This originally appeared in Sparksheet.
Tea is gaining grounds in North America’s coffee culture and David’s Tea is looking to expand and modernize the millennia-old industry. Jeff Swystun examines the standing power of this bold brand as it steps onto the stock exchange and transitions from niche to mass market.
The bold sign, in cheerful teal and green, draws your attention. Curious, you peak inside and are greeted by a clean, bright environment and pleasing aromas. The aisles and displays resemble a cosmetic store. The goods are presented as precious keepsakes; the packaging suggests there is an item among them uniquely for you. A fresh-faced staffer attentively waits to answer any questions.
Welcome to the new world of tea.
David’s Tea was founded in 2008. A newcomer to the centuries old tea business, but one confident that it could make the product relevant to the modern consumer. The opportunity is great, but the company also faces significant challenges. It must convert coffee drinkers, have smart distribution, and battle a competitor with deep pockets while keeping investors happy.
Tea has been a beverage of choice for centuries, since its origins as a medicinal elixir in Shang Dynasty China. The British famously popularized tea production for the western drinker and through trade took it global. The East Indian Tea Company was so successful it became a synonym for “monopoly”.
Tom Standage, author of The World in a Glass: Six Drinks That Changed History, writes, “Englishmen around the world could drink tea, whether they were a colonial administrator in India or a London businessman. The sun never set on the British Empire—which meant that it was always teatime somewhere.”
Fast forward to the 21st century and the casual beverage market is crowded and confusing. Soft drinks, energy drinks, and variations on bottled water crowd shelves. Then, of course, there is coffee. The apparent dominance of coffee has been underway for hundreds of years. It began when coffee fueled commerce and created strong links to the rituals of business that remain in place today. Lloyds of London and the London Stock Exchange were both originally coffeehouses.
However, after water, tea is the most popular drink on earth. It is a $45-billion market worldwide. Yet, it has only recently gained a foothold in North America, where it is set to explode, especially in the United States. According to The Tea Association of The USA, the market has grown from less than $2 billion in 1990 to an estimated $10 billion in 2014. Eighty-five percent of US tea consumption is iced tea, but hot tea sales have increased 17% over the last 5 years. According to the The Tea Association, this growth is forecasted to continue.
Montreal-based David’s Tea offers a wide range of loose-leaf teas, pre-packaged teas, tea sachets, and a host of tea accessories. Their website currently offers organic, fair trade, kosher, detox, energizing, chai, chocolate, and cold fighting teas. They run the gamut from white, green, oolong, black, pu’erh, mate, rooibos to herbal. The tea does not come cheap. For example, Yogi Berry is priced at near $50 for 250 grams.
The accessories provide great margins and invite consumers to dive deeper into tea culture. Stores are stocked with mugs, teapots and tea makers, teacup sets, infusers and filters, kettles and frothers, tins and spoons, along with important replacement parts. A Crystal Clear kettle will set you back $100.
Located primarily in Canada and the United States, David’s Tea operates 161 retail locations as well as online sales. Even with aggressive expansion they have maintained an artisan’s approach. Since founding, they have introduced over 400 different teas and pride themselves on creative blends. Some of these concoctions from David’s Tea profess the same medicinal benefits claimed centuries ago.
Beyond the crowded beverage category, David’s Tea’s most visible competitor is now part of the Starbucks’ empire. The coffee giant intends to use its network to build up Teavana. Starbucks bought the chain in late 2012 for $616 million and, according to Fortune Magazine, plans to expand to 500 stores in 2015. Although, there are presently only 360 Teavana locations.
The goal is to make Teavana a $3-billion-a-year brand within five years. Starbucks will give Teavana more space in its thousands of stores overseas following the same strategy in US and Canadian Starbucks locations. They have indicated that they will shy away from investing in more Teavana standalone stores relying instead on the existing Starbucks’ footprint. It will be interesting to see if Teavana sales cannibalize those of Starbucks or result in net gains.
Where Starbucks intends to apply some attention is in a fresh brand-awareness campaign and an overhaul of Teavana packaging. This a direct response to the success of David’s Tea whose fresh brand is creating loyalty. Starbucks has had an eye on tea for some time. It bought Tazo tea for $8.1 million in 1999. That business now brings in more than $1 billion in annual sales of products such as tea bags and bottled tea. Starbucks is hedging against coffee saturation and will use its playbook and network to dominate the tea business.
David’s Tea went public, debuting on the NASDAQ on June 5, 2015. The share price started at $19 and closed at $27 per share. That success was quickly tempered when the company announced it lost $93.2 million in the first quarter. Leadership was quick to point out the cost of becoming a public company was a prime contributor to those results.
The good news is sales grew 29 percent to $35.8 million as comparable sales for stores open at least a year grew 6.3 percent, according to The Canadian Press (CP). David’s Tea opened 7 new stores in the first quarter. The chain now has 161 in North America. The company’s CEO, Sylvain Toutant told CP that his priority is further differentiating the offer. This means more interesting products, a greater focus on customer service, broader awareness of the brand and a plan to grow the chain to over 550 stores in North America. That is the number that David’s Tea believes will grant ubiquity but not saturation.
The in-store experience at David’s Tea is pleasing. Samples abound and, unlike Starbucks’ baristas who are hunkered down behind counters, David’s Tea employees circulate throughout the store. Further contrasting the coffee giant, David’s Tea does not provide seating. On the one hand, buying a tea is an an in-and-out shopping event. On the other, the experience is not tainted by loud people at the next table or by the clatter of keyboards from wannabe Hemingways.
David’s Tea has an ethos of knowledgeability but not arrogance, akin to yoga stores like Lululemon and Lole. These lifestyle brands resemble private clubs. They give the impression of exclusivity but invite everyone to join. David’s Tea attempts to communicate this with every interaction, evidenced by their large teal coloured shopping bags that emulate the finery of Tiffany & Co.
One area that the brand has focused on from the outset is loyalty. Many brands gear their marketing budgets to the one-time acquisition of a customer. Smart brands look to provide lifetime value. David’s Tea in-store experience and loyalty program are working in concert to keep people coming back.
Sipping to a Conclusion
The rising consumption of tea in the USA bodes well for David’s Tea. Even capturing a small part of the market will amount to enviable performance. That is why expansion and distribution will determine success.
Claims by retailers that they will grow by X-hundred stores are meant for the business press and investment community,but the David’s Tea brand seems niche enough that it may benefit most in the longterm by growing margin rather than square footage.
David’s Tea is coming online during a time when people are very comfortable with online purchasing and major brands are closing retail outlets. This year, according to the American Retail Federation, McDonalds has closed 700 stores globally and Starbucks is shutting down all 23 of its La Boulange locations. By all means, David’s Tea should dot the map with stores in smart markets but leave saturation to the digital world.
Co-branded locations can be helpful too. Starbucks benefited from the combination with bookstores. David’s Tea could find clever homes in yoga studios and stores.
Underlying the brand is an aversion to complacency. If you are a frequent visitor to the chain you will notice David’s Tea is constantly tinkering but in a way invisible to the occasional consumer. A marketer or brander will pick up on it though: Frontline training is improving, merchandising sees subtle tweaks, and they constantly experiment with new elixirs that keep tea fresh as an alternative to competing beverages.
David’s Tea might have been best as a niche business in scale but a lifestyle brand for loyalists that live, breathe and, of course, drink tea. However, going public has created pressure to grow the business, perhaps beyond the frontiers of its specialty brand.
The moment the bell was rung and David’s Tea appeared on the NASDAQ, it became a different game, a different race. The company openly declared it meant to be the biggest, and just I hope the brand is not sacrificed along the way.