Why the future of Starbucks is in tea

In 1987 Starbucks (ticker: SBUX ) had a mere 17 stores. The business was one of the earliest coffee shop chains, and it was testing new waters. As it turned out, the water was just about the perfect temperature. Now, Starbucks operates more than 17,650 locations across the globe, and its brand is universally recognized. In the beginning, CEO Howard Schultz had to bet on the future of coffee and convince customers that paying real money for real coffee was something worth doing. Yesterday, Schultz and Starbucks made the same leap of faith with tea.

Starbucks sells more tea

While Starbucks has long served tea, the company took its relationship with the dried leaves to a new level last year when it purchased Teavana for $620 million. That brand is now the face of Starbucks' first stand-alone tea bar, located in New York City. Teavana is also going to be used as a rebranding for Starbucks' other tea brand, Tazo.

The drive to revolutionize tea consumption is based in Schultz's belief that Starbucks can take a huge share in a relatively untapped market. The company has forecast the global tea category at more than $40 billion, while other observers have pushed that even higher.

The Teavana concept isn't meant to simply be a Starbucks spinoff, either. The stores are much more minimal in appearance, no coffee is served, and the locations will focus more on selling bagged products for home consumption.

International possibilities

One of Starbucks' biggest hopes has to be the possibility of selling tea in countries that have eschewed coffee. British consumers, for instance, drink about six times as much tea as Americans. The other side of that coin is that Brits consume about two-thirds as much coffee. That means that Starbucks is leaving money on the table by not addressing the tea-consuming public.

Tea consumption is also much higher in the Middle East and Asia, where Starbucks is still looking for big growth. Last quarter, the business earned slightly less than 7% of i! ts total revenue in its Europe, Middle East, and Africa division. Revenue also rose at an anemic pace, up just 2% year over year compared to global revenue growth of 8%.

In short, the tea push from Starbucks looks like a fantastic move. The combination of domestic and international opportunities should help this already large brand expand even further. I've loved most of the moves that Starbucks has made over the last few years, and this new venture is one of the best. I'm looking forward to big things in the next five years from Teavana, and investors should also expect good news to come along.

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