Step Aside Starbucks: Premium Tea Is the Next Hot Beverage Craze

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Remember when Starbucks (SBUX) was special? Long before there were baristas making lattes at every corner, premium coffee really was an exclusive sipping experience.

It's a different world these days. You can now get a pretty darn good cup of joe from doughnut shops, smoothie stands, and even drive-through burger joints. You also don't even have to leave home anymore. Green Mountain Coffee Roasters (GMCR) championed the Keurig platform, where you're only a K-cup refill and a push of a button away from a single cup of freshly brewed exotic java.

Wouldn't it be neat if there was a ground-floor opportunity for another hot beverage on the rise? What if there were a play in premium tea, paralleling where Starbucks was more than a decade ago?

Say hello to Teavana (TEA).

Tea in the Teavana for Two

If Teavana isn't a household name it's because the company just went public a month ago. There are only 179 locations, but they're coming along quickly. Teavana expects to open 50 new stores this fiscal year.

Teavana isn't a teahouse the way that Starbucks is a coffeehouse. Teavana is a mall retailer, selling the fancy tea-making equipment and stocking more than 100 varieties of loose-leaf teas.

Teavana isn't cheap, but it's clicking with well-to-do mall shoppers. Net sales climbed 36% to $31.3 million in its latest quarter, fueled by heady expansion and an 8.7% increase in comparable-store sales. Margins widened, with earnings soaring 78% higher.

We're still early in Teavana's growth cycle. The ritzy retailer added 18 new stores during its latest quarter, targeting 50 new openings for the entire fiscal year. It also just announced a development deal to get its stores going in the Middle East under a largely risk-free franchising program.

In short, there's still plenty of upside here.

Hot beverages Are Heating Up

Consumer appetite for warm drinks has never been hotter. Dunkin' Donuts parent Dunkin' Brands (DNKN) was a scorching IPO this summer, more on the strength of its popular brews than its Bavarian cream-filled treats. However, premium coffee is already everywhere. Stroll the supermarket aisle and you'll find dozens -- if not hundreds -- of premium blends available. An appreciation for more than just traditional or green tea is just starting to percolate.

Teavana isn't cheap. It trades for less than 60 times the $0.42 a share to $0.44 a share it's targeting to earn this year. Starbucks, on the other hand, only fetches 25 times this year's projected profitability.

Teavana also won't corner the market on premium teas. Starbucks has its Tazo line of teas. Green Mountain offers several flavors of tea that brew perfectly well in its single-cup coffee brewers. However, few will go out on the kind of limb that Teavana has in building its model entirely on the tea beverage.

I appreciate Starbucks, and I can see it at the very least keeping up with the market over the next few years. Teavana, on the other hand, is taking homerun-caliber swings -- and swigs -- in the on-deck circle.

I'll stick with Teavana.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters and Starbucks.


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19 Comments

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BajaBeachie

Mr. Munarriz's credibility went out the window with his comment that he can get a "pretty good cup of Joe" at the donut shop or burger joint. Obviously he lacks the knowledge to know of what he writes.

Enjoying my Saturday morning french-pressed cup of premium coffee.

September 03 2011 at 8:45 AM Report abuse rate up rate down Reply
Phil Hovatter

Teavana does a great job of marketing, but the product that they market is far from what I would call "premium" tea. If they can introduce a broader market to the concept of drinking better tea than you can get at the grocery store, more power to them. I just hope their customers don't stick with Teavana, but discover some of the real premium tea merchants that are available online.

September 03 2011 at 1:21 AM Report abuse rate up rate down Reply
palmejn

We are both tea and coffee drinkers. Starbucks has many varieties of coffee - no need to "suffer" if it is too strong for you. Their Tazo Tea is wonderful - no additives or fake flavors. Tried Teavana and it tasted like a mixture of oil and mud. AWFUL STUFF!!

September 03 2011 at 12:40 AM Report abuse +1 rate up rate down Reply
Master Tad

What's up with these people, drinking that burnt, bitter strong tasting coffee that gives you a real crash after the lift. Almost like cheap drugs. Starbucks stinks, had it a couple times and realize that only people whose tastebuds have been severely gone dead can enjoy that dark, burnt-tasting stuff. Wouldn't mind a good cup of tea on the other hand, get the same lift and a much more pleasant and soothing beverage. Love my coffee too but it's not going to be STARBUCKS. NO NO NO.

September 02 2011 at 11:56 PM Report abuse +2 rate up rate down Reply
1 reply to Master Tad's comment
wfreeberg

We in the USA have been brainwashed to think that the colored water we receive from most eating establishments constitues Coffee. Starbucks and a few other chains actually make a good cup if you order their dark coffee. You can't beat French or Italian Roast.

September 07 2011 at 12:14 PM Report abuse +1 rate up rate down Reply
swaggreg

Step 1: Go to Google
Step 2: Enter "tea is the new coffee", in quotes
Step 3: Click "show search tools" on the lower left of the results
Step 4: Select "Timeline" under "All Results"
Step 5: Note that they've been saying this since 2003 and today is no different.

September 02 2011 at 9:09 PM Report abuse +1 rate up rate down Reply
michelebachmann8

I JUST LOVE TEA!!!!!!!......I ADMIT THOUGH I DRINK TOO MUCH OF THE STUFF, THAT'S PROBABLY WHY I HAD THIS CRAZY LOOK ON MY FACE WHEN THEY TOOK MY PHOTO FOR NEWSWEEK MAGAZINE.........HAPPY BIRTHDAY ELVIS!!!!!!!

September 02 2011 at 7:43 PM Report abuse +1 rate up rate down Reply
1 reply to michelebachmann8's comment
Joshua Reber

LMAO

September 21 2011 at 2:29 PM Report abuse rate up rate down Reply
Robert G

I'M A FOLGERS,. MAXWELL HOUSE AND CHASE & SANDBORN GUY MYSELF. Starbucks is way to strong and I'm not much into weird or exotic teas. I like Lipton orange pekoe or English Breakfast or Earl Gray. I'm pretty traditional Meatloaf, mashed potatos and green bean kind of guy lol

September 02 2011 at 6:18 PM Report abuse rate up rate down Reply
Seize the Moment

You are right frequent wind. Starbucks is ahead of the trend.

September 02 2011 at 3:39 PM Report abuse +1 rate up rate down Reply
Seize the Moment

My comment was censored for telling the truth. Why is that?

I would never buy Teavana flavored tea again through mail order. Their "flavored" tea tasted artificially flavored.

On the other hand, Starbucks makes a good cup of Tazo mint iced tea, delicious in the summer or green tea lattes.

To each their own.

Seattle Tea Drinker

September 02 2011 at 3:37 PM Report abuse rate up rate down Reply
Seize the Moment

I would never purchase flavored tea from Teavana again through mail order.

Their "flavored" tea smelled and tasted artificially flavored.

Starbucks on the other hand makes great mint iced tea (Tazo) and also makes great green tea lattes.

To each their own :)

Seattle tea drinker

September 02 2011 at 3:28 PM Report abuse +1 rate up rate down Reply
1 reply to Seize the Moment's comment
Joshua Reber

Yes starbucks has wonderful Tea.
I do have to say I have had better though! Premium Teas are wonderful =3 I drink Tea from a local dealer who is going to be heading to local herbal fairs and try to soon get herself out there!

September 21 2011 at 2:31 PM Report abuse rate up rate down Reply