Why Starbucks is smart to push tea

America, the land of the free and the home of the caffeinated, is becoming increasingly a land of tea drinkers.

And that's good news for Starbucks (SBUX), which is expanding its tea business through its $620 million buy of Teavana Holdings, its biggest acquisition yet. The deal is a good one for the Seattle company.

Though most tea sold in the U.S. is iced, sales of so-called specialty teas that originate from one location are on the rise. These include gourmet hot teas sold in specialty shops, the numbers of which have skyrocketed to about 4,000 from 200 a couple decades ago.

"It's very much like the wine business was 30 years ago," said Ann Rosenfeld, who edits TheTeaDrinker.com, adding that tea's surging popularity is coming at the expense of soda. "People are more open to try different teas. . . Across the board, there is more interest in tea."

Indeed, Coca-Cola (KO) acquired Honest Tea last year for an undisclosed amount. Earlier this year, PepsiCo (PEP) said that its Brisk Ice Tea had reached $1 billion in sales. Notwithstanding the name it shares with a right-wing political movement, some parents are even throwing elaborate tea parties for their children. 

Though Rosenfeld doesn't care for Starbucks' tea, she said that connoisseurs like herself are not the company's target market and that the company's growing interest in the business is good for the industry overall.

"The middle market has gotten much more bigger and there are a lot more varieties being sold," she said.

There are currently about 300 scientific studies investigating the health benefits of tea, which, as the public grows more aware of them, are helping boost sales, according to Joe Simrany, the head of the Tea Association of the US.

"The specialty market has grown nicely on the basis of more adventurous customers," he said.
 
Data from IBISWorld shows that tea industry revenue is expected to rise at an annualized rate of 3.1% in the five years ending in 2012.  Though growth is expected to slow this year because of uncertainty abroad, the growth is expecting to ratchet up again to 3.6% through 2017.

"Emphasis on healthy living is changing consumer dietary patterns, helping to
drive the industry’s growth," according to the market research firm. "The gourmet and
specialty tea segments are forecast to be the fastest growing segments as rising disposable income enables consumers to loosen their purse strings."

Data cited by The Economist indicates that per-capita coffee consumption has been on the wane while tea drinking is on the rise since 1980. That's surprising, given the popularity of Starbucks and Green Mountain Coffee's (GMCR) Keurig single-cup coffee makers. Tea, though, isn't likely going to overtake coffee as the hot, caffeinated beverage of most Americans any time soon.

Average coffee consumption is about 9.39 pounds a year versus 0.9 pounds for tea, according to the Economist. Data from the National Coffee Association shows that 46% of Americans say that they have drunk tea in past day, up from 40% in 2010.  During the same time period,  coffee drinking has risen from 56% to 64%.

Good thing for Starbucks that it has both markets covered.

--Jonathan Berr does not own shares of the listed stocks.  He is a two-cup-of-coffee drinker and probably won't be changing his ways. Follow him on Twitter@jdberr.

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