Can Teavana Drive Revenue Growth For Starbucks In China?

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In its recent shareholder’s meeting,  Starbucks Corporation (NASDAQ:SBUX)  announced that it plans to launch is Teavana brand across EMEA and China/Asia Pacific by the end of this fiscal year. (Fiscal years with September.)  The brand has grown successfully in the U.S. and Canada and recently generated growth of 17% in its tea segment over the prior year. Building on this success, Starbucks is now planning to expand Teavana into other regions. According to the company, tea is the second most consumed beverage in the world, next to water, with a global market size of nearly  $125 billion. Recently, Starbucks streamlined the management of its Teavana division as a part of a plan to increase its tea sales to $3 billion over the next five years. While tea could be a growth opportunity for Starbucks, driving revenues for this segment in China can prove to be challenging for the company as it tries to establish itself in the traditional tea-drinking nation.

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Establishing Teavana  In The World’s Largest Tea Market Could Be Challenging

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While Starbucks plans to bring Teavana to China by September this year, establishing this brand in the largest tea drinking nation in the world could be challenging for the company. According to  Euromonitor, the size of China’s retail tea market was nearly $10 billion in 2014, the largest in the world and far ahead second-positioned Russia. (See below.)

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Starbucks believes that Teavana is complementary to its coffee business and the company plans to grow this segment as a premium brand similar to its coffee franchise. However, with aggressive growth plans in China, whether the company will be able to retain its “premium” status remains to be seen. Starbucks plans to increase its store count in China to 3,400 by 2019 from 2,000 stores currently. With this expansion, as Starbucks becomes visible everywhere in urban China, there could be a threat to its premium status.  Tea is a traditional drink in China and the country has a highly localized and well-informed tea culture, making it difficult for international players to penetrate this market.  According to a EuroMonitor report of 2014, several complex factors drive tea purchase in China. Tea specialists where tea (both packaged and unpackaged) and tea paraphernalia are sold accounted for nearly one third of the tea volume in the country in 2013.  Most of China’s top domestic brands operate their own tea shops including Da Yi Tea Group , the largest player in Pu’erh tea. Tenfu group, the fifth largest overall tea player in China operates over 1,300 tea shops across 31 provinces.  With strong preference for domestic flavours and intense competition from local players , Starbucks could find it difficult to carve a niche for itself in China’s retail tea market. However the company is banking on the success of its brand in the region for the expansion of Teavana.  We believe it will be challenging for Starbucks to gain a significant share in China’s tea market. But the region presents a huge growth opportunity for the company if it succeeds in establishing itself as a premium tea brand.

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