Tea Is Hot, from Trendy Teahouses to Starbucks

Not since it was a British colony has America been so fixated on tea. Fifteen years ago there were a mere 200 tearooms in the U.S. Today there are nearly 3,000, according to the New York-based Tea Association of the USA. The tea shop craze arguably started in 2003 with the opening of Argo Tea's tearoom in Chicago's yuppie Lincoln Park neighborhood. "A lot of people thought it was insanity," says Chief Executive Officer Arsen Avakian, who saw a gap in the market after realizing that Americans knew only "the crappy tea bag." Avakian dreamed of creating a tea experience with cafés offering modern twists on traditional brews. "Apple (AAPL) completely revolutionized the computer business," he says. "We're hoping to do that with tea!"

So far it's working. Argo now has 19 stores from New York to St. Louis, and tea drinks make up 80 percent of its roughly $15 million in annual sales, Avakian says. A zero-calorie medium Argo tea costs $2.55, but a sugary signature drink that would have made the Queen Mother cringe runs about $4. These beverages have fancy names such as Earl Grey Vanilla Crème and Tea Sangria. Argo also has tried to capitalize on what Tea Association President Joseph P. Simrany calls the "allure of the exotic nature of tea" by creating a line of tea-infused foods such as chai curry chicken quinoa. It plans to have 30 shops by yearend.

The tea trend may be perfectly timed. Coffee consumption in the U.S. dipped 2.3 percent from 2006 through 2009, and tea drinking has climbed 4.5 percent, to 117 eight-ounce servings per capita in 2009, according to Beverage Digest. "It's been a long time coming, but it's getting bigger and bigger, like a snowball," says Michael Harney, vice-president of Harney & Sons Master Tea Blenders in Millerton, N.Y. In November, Harney & Sons opened a tasting room in Manhattan's SoHo, replete with apothecary-like cabinets and a polished walnut bar.

Starbucks (SBUX) has taken notice. Tazo tea has become "a billion-dollar brand" for the brewer, said Jeff Hansberry, the company's president for global consumer products, during a Dec. 1 investor call. Starbucks also recently dropped the word "coffee" from its logo. "Could that be a signal that they want Starbucks to represent more than just coffee?" wonders UBS (UBS) analyst David Palmer. One thing is certain: Starbucks won't be serving caramel Teappuccinos. Argo's got the name trademarked.

Supersize Tea

How one of Argo's tea drinks stacks up against a Starbucks calorie bomb

Red Velvet: South African rooibos (red) tea is coupled with white chocolate and raspberry flavor. 352 calories

Starbucks' Eggnog Latte: Espresso is blended with steamed eggnog and milk and topped with a sprinkle of nutmeg. 470 calories

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