Starbucks Read the Tea Leaves Right on Teavana Acquistion


It's starting to become clear why Starbucks (SBUX) is making such a big push into the premium tea market.

Teavana Holdings (TEA) posted what may very well be its final quarterly report as a standalone public company on Monday. Starbucks agreed to buy Teavana in a $620 million deal last month.

The mall-based retailer of aromatic loose teas and upscale tea-brewing equipment saw its net sales soar 38 percent to $46 million. Compare that to the mere 11 percent top-line advance at Starbucks, and it's easy to see why the java giant is warming up to premium tea.

Starbucks Can Make It Better

The good news in Teavana's report ends there, though. Same-store sales were nearly flat. The retailer's growth is coming primarily from frenetic expansion and its recent acquisition of the 46-unit Teaopia chain. There are now 301 Teavana stores across the country, and the company posted a small loss for the quarter.

Starbucks is fine with that. The company that put premium coffee on the map sees a similar opportunity in tea leaves, and it has big plans to make the Teavana brand stronger. It plans to emphasize the brewing of warm tea beverages at the mall stores, as well as to grow Teavana beyond its current grip at ritzier suburban shopping malls with a more accessible neighborhood store concept.

The Time Is Coming

This isn't the first time that Starbucks has made an acquisition for a piece of the $40 billion global tea market. It shelled out a mere $8.1 million for the Tazo tea brand in 1999.

Now, Tazo teas are served in Tazo stores. However, apparently Starbucks either felt that Tazo wasn't enough or it didn't want Teavana around as a potential disruptor.

There's also another big reason for Starbucks to guzzle tea: China.

All the Tea in China

Earlier this month Starbucks revealed that China will be the company's largest market outside of the U.S. by 2014. Many of China's urbanites have taken to the company's coffee bean beverages, but the world's most populous nation remains largely a country of tea sippers.

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Tazo would seem to be enough, and the Starbucks menu at its Chinese units is heavy on tea drinks, but Tazo isn't a brand that customers associate with a great deal of variety. It's not like walking into a Teavana store where 100 different colorful canisters of exotic loose tea leaves greet guests.

Some skeptics argue that Starbucks is overpaying for Teavana, even though it will be taking it out for less than the chain's IPO last year at $17 a share. Starbucks has the breadth of distribution and the real estate savvy to make it work.

Relax, naysayers. Have a seat. Enjoy some tea.

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Rick Aristotle Munarriz has no positions in the stocks mentioned above. The Motley Fool owns shares of Starbucks and Teavana Holdings and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Starbucks.

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