At exactly 2:51 p.m. on November 14, Starbucks (Nasdaq:SBUX) announced it was buying Teavana (NYSE:TEA) for $620 million in cash. The acquisition is its biggest to date putting it squarely in the driver's seat when it comes to tea. Paying a 53% premium to Teavana's November 13 closing price, many will see this as another move by an organization desperate for growth. I don't. I see this as an opportunity for Teavana to take its growth to the next level and only Starbucks has the customer experience, knowhow and global infrastructure to make it happen.
Bravo, Howard Schultz! Your company continues to amaze.
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I've watched Starbucks as it's become this global iconic brand that with the exception of two disappointing fiscal years in 2008 and 2009 - Howard Schultz was forced back into the CEO's chair - it has performed almost flawlessly. Its success has brought many detractors. This acquisition will undoubtedly draw criticism as a needless, not to mention expensive, distraction from the many things it already has on its plate. Fair enough I suppose, but ultimately opportunities to capture an entire segment of a market or at least a good chunk of one that doesn't come along every day. Teavana is to tea what Starbucks is to coffee.
Are you familiar with Tazo tea? It's the small tea company Starbucks bought way back in 1999 for $8.1 million and has turned into a $1.4 billion brand. Whether you're at one of its coffee shops or in the grocery store aisles, Tazo is available for sale. Starbucks said in the summer it was planning to open a Tazo tea store in Seattle as part of its move to capture the tea market, but clearly the Teavana deal ends any further discussion. In its press release the company states:
"Starbucks investment in Teavana is matched by its commitment to continue to grow the Tazo business - giving Starbucks a two-tiered market position for tea. Starbucks plan is to define a new elevated platform of tea experience and education, and for both the Teavana and Tazo brands to grow and complement one another while at the same time elevating the entire category through a combination of expertise and assets."
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Tazo becomes its second-tier-brand positioning itself between Teavana and lower priced brands like Dunkin Donuts and Tim Hortons (NYSE:THI). Having Teavana in the fold enables it to go into countries like India and China where tea is extremely popular, and cater to the local taste preferences. In my opinion, this reduces the risk involved with further global expansion.
It Makes Sense
Reading some of the post-acquisition analysis, I've come to the conclusion that this deal makes all the sense in the world. Teavana went public July 28, 2011, at $17 per share. It gained 64% on its first day of trading. Since then it's lost all of those gains and then some, closing November 13 at $10.13. Teavana has opened 38 stores in the first two quarters of the year with a total of 60 planned for fiscal 2012. In addition, it acquired another 46 in Canada by buying the Teaopia chain in June for $27 million. It's growing so fast its management doesn't appear to be able to keep up.
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In its November 6 announcement of its 300th company-owned store opening, Teavana said, "...it's successfully completed the conversion and re-branding of all 46 Canadian Teaopia stores." That's not exactly true. I live less than two blocks from its Bayview store in Toronto and the sign outside still says, "Teaopia." Obviously the left hand doesn't know what the right hand is doing. In terms of customer service, if you go to Steepster.com, a website for tea fanatics, you'll see that Teavana gets a lot of poor reviews for both customer service and up-selling issues. Conversely, I've been in hundreds of Starbucks stores and I can honestly say I've never had a bad encounter with any of its employees. That's why I go back. It's clear that Teavana needs help with many aspects of its business - customer service being priority number one.
The Bottom Line
From where I sit Teavana was headed for a severe breakdown. David's Tea, it's privately owned Canadian competition must have relished doing business against a company that doesn't seem to have its act together. With Starbucks entering the scene it won't have it nearly as easy. I'm not suggesting it will roll over and admit defeat, but it no longer has carte blanche when it comes to the customer service experience.
If you bought at the IPO price of $17, I feel your pain. Starbucks didn't set the price, however; Teavana and its investment bankers did. If Teavana's management didn't make this deal its stock would have continued into single digits. On the other hand, Starbucks shareholders can expect management to turn Teavana, a business rough around the edges, into a gem of a company and that's a good thing.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.