March 2013 US$39.00 SPECIAL REPORT Tea: Rediscovering an Ancient Beverage in the 21st Century As soda and energy drinks come under fire in the United States, specialty tea is poised to capture major market share, whether high-end organic loose leaf, ready-to-drink or the classic tea bag. Formulation-friendly with inherent health-boosting characteristics, tea is a classic beverage on the verge of atypical growth. by Brian R. Keating Tea: Rediscovering an Ancient Beverage in the 21st Century by Brian R. Keating fter 25 years of analyzing and reporting on the global tea industry, our team of beverage analysts can say with total confidence: 2013 is A going to be the year of “all things tea”—especially in North America. Specialty tea offerings are booming as a thirsty planet fully embraces the second most-popular beverage after water and the closest thing to a legitimate health panacea ever discovered. The current full-steam expansion for an eager tea industry—including retail products, foodservice offerings and even multi-unit retail outlets—is nothing short of staggering. In broad terms, specialty teas are the higher-end offerings made from longer leafs, organic teas and naturally flavored vs. conventional recipes and old-school black tea in a simple tea bag or can. The multi-decade germination and emergence of tea in North America has almost perfectly paralleled the patterns exhibited by the North American natural foods industry, which simmered with “what if” possibilities in the 1960s and ’70s and finally exploded in the 1980s. The rest is history still in the making. With the natural Savvy business market products sector expanding from a few hundred million to tens of analysts forecast billions of dollars in annual sales, and many natural foods brands now owned by mass-market conglomerates, it’s time to brew a cup the entire U.S. tea of tea and grasp the reality of the staggering events underway. The marketplace will double Wild West, ‘gold rush’ business mentality swirling around this industry currently revolves around a universally consumed, but in value by 2016. previously underperforming beverage, tea. Sales of tea of all types and channels in the United States circa 1990 were about a billion dollars annually. A neat and tidy quantification of the tea industry’s size today is simply impossible as some foodservice and other channels and product formats are not tracked efficiently or even reported (Wal-mart, Whole Foods and others). Estimates run from $5 billion in current total annual retail sales (all product types and distribution channels in the United States) to more than $20 billion. Perhaps more significantly, savvy business market analysts such as Mintel (mintel.com) forecast the entire U.S. tea marketplace will double in value by 2016. Multiple independent market intelligence data suppliers—Mintel, Packaged Facts, Canadean and others— state similar growth forecasts and overall potential of the tea industry. Beverage Insights • Tea: Rediscovering an Ancient Beverage in the 21st Century 2 beverageinsights.com Year-over-year compounded growth is one of the more important signs of a healthy industry. Specialty tea has enjoyed a 15-year growth run, estimated at an average of 10 percent per year (in all product formats and distribution channels, compound annual averages). Specialty tea not only survived the economic downturns of the last few years, but maintained its solid growth and expansion profile during this period. This is Warren Buffet-style stability and long-term viability from a commodity category that has premium value add-ons, suggesting something even grander. Tea Merger Mania Unleashes in North America – 2012 The year 2012 marked the first big breakout phase for the Specialty tea not North American specialty tea industry. Capital started to flow into this category in a big way for the first time and the only thing only survived the slowing down the merger and acquisition (M&A) mania is a economic downturns short-term lack of mature tea brands. Many established brands are of the last few years, still a little shy on annual revenues, even as most show excellent signs of profitability and unique positioning for future growth. but maintained its • Giant food and beverage powerhouse Sara Lee acquired solid growth and upscale Tea Forte. With sales of a mere $12 million or expansion profile so, this is an example of the “desperation” of big brands eager to hop on a steaming tea business train. during this period. • On the “snap up a deal in 7 minutes” program “Shark Tank” (ABC TV), the micro-size Talbott Teas was acquired by some of the show’s savvy business dealmakers and flipped almost immediately to national chain Jamba Juice. The new marriage appears to be working. • The European botanical conglomerate Martin Bauer snapped up Georgia-based Beverage House, a manufacturer of liquid tea concentrates, for an unknown sum. • North American Coffee & Tea, possibly the biggest tea co-packer in North America, was acquired by the much larger Associated Brands. • Canada’s breakout tea retail chain, David’s Tea, raised private equity capital for expansion into the United States; and U.S.-based Teavana (America’s first publicly traded specialty tea venture), acquired Canada’s Teaopia tea chain and was in turn acquired by Starbucks. • Harney & Sons Fine Teas, Stash Tea and Tazo all launched new retail tea outlets. Beverage Insights • Tea: Rediscovering an Ancient Beverage in the 21st Century 3 beverageinsights.com • Coca-Cola finished its rollup of Honest Tea organic RTDs (ready to drink) in a move that seemed to satisfy all parties, including the founder’s team, the soda behemoth and consumers. • World Tea Expo—America’s premier tea trade event, held every June in Las Vegas—was acquired by a large media conglomerate in a play that is guaranteed to strengthen the one-stop-venue for global specialty tea enterprise. Meanwhile, the steady moneymakers include a complex network of accessories sellers, small-time operators (cafes, bars, salons) and reliable wholesalers. The “gold” here is to be found within the chains and brands that are increasingly being acquired Exuberant activity can be after years of patient maturation. Dealmakers remain surprised— seen in most packaging after years of ignoring specialty tea—that there are so few prospects for them to court, as they typically define their targets formats and tea types: as businesses with annual sales of more than a few million mass market, natural dollars. Yet, key capital sources are lowering their benchmarks as they discover solid bottom-line profits and untapped growth channel, retail and, soon, potential within even very small tea ventures. At the base of this greater interest in organic momentum: millions of consumers who are now very receptive to alternatives to mainstream soda and energy drinks. teas and RTD cold teas. The North American Specialty Tea Marketplace Is... A hotbed of creativity. New products and tea chains are sprouting up everywhere, creating solid annual growth and profits. Reflect upon the middle- tier years of both the natural foods and specialty coffee industry, and you have a pretty clear snapshot of what will be happening in the full-boil gyrations of the North American tea industry between 2013 and 2020. Vibrant at virtually every level of distribution. Exuberant activity can be seen in most packaging formats and tea types: mass market, natural channel, retail and, soon, greater interest in organic teas and RTD cold teas. An emerging industry ripe for investment, expansion and development. There is more capital available than there are deals—frustrating some investors—inside the usual sweet spot of $50M in annual sales. This standard target is now being lowered by the mavens of M&A, and hundreds of young companies are a mere one to three years away from becoming splendid candidates for this kind of takeover. Impacting citizen health and well-being in a very positive way. The annualized dollars saved on improved health, disease prevention and lifestyle improvements (more energy, clarity of mind, fewer minor health conditions Beverage Insights • Tea: Rediscovering an Ancient Beverage in the 21st Century 4 beverageinsights.com such as flu, sore throats, etc.) is incalculable. When people consume tea on a regular basis, health outcomes are often improved. There are dozens of health conditions that tea prevents, eradicates or minimizes. At a time when obesity, cancer, heart disease and other maladies are still rampant, the simple addition of tea to the daily regimen is affordable—and compliance pleasant and easily maintained. The tens of billions of cups of tea consumed each year impact human health positively and more economically than any beverage outside of plain water. Tangibly benefiting producing countries. Tea-producing countries have struggled to boost output and revenue, especially in the face of global climate warming, but production is on the rise. The increase in popularity of specialty tea—in North America and internationally—is slowly raising demands for better-quality teas and helping bring grower prices into line with other commodities that have transitioned from core-crop to value-added raw material. The financial benefits will drive this up-production trend even further. Boosting the economy. The positive boost to the North American economy from the thousands of new tea ventures sprouting through the last decade or so has increasing significance. There is no practical way to estimate how the new job creation, revenues and enriched tax coffers are helping to drive the economy, but with this multibillion dollar industry in an The tens of billions expansion mode, the consequences are positive. of cups of tea consumed each year Tea Beverage Industry Success Factors Tea & Health. The tea-health connection remains one of the impact human health primary catalysts in getting consumers “hooked on tea.” positively and more Consumption of tea promotes healthy well-being; may prevent multiple diseases; and is generally free from ingredient negatives, economically than e.g.