Starbucks Looks to Own Tea Category

SEATTLE -- Starbucks Coffee Co. has inked an agreement to acquire Teavana in a move to tackle and transform the global tea industry. The all-cash transaction carries a $620-million price tag.

Teavana will operate as a wholly owned subsidiary of Starbucks once the deal closes, which is slated for the end of 2012.

The deal will leverage Starbucks' core competencies of real estate, design and store operations, and integrate them with Teavana's tea authority, global sourcing capabilities, merchandising and best-in-class retail store unit economics, according to Starbucks. The company plans to grow and expand Teavana's 300 mall-based stores as well as add a high-profile neighborhood store concept that will drive Teavana's domestic and global footprint.

"We believe the tea category is ripe for reinvention and rapid growth. The Teavana acquisition now positions us to disrupt and lead, just as we did with espresso starting three decades ago," said Howard Schultz, Starbucks chairman, president and CEO. "Teavana's world-class tea authority, coupled with the romance and theater of the retail experience that is the heart and soul of Starbucks heritage, will create a differentiated customer experience and business opportunity that delivers immediate value to shareholders. This complements our existing Tazo brand and gives us the unique opportunity to create a two-tiered market position."

In calendar 2013, Starbucks will integrate its assets -- including its leading position in social and digital media, its 10-million member global loyalty program, card and mobile payment platforms -- with the Teavana customer experience to expand Teavana's current mall-based store footprint with a comprehensive design strategy that will include new Teavana neighborhood locations in markets across North America and around the world. Teavana recently opened its first store in the Middle East in partnership with Starbucks' existing joint venture partner Alshaya, and has plans to enter new, high-consumption tea markets around the world in the years ahead, the company said.

"By contributing deep tea expertise, global sourcing capabilities and a passion for the category that is second to none in our industry, we believe we can deliver an elevated tea experience together with Starbucks," said Andrew Mack, CEO and co-founder of Teavana, who has committed to staying and leading Teavana's day-to-day operations. "After growing Teavana for 15 years, we are thrilled that Starbucks will be able to truly fulfill our mission of bringing premium tea to millions of people on a global platform. It is with great respect for what Howard and his team have built that we join the Starbucks family."

The acquisition is raising some eyebrows at Wells Fargo Securities. "We are intrigued by [Starbucks'] vision in building and expanding the Teavana brand and bringing its signature romance to the tea category. However, we question if [Starbucks] is over-extending its capabilities by acquiring Teavana, rather than forging a partnership or developing a new concept themselves," said Bonnie Herzog, managing director of beverage, tobacco and consumer research at Wells Fargo Securities LLC.

Herzog added that the Teavana deal marks the third acquisition for Starbucks this year -- with each one larger than the previous one. And at this time, the deal also raises more questions than provides answers, she said.

For example, will the Teavana brand be relevant in "neighborhood" locations and in the CPG channel and will a tea-only offering ever be enough of a draw for U.S. consumers? Also, will the price tag and Starbucks' investment into Teavana justify the eventual opportunity, she asked.