Starbucks With Teavana Moves Schultz Beyond Coffee Roots

Starbucks to Buy Teavana for $620 Million to Add Tea Brands
Tables at the Starbucks Corp. store inside the Fair Oaks Mall in Fairfax, Virginia. Starbucks, which dropped the word “coffee” from its logo last year, has in the past 13 months bought Evolution Fresh Inc. Photographer: Andrew Harrer/Bloomberg

French pastries? Check. Cold-bottled juice? Check. Globally recognized tea? Coming soon.

Yesterday, Starbucks Corp. announced an agreement to buy Teavana Holdings Inc. for about $620 million. Teavana, the company’s biggest acquisition, is another building block in Chief Executive Officer Howard Schultz’s plan to take Starbucks well beyond its coffee roots and namesake shops. Since returning as CEO in 2008, Schultz has revived the company and is making moves to sustain revenue growth with instant coffee, energy drinks, juice, a single-serve brewer and food to sell in its shops and in grocery stores.

Starbucks, which dropped the word “coffee” from its logo last year, already owns the Tazo tea brand and last year bought Evolution Fresh Inc. for $30 million and Bay Bread LLC this year for $100 million. The company is also expanding its retail presence in the U.S. beyond Starbucks cafes with a Tazo shop and a new, smaller design for its Seattle’s Best Coffee locations, which it plans to take nationwide.

“We have to be as good, as relevant, as forward thinking, as innovative on the things that we present to our customers,” Schultz said in an interview last month in Houston. “Our core business as a retailer is not going to be defined solely by the experience that we create in our stores.”

Teavana investors will receive $15.50 a share in cash, Seattle-based Starbucks and Atlanta-based Teavana said in a statement. The takeover is expected to close by the end of the year and will add about 1 cent to earnings per share in Starbucks’s fiscal 2013, the companies said.

Prime Storefronts

“This Teavana store concept is going to give them immediate access to prime storefonts and the ability to cater to that whole new consumer base,” said Jason Moser, an Alexandria, Virginia-based analyst at the Motley Fool. “They’re going to take this and make it their own.”

“There’s no questions as to the popularity of tea as a beverage,” Moser said.

Teavana, founded in 1997 by Chairman and CEO Andrew Mack and his wife, Nancy, sells more than 100 varieties of loose-leaf teas. It has 2-ounce quantities of Jasmine Oolong tea for $12.50 and Golden Monkey black tea for $18.50 for sale on its website.

Since its initial public offering last year, in which it sold shares for $17 each, Teavana had dropped 40 percent through Nov. 13. Revenue climbed 35 percent to $168.1 million in the year ended Jan. 29, according to a company filing.

The shares jumped 53 percent to $15.45 in New York yesterday. Starbucks fell 2.9 percent to $48.84.

Brand Recognition

The “immediate opportunity” is to sell Teavana products in Starbucks stores, Peter Saleh, an analyst at Telsey Advisory Group in New York, said in an interview. “Maybe Teavana has a better brand recognition” than Tazo, he said.

Teavana has about 300 stores in the U.S., Canada and Mexico, and recently opened a location in Kuwait. Starbucks plans to accelerate the chain’s international openings and also sell Teavana in grocery stores, Starbucks Chief Financial Officer Troy Alstead, said in an interview.

“Tea has been part of our core from the beginning,” Alstead said. “It’s the second-most consumed beverage in the world, second only to water. We should be leading in tea.”

Tazo Tea, which Starbucks bought in 1999, and Teavana are “complementary brands” and the company hasn’t yet decided if they will sell both in Starbucks cafes, he said. Tazo sales are about $1.4 billion a year, he said.

This year, Teavana traded as high as 24.7 times its earnings before interest, taxes, depreciation and amortization, data compiled by Bloomberg show. The Ebitda multiple had declined to 11.2 by Nov. 13, the day before the deal was announced. The Starbucks purchase valued the company at about 17.5 times its Ebitda in the last 12 months, the data show.

Asia Ambitions

Starbucks, along with other chains including Yum! Brands Inc., has pointed to China and India as some of its top markets for growth -- both nations have a growing middle class where tea is consumed more than coffee. The coffee brewer, which formed a joint venture with Tata Global Beverages Ltd., opened its first cafes in Mumbai in October and plans to open another in New Delhi early next year.

In China, people will consume about 16 times more tea than coffee in 2012, and in India, they’ll drink about seven times more, according to data from Euromonitor International. Chinese consumers will drink 11 percent more tea this year than last year, while sipping 8.5 percent more coffee, the data show.

While Schultz has said Starbucks plans to add 1,000 U.S. stores in the next five years, there are about 440 fewer domestic Starbucks stores compared with four years ago and the company is closing stores in the U.K. There are more than 18,000 Starbucks locations worldwide.

In the U.S., “you’re not in the upswing in terms of unit growth -- you’re on the downswing,” Saleh, of Telsey Advisory Group, said. “To get more growth, you’re going to need to do more acquisitions.”


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