Starbucks studies the tea leaves
Starbucks wants to make the tea shop as ubiquitous as its namesake cafes.
The Seattle-based company said Wednesday that it will pay US$620 million ($765 million) in cash to buy Teavana Holdings, which sells high-end loose leaf teas in 300 shopping mall locations. The plan is to expand Teavana's footprint beyond the mall with stand-alone shops, adding tea bars with specialty drinks.
In an interview, CEO Howard Schultz noted that Starbucks cafes only sold coffee by the pound in 1987, with the offerings of specialty drinks evolving over time. Schultz said the company would use that experience to transform Teavana over time as well.
Starbucks already owns the Tazo tea brand, which it purchased in 1999. And the company announced plans earlier this year to open its first Tazo tea shop where customers can buy specialty drinks and blend loose leaf teas with the help of employees - not unlike the shops it's now envisioning for Teavana.
Schultz said on Thursday that the Tazo shop will serve as a "learning laboratory" for its development of Teavana stores. He said that the brands give the company a two-tiered approach to the fast-growing tea category, since Teavana is a premium loose leaf tea while Tazo is a bagged tea product sold in supermarkets
Schultz said Teavana will also move into the consumer packaged goods category, meaning it will also be sold in supermarkets.
Brian Sozzi, chief equities analyst for NBG Productions, said the deal gives Starbucks a "high/low" positioning in a fragmented tea market, similar to the company's two-pronged approach in the coffee market with its Starbucks and Seattle's Best cafes.
The deal also marks Starbucks latest push to expand beyond its ubiquitous cafes, with the company facing intensifying competition from fast-food chains offering specialty coffees. This summer, Starbucks also bought small bakery chain La Boulange for US$100m, after its purchase last year of fresh juice maker Evolution for US$30m.
While the Starbucks cafes may serve as a blueprint for Teavana's growth, Schultz noted that coffee and tea have distinct cultures and that Teavana stores won't feel like the Starbucks cafes people are so familiar with.
Starbucks cafes, for example, are defined by their rush hour bustle in the mornings. Tea shops have a more serene, cerebral feel. When walking into a Teavana store, Schultz said people feel as if they've "stepped into a shrine to tea".
Teavana shareholders will get US$15.50 per share cash in the Starbucks deal, which is expected to close by the end of the year. Starbucks says it will add a penny per share to its 2013 earnings. Analyst Sozzi noted that the deal is an "opportunistic purchase" for Starbucks, since Teavana had its initial public offering last year with shares priced at US$17.