Starbucks' Teavana Troubles

| About: Starbucks Corporation (SBUX)

Summary

Starbucks bought Teavana and found its original store concept limited.

Tea is not coffee. Tea takes time, attention to detail. And the ticket can be small.

Starbucks is taking Teavana to "tea land" to crack the profit code.

Success in the restaurant business is all about turning tables. It's about getting people in, getting them out, and getting the biggest ticket you can in the process.

This is why Starbucks (NASDAQ:SBUX) is having a problem with tea. It doesn't lend itself to speed.

Starbucks has bought two tea companies in its history - Tazo Tea and Teavana. With the first, it added a packaged goods product for stores and created an alternative beverage for its stores - drop a bag into cup, pour hot water over it, profit.

With the second, it has had more serious problems, although Teavana ran a successful chain of stores before its acquisition. Teavana stores sold the idea of tea as an experience by selling loose tea, tea sets, and tea accessories in malls, starting in Atlanta. Starbucks tried turning Teavana into a "tea bar," even getting Oprah Winfrey in as an endorser, but the plan failed. Starbucks also tried turning Teavana teas into Starbucks-like cold drinks. The jury is still out on that.

There is obviously demand for tea. SBUX said in January Teavana generated close to $1 billion last year in Starbucks' stores - about 5% of total revenue. The problem is that trade-off between money and time.

A proper tea requires proper service. It requires quiet. Most of all it requires time. Whether we're talking about an English tea time with scones and other sweets, or an oriental tea with its elaborate ceremony, there can be an immense effort spent creating a true tea experience, without a huge financial pay-off at the end of it.

That's why the original Teavana concept was to market the idea of a proper tea, but to sell high-priced loose teas, blends, and equipment. That delivered a high ticket justifying the expense of the space. But boosting profit beyond that is not easy.

Starbucks' latest idea is to take the existing Teavana concept on the road, to "tea-land," to places like India and China where they understand tea. The company's financial muscle can bring in the best tea, Indian and Chinese customers know good tea, so profit?

Maybe there are other ways to go. SBUX could combine Boulanger, the bakery whose stores it closed earlier, with Teavana and create a "tea time" day part in some Starbucks locations, a block from 3-6 PM, which are quiet times for coffee bars, when it might offer a "full English" set of tea in pots and snacks for a set price. Or it might set aside rentable rooms in some Starbucks locations for coffee-soaked meetings in the mornings, and true Japanese tea services in the afternoons and evenings.

I should add at this point that I am a regular tea drinker. A pot of loose tea, with some salty snack, delivers me a caffeine high without the caffeine jitters or caffeine crash I get from coffee. There are many millions of people like me, and many millions more who enjoy tea, greatly, in other ways and other settings.

There are many ways this can go, and many opportunities out there. But it's clear that, so far, Starbucks has yet to crack the tea code that leads to maximum profit. When it does, I think the size of the company could double within a few years. I hang in with my Starbucks investment because I believe that eventually it will.

Disclosure: I am/we are long SBUX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.