Starbucks Brews The Right Recipe For Growth With Teavana Expansion

by Trefis Team
+10.56%
Upside
74.60
Market
82.48
Trefis
SBUX
Starbucks
Rate   |   votes   |   Share

Starbucks Corporation (NASDAQ:SBUX) recently opened its first Teavana tea bar in New York City. [1] Teavana is the tea-based company acquired by Starbucks for $620 million in 2012. The company plans to open as many as 1,000 Teavana stores in North America within the next decade.

Although the expansion will be slow, Teavana does provide the company with a new outlet for growth. There aren’t many big players in the tea category and given Starbucks’ history of running stores successfully, one can expect Teavana to become synonymous with tea over the next few years. This is part of Starbucks’ broader strategy to diversify its offerings in the relatively saturated American market while leveraging its brand to expand internationally.

We  have a $72 price estimate for Starbucks, which is about 10% below the market price

Teavana is being positioned as an upscale place and will be pricier than than Starbucks stores. In addition, the company needs to ensure that Teavana sales don’t end up cannibalizing the sales of its traditional Starbucks stores. Therefore, the company is marketing the tea bar as more of an afternoon place for tea lovers, the time of the day which generally sees less traffic at the Starbucks stores.

See our full analysis for Starbucks Corportion

Penetrating Into International Markets Will Take Time

Expanding Teavana to global markets could be a smart move since international markets such as China, India and Western Europe have traditionally been a strong tea drinking market. The global tea market is already more than $90 billion and a significant portion of that is the unorganized sectors in Asian countries. [2] As incomes continue to grow in the developing markets of Asia, more people will get comfortable with the idea of spending $3 or $4 on a cup of tea. However, to be successful in international markets, Teavana would need to first build a strong brand here in the U.S.

The U.S. has a strong cultural influence on the rest of the world. As a result, the brands that are popular in the U.S. are recognized globally. The fact that there are huge queues outside new Starbucks outlets in China or India is a testimony to the popularity enjoyed by the Western brands in these countries.

But only those Western brands tend to do well that enjoy a huge popularity back in their home. Till the time Teavana does not establish itself as a household name in the U.S., it is unlikely to create the same hype in international markets as Starbucks stores did. This can only be achieved gradually. In short, Teavana is more of a long-term project for Starbucks but one which could yield rich dividends.

Starbucks isn’t the only company which is using its scale and expertise to build new, independent entities. Chipotle Mexican Grill (NYSE:CMG) has plans to open more stores of its Asian cuisine venture, known as ShopHouse Kitchen. While running each business has its unique set of problems, the expertise developed over the years such as brand positioning, optimizing store sales, building supply chain etc can be definitely leveraged.

Understand how a company’s products impact its stock price at Trefis

Notes:
  1. A Tale of Two Cups: That Starbucks Sleeve Is Too Drab for Teavana, November 7, 2013, businessweek.com []
  2. Starbucks’s Teahouse Ambitions for Its Teavana Chain, October 31, 2013, bloomberg.com []
Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Be the first to comment!