jack li
Tea Retail Reality
Tea rooms and independent tea merchants on the brink of collapse demonstrated greater resourcefulness and tenacity than their chain counterparts.
Statistics paint a dire predicament for foodservice businesses globally. In US zip codes with large workday populations, closures (temporary and permanent) ranged from 54% in Manhattan (10018) and 50% in Seattle’s First Hill (98101) to 45% in Denver (80202) and 40% in Chicago’s Loop (60606). The Las Vegas Strip (89109) experienced a closure rate of 60.3%. The average closure rate was 11.5% nationally, according to Datassential’s weekly Firefly survey of retailers.
“Closed” is an admittedly fuzzy term as “restaurants are in flux,” Datassential managing director Jack Li explained to weekly webinar participants. At the height of the lockdown, US states and Canadian provinces banned dine-in service at nearly 695,000 locations of which 395,000 are independently operated.* By June 603,903, restaurants will have reopened their dining rooms, including coffee and tea shops and bakery shops, categories that experienced a closure rate of 32% nationally, according to Datassential.
ALSO: Surviving the Pandemic: Vulnerabilities In the Global Tea Industry
Li praised the “grit” demonstrated by independent restaurant operators who were forced to close temporarily but continued delivery and curbside services. “They may have more to lose,” he speculated. Cafés and tea and coffee shops stepped up delivery, switched to contactless transactions, and offered goods such as groceries and sanitizer to boost sales and keep customers loyal.
“Independents and legacy restaurants are far more likely to have stayed open,” said Li. The highest number of restaurant closures were stores that first opened in the past five years. He said that 12% of ventures launched in 2018 are permanently closed, for example, compared to only 1.6% of shops operating since 2000.
Emerging Trends
Shops located near offices in crowded downtowns and those dependent on tourist crowds will experience the most significant challenges during the reopening phase.
Distancing precautions render previously crowded tearooms, cafés, and pubs unprofitable, accelerating “homing” a trend that is defined as more frequent preparation and eating at home. Susan Schwallie, executive director of food and beverage consumption for the NPD Group, notes that in the US “we’re much less likely to go out to a restaurant and eat on-premise” with delivery already growing by 22% in 2019. Carry-out is actually bigger than delivery, increasing to double the sales volume of delivery during the pandemic, said Schwallie.
• The pandemic virtually eliminated afternoon tea service worldwide as hotels closed their dining rooms, and destination shops were shuttered. All types of experiential tea venues will require a rethink as they thrive on intimacy (think special mom and daughter moments).
• US food sales in grocery currently exceed foodservice sales. Tea sales online surged, and tea sold in grocery gained market share as in-home consumption increased. Online ordering is gaining credibility. Until this spring, the use of online grocery apps had declined by 25% from 2018 to 2019. Last year grocery sales online totaled $35.2 billion, according to IBISWorld. Before the pandemic, only a quarter of US consumers had tried online grocery, and only 6% placed orders at least monthly, according to Bain & Company. Expect sales to climb to more than $50 billion due to the coronavirus.
• Stops for a drive-thru breakfast during the early-morning commute have shifted to late morning and afternoon snacking occasions. Transactions rose to 165 million per year in convenience stores. Every two days, on average, almost every American now visits at least one of the 152,000 US c-stores. According to the National Association of Convenience Stores, food service sales in convenience rose 4.4% last year to an average of $55,000 per store per month.
As shops reopened in May, Starbucks regained 65% of US same-store sales pre-lockdown. In China, the company’s same-store sales are 80% of pre-lockdown. The owners of JDE Peet’s coffee, the world’s largest pure-play coffee and tea group with $7 billion in annual sales, announced a planned initial public offering estimated at $764 million would go forward on the Euronext Amsterdam exchange.
Tea consumption in Britain doubled during the lockdown according to a survey by Net Voucher Codes that found UK residents drinking an additional 112 million cups each day, but 30,000 pubs and small cafés may eventually close.
Washington DC-based Sinensis Research surveyed American tearooms and tea merchants in April as US retail sales declined by a record 16.4% to $404 billion, according to the US Census Bureau. April sales were 21.6% below foodservice sales in April 2019.
Surviving the Pandemic: Vulnerabilities In the Global Tea Industry
US Retail and Food Service Sales Drop to Lowest Level Since 2012
Sinensis Research founder Adam Rowe reported that 32% of tea businesses temporarily closed in April, with 2.3% permanently closed. “Revenue is expected to decline to 65% of 2019 sales, suggesting an overall loss of about $133-154 million in tea sales by specialty tea vendors,” according to Rowe. He said that 82% of the specialty tea business had laid off staff, eliminating around 9,200 jobs held by tea professionals. Restaurants employ 2.2 million in the US of which 35% work full time. The nation’s waitstaff is 70% female.
“Eight months of restaurant closures were squeezed into six weeks,” noted Li, who told webinar participants that closures were concentrated in urban areas, specifically downtowns where offices closed. Stores in every US state are now reopening, but consumers remain cautious. Datassential reports that 53% of consumers remain “very concerned” about coronavirus, down from a high of 67% April 1 with 51% saying they will “definitely avoid” eating out, down from a high of 68% on April 10. Medical authorities note a clear upward trend in new COVID-19 cases in the 17 states that opened first. Everyone is concerned that the fall flu season will be harsher than in the past.
Foot Traffic Declines
In developed countries, independent tea merchants and tea rooms in malls and along main street depend on foot traffic. Economists predict that 100,000 stores will close during the next five years, more than triple the number shuttered during the Great Recession. Stores in major cities cannot expect a return to normal when companies downsize their office staff by two thirds.
Two million US retail jobs disappeared in April as retail stalwarts, including Macy’s and JC Penny, reacting to virus-induced changes in consumer behavior. In May, China reported that 95% of supermarkets and 85% of department stores and malls were open for business, but foot traffic is only 30-40% of pre-lockdown totals. McKinsey & Company in China notes the rapid adoption of online-to-offline sales (abbreviated O2O) that combine online ordering and payment with accelerated physical delivery. In the US, after purchase, scheduling waiting days for a delivery slot or pickup date hamper online orders.
Delivery Dilemma
Successful cafés seeking incremental sales reluctantly agreed to a delivery commission of up to 30% with Grub Hub, Uber Eats, Doordash, or Save The Dishes, but during lockdowns, none can afford to pay that sum on 100% of transactions. The average profit for a small café is 2.5% in the US, where direct costs average 15%. Assuming $500,000 in revenue, applying a 30% delivery commission on 5% of sales costs $625 a month, but when you apply that same commission on total sales, the cost per month rises to $12,500. Several cities enacted ordinances capping commissions at 5% to 10% while stay-at-home orders are enforced.
• Online grocery orders for curbside pickup or delivery are a bright spot as the number of SKUs (stock-keeping units) assigned to tea expand. Specialty tea at ventures such as Whole Foods Markets frequently competes for scarce shelf space in-store. There are fewer restrictions on the number of brands on offer online since warehouse space is much less expensive than in-store. Shoppers expect extensive selections when browsing online
• Tea Epicure founder Tony Gebely anticipates the shift to online tea purchases “is an opportunity for less popular tea regions.” He said that tea from lesser-known growing regions meets the standard for quality and taste. Price is a consideration as the supply chain adjusts to logistics challenges.
• Promoting the health benefits of tea pay off. In March, during the rush to stock pantries, Kombucha benefitted from a 10.1% year-over-year increase in sales. Bottled water sales increased 42%, and oat milk grew by 347% during the same period, according to Nielsen market research for the week ending March 7.
The Way Forward
No one knows the duration of either the global health crisis or the economic crisis. Like a playground see-saw, responses to any aspect invariably affect other outcomes. Preventing a surge extends unemployment. Which is worse? There comes a time when the only rational course is to stop asking, “what comes next?” and begin exploring it.