low twenties) for specialty, premium, and canned/bottled (RTD) tea sales for the next decade. The Starting Line According to the Tea Association of the USA, there were “more than 4,000 specialty tea rooms and retail shops in big cities and small towns across America” in 2013 (www.teausa.com). However, with a lack of supporting data for their estimate, and as our company has one of the most extensive databases of tea businesses, I estimate the true number is around 2,500. When we launched the first-ever tea trade show in 2003, there was an estimated 1,000 tea-specific retailers in the U.S. That number grew steadily over the next 6 years peaking at an estimated 4,000 retailers. In 2009 & 2010, we saw a significant contraction with a large number of small tea retail businesses closing their doors from the Great Recession. In the past 2 years, we have seen a strong surge on our World Tea Expo attendance for first-time attendees and increased enrollment in our Tea Business Boot Camp held at the expo. In the past 12 months, we had over 23,000 new visits to World Tea News and continue to set record numbers of page views. Collectively, the numbers are indicators that show increased interest, awareness, and investment in tea on the B2B level. While you were sleeping….aka Sleepless in Seattle? In case you are not in the tea business or have been sleeping on your laptop here is a recap of the literal big fish (mermaid) in the pond. In May of 2011, Teavana files for a $100-million IPO filing for their 161-store retail chain for expansion. In July, their stock hit the street and they raised $120 million (store count now at 180). In April of 2012 (store count at 223), they use the extra $20-million of raised capital to buy similar biz model Teaopia in Canada and overnight add another 46 stores. In November 2012, Starbuck’s (SBX) acquired the 300-location Teavana brand for $640 million. Teavana CEO Andy Mack hit the tea lottery. Teavana’s target was on high-traffic shopping center locations with their revenue focus on dry tea and retail accoutrements. Their required SEC S-1 filing revealed breathtaking revenues and profits with stores averaging near $1,000 per square foot and massive gross margins driven by an uber-aggressive sales staff. I did not believe they had a long-term sustainable business platform as they had a churn-and-burn mentality with their customers, very contrarian to the brand loyalty Starbucks’ fosters, but with very little competition and a generally uniformed consumer base, this certainly was a successful plan from a financial perspective. (Consequently, I have seen many independent tea-retailers thrive in the shadows of Teavana locations for this very reason.) Also key to Teavana’s success and valuation was they literally locked up every major mall in the U.S. and Canada. In October 2013, Starbucks’ launched its first stand-alone Teavana lounge concept with more focus on wet tea sales mixed with retail, and announced plans to open 1,000 locations in the U.S. in the next 5 years. SBX currently owns and operates approximately 13,000 coffee retail locations in the U.S. This is slightly less than half of the total estimated coffee shops in the U.S, or roughly 40%. It is arguable that SBX’s success has facilitated a retail growth factor of 2.5X by creating increased awareness and demand. It is then plausible that SBX will have the same effect for tea retail. With increasing consumer knowledge and shifts in demand, tea sales are skyrocketing. Domestic tea sales at restaurants, grocery stores and shops reached $15.7 billion last year, up nearly 32% from 2007, according to consumer goods research firm Packaged Facts. In the next two years, the market is expected to expand to $18 billion. I believe that SBX will open double the number of stores it projected, closer to 2,000, in the next 5 years. The profitability of these locations will be highly seductive to the executives at the big fish. This will be a combination of new store locations and conversion of some Starbucks’ locations in areas they are over-concentrated (in some cases they have locations across the street from themselves). And with an expected multiplier of 2.5X, this will result in 5,000 new locations between now and 2018. This multiplier will be facilitated by a combination of significant chains such as DAVIDsTEA, Argo, and the Tea & Spice Merchant along with new up-and-comers like Capital Teas who just received a $5-million infusion to double up their store locations in the greater-DC area, and a drove of new tea-prenuers launching independent locations. Pick your favorite child I like flying Southwest Airlines because their flight attendants have a sense of humor. On one recent flight they said that if the air masks drop from the ceiling, put yours on first, then choose which kid you think has the best chance, and put theirs on next. There are two things that are still keeping me on the edge of my seat from the SBX acquisition. First, what will they do with their estimated $1.4 billion Tazo brand? Bought from iconic tea brand-birther Steve Smith in 1999 for a few million, this brand is now the largest specialty tea brand in North America. They roughly make half of their sales volume through their Starbucks’ locations and the other half through the grocery channel. It is not unheard of for a CPG company to have two competing brands in the market simultaneously. It ties up shelf space and keeps out the competition in the grocery channel. Alternatively, they could phase out the Tazo label and phase in the Teavana brand. There would be no challenge to this in their own stores, but would require the buy-in from the category buyers, and take time and money, while other brands smell the opportunity to bloody the waters. SBX will prevail and never, I mean never, bet against Howard Schultz. The other question is when will SBX close down the supply chain from Teavana and absorb it into their business? In Teavana’s early years, they sourced a significant amount of their product from U.S.-based wholesaler Specialteas. Teavana then bought Specialteas so it could work directly with their supplier or suppliers. There is clear redundancy here and inefficiency. And with the massive size of SBX, I would expect they would have the better processes and systems to eliminate the supply chain for Teavana. The only hold-back may be if there are proprietary blends but even these are more easily reverse engineered than a washer and dryer. Come to the Dark Side…I am your father But the biggest push in sales growth for tea will come from our dark-cupped cousin coffee. First, there are a far greater number of coffee retailers already in business. They understand the business model and they are more willing to meet changing consumer demands and expand their offerings without losing their identity than the purist tea retail concept. Their biggest challenge will be in the education of their staff and ultimately their customers. Over the past 5 years and in private conversations, many of the major coffee chains and independent coffee retailers have seen tea move from low single digit percentages of total sales to high teens. Tea will be the proverbial 4th wave for the coffee industry. Both Peet’s Coffee & Tea and The Coffee Bean & Tea Leaf continue with aggressive expansion. Peet’s (recently acquired and with an infusion of fresh capital) announced in March 2014 plans to open 23 stores in the DC area in the next 6 months to a year. Based on an estimated 25,000 coffee retailers in the U.S. and average store sales of $500,000, each percentage shift from coffee to tea would translate into $125 million in increased tea sales volume. In 2012, I moderated a panel at World Tea Expo with the VP of Starbucks Tea Retail, The President of Argo Tea (and former PepsiCo exec), the head tea buyer for The Coffee Bean and Tea Leaf, and a seasoned independent coffee retailer from the Midwest. The focus of the panel was whether tea would ever eclipse tea in the U.S. I make no pretenses that I wasn’t leading the witnesses, but the conclusion was that yes, tea sales would surpass coffee in the U.S. by 2017 - not by store locations or total volume, but in retail sales volume. Release the Kraken Tea is only beginning to be leveraged in the marketplace with a lot of Blue Ocean opportunities. Quick-serve to high end restaurants are starting to recognize the increased margin and ticket from premium tea. They will continue to move away from high volume commercial brands and serving the customer an unfinished product with a cup of hot water. In the better years of the coffee boom, everyone was getting in on the action and coffee carts, kiosks, and drive-throughs sprouted on every available commercially zoned piece of real estate. I have yet to see a boon of tea carts or Chai Wallas in the malls (likely because of Teavana locations) but there are other emerging business models such as a handful of direct home selling tea businesses’ who are building momentum and getting capital infusions. Grocery went through a large expansion of shelf space dedicated to tea, but I am seeing this beginning to contract. According to Packaged Facts, specialty tea brand lines that increased in absolute dollar sales by $5 million or more in 2013, include Celestial Seasonings, GTS Kombucha Synergy refrigerated teas, several Keurig co-branded tea pods for single-cup brew machines, Milos Famous refrigerated teas, Twinings of London, Tazo, and Yogi. While contracting in size, there is still a lot of space dedicated to packaged tea in the main stream grocers’ aisles. RTD Tea is one of the fastest growing segments of the canned/bottled drink business. According to Euromonitor International, USD$ 47.7 billion of RTD Tea was sold globally in 2013 and over USD$ 5 billion of that amount was sold in the USA in 2013. RTD Tea is projected to grow 38.3% for a market total of USD$ 65.9 billion globally in 2014. Single-serve tea has been revitalized through the Keurig machine, and innovation in tea bagging machines. According to Mintel, 70% of non-RTD teas in the US are sold in bags, and about 10% in the last two years have been in pod format. While this segment remains dominant, it is rapidly moving from high-volume commercial product to origin-specific and high-quality specialty tea blends. We are in a golden age of expansion for the specialty tea industry. Tea remains the most-consumed beverage globally second only to water, but lags at 7th in the U.S. The opportunity for growth is strong and the returns are significant making this an attractive industry to capitalists and entrepreneurs. Market makers like SBX are making bold moves and significant innovations are being made by companies like BKON. The stars are all aligned. The fruit is ripe. The future is tea.