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Tea Pivots Online
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Teabox founder Kausshal Dugarr pioneeredmethods of consumer engagement online thatincrease sales and improve supply chainefficiencies.
By Dan Bolton
Kausshal Dugarr’s retail vision is unfolding nicely amid a pandemic that is radically transforming tea retail.
“Online sales are up three-fold during the July-September quarter. The second quarter of 2020 was the best quarter in the company’s history,” says Dugarr, 37, who in 2015 founded India-based Teabox, the tea industry’s most sophisticated vertically integrated, high-tech, multi-channel subscription sales and marketing platform.
Teabox benefits enormously from a five-year head start as tea retail pivots online. Wholesalers and retailers in Asia, North America, and Europe that are resilient enough to have weathered lockdowns, restaurant closures, and abandoned offices; all point to online sales as the key to their survival.
Dugarr and others STiR spoke with have important lessons to share in a global market where:
• There is no going back to how things were before Covid-19. The pandemic changed consumer behavior, accelerating many early-stage trends, forcing the tea industry to adjust to a new reality: purchasing tea online in direct-to-consumer transactions; or via Instacart-like aggregators for grocery pickup and delivery will ultimately account for most tea sales.
• Transparency and the ability to deliver fresh tea re-define the premium category. Serious impediments in transport, logistics, and storage reveal a bulky, costly, opaque, and inefficient supply chain that delivers stale tea.
• Retail sampling strategies based on the premise that “each one, teach one” are in jeopardy. Mall stores and independent tea shops responsible for introducing and upselling millions of conventional tea drinkers to specialty tea must innovate new ways to educate and entice.
• Safety, convenience, and the ever-present threat of Covid-19 add urgency to tea’s historical reputation as a healthy beverage that combats inflammation and boosts immunity. Medical researchers are documenting science-based findings that components of tea inhibit the reproduction of coronavirus in the lab. Healthy versions of ready-to-drink (RTD) tea are emerging as the preferred immunity-boosting, single-serve format.
Wholesale orders from foodservice vendors account for 20% of global tea sales. Orders plummeted as half of the world’s 2.2 million restaurants temporarily closed their doors. In the US two-thirds will not reopen. In-home consumption remains steady. Coffee shops, cafes, and fast-food restaurants serving suburban commuters and downtown business centers experienced unprecedented declines in daily transactions. The volume of tea consumed in offices vanished. Near-vacant hotels abandoned afternoon tea service. Tourist locations and quaint Victorian tea rooms in rural communities remain shuttered. Distancing orders halted traditional Chinese, Japanese, and Korean tea service where proximity is essential.
“This pandemic has shown us that tea is resilient in this crisis - we’ve seen an increase in tea sales in grocery by 34% - that’s well over the average CPG which is up 20%,” writes Shabnam Weber, president of the Tea & Herbal Association of Canada (THAC). Grocers and tea merchants reported a massive spike in sales of tea prepared at home. Sales of iced tea blends and ready-to-drink brands grew as convenience stores and neighborhood markets attracted shoppers that would typically visit supermarkets, according to a study by Ensemble IQ. Grocery stores are a growth opportunity now that delivery is viable. This is because grocers are no longer forced to limit inventory to what fits on the local store shelf. In a rush to fill home pantries, online sellers reported the fastest growth, but grocery remains the channel of choice.
Consumers spent $1.4 billion on loose leaf tea and teabags and $4 billion on RTD tea at US grocery, mass market, select dollar retailers, club, convenience, and commissary stores during the 52 weeks ending July 12, according to market research firm IRI. In the US, sales of Bigelow Tea are up 20.5% in a dry tea category that grew 12% overall. The Lipton-Pepsi Co RTD brands generated $1.7 billion of the total. According to IRI, Arizona sold $825 million worth of tea, and Coca-Cola brands earned $440 million.
Consumers drink about 85 liters yearly and globally spend an average of $26.79 per person on tea, according to a 2020 Statista Forecast. Sales worldwide are estimated at $200 billion, with China generating $78 billion of the total. Mintel research, conducted before the pandemic, reveals nearly all (95%) of tea shop consumers in China purchase drinks in physical stores with just over two-thirds (69%) have ordered their drinks online.
The pandemic reversed predictions that by 2025 spending out-of-home would increase to 52% of global sales. Euromonitor predicts sales at specialty coffee and tea shops to decline by 11% in 2020 due to restaurant closures. The trend toward premiumization remains, attributed mainly to tea’s health benefits. While sales volumes of black tea dropped by at least 10% in the UK, US, and Russia during the five years ending 2019, according to Euromonitor, the price paid per unit increased during that period.
Direct-to-consumer pioneer
Innovations to the direct-to-customer business model that Dugarr introduced have supercharged tea sales in a dormant channel for nearly a century — following a century of success. Before World War II, tea was sold by mail order and delivered by post. The Great Atlantic & Pacific Tea Company (A&P), founded in 1859, grew from a national mail-order tea business to become the largest retailer in the world, with sales in 1930 approaching $50 billion in today’s dollars.
When Teabox launched as Darjeeling TeaXpress in 2012, “We didn’t know how the next 5 or 10 years would look like. It was a step into the unknown… quite a step,” reflects Dugarr, recalling the economic friction he faced while creating the tea industry’s first cold storage supply chain. Teabox vacuum packs and ships tea to customers within 48 hours after processing, eliminating a complex system of processors, distributors, importers, exporters, auction houses, warehouses, buyers, and sellers, reducing to a week the typical 3-6 months “between harvest and cup.”
“Tea is a very old, closed-mindset industry,” he observes. “We were trying to pioneer this and literally everyone ridiculed us, including my own dad, who said ‘you’re wasting your time’.” Dugarr’s mid-chain efficiencies permit Teabox to offer growers top dollar, but estates with the best teas initially reserved their allotments for overseas buyers.
Teabox now purchases hundreds of teas direct from more than 100 tea gardens in Nepal and India and ships to customers in 117 countries and 14 domestic markets. The company’s sophisticated online logistics software learns and retains customer preferences, personalizing their online experience, and gently nudging tea drinkers to expand and upgrade their taste for fine tea.
“If you have made a purchase, you will see the same kind of teas on the home page,” Dugarr explains. “When we send teas to you, you give us feedback based on your palate: ‘Okay, I like it, or No, I didn’t like it.’ ”
“We then look at all the other people who have tried these teas and have given similar answers. By the second or third buy, I am able to predict with 85% to 95% accuracy the teas you might end up liking.”
Selling direct to customers is efficient, but it requires something more to convince tea drinkers to experiment and spend.
“Let me be quite candid and say you can never get to 100% replacement of that offline touch and feel and context. That’s unique. When you see the person, you interact with the person in the offline setting, the way you are able to relate is very different, and we realize that from our store at the airports. However, there is no reason why you can’t get to 95% of that experience, and thankfully, in today’s day and age, with technology, you’re able to do that,” explains Dugarr.
The decline of brick and mortar
It is now apparent that several retail formats are no longer viable due to Covid-19 restrictions. DAVIDsTEA, the largest chain tea retailer in North America, declared bankruptcy this spring, closing all but 18 of its 231 locations. According to the Montreal-based company is reorganizing, pivoting to online sales, and grocer after e-commerce sales increased by 127% compared to last year. Wholesale sales in grocery are up 86% compared to fiscal 2019.
Weber, at THAC, observes that DAVIDsTEA “built a strong brand over the years that can stand on its feet firmly through online and grocery store sales. Their customers will continue to purchase their products - because they know them and trust them.”
Small chains and franchise operations like The Spice & Tea Exchange are stable and even expanding in some locations, including St. Petersburg, Fla., a state hard-hit by coronavirus.
“Ninety-seven percent of our stores have been impacted by the coronavirus pandemic, whether that’s having to close doors completely, or reduce hours,” writes c.e.o. Amy Freeman. She said the company’s executive staff called every franchise operator “to hear straight from our leadership that The Spice & Tea Exchange is a nimble company, working tirelessly to pivot, so they profit.”
“The company has always given 20% of its online sales back to franchisees, it has increased to 30%. On top of the higher percentage going back in the pockets of franchisees,” she said. “The company has been working around the clock to get customers to the website to drive online orders. The franchise is offering free shipping and specials through e-newsletters and Instagram/Facebook posts,” according to c.o.o. Penny Rehling.
Intimate, independent Victorian and Southern-style tea rooms that resemble small cafes with limited financial resources appear vulnerable. YELP, which tracks business activity in 219 cities in 32 countries, reported in August that 61% of its foodservice listings were permanently closed. An August survey of owners by the New York State Restaurant Association found 63.6% of New York restaurants are likely to close by the end of the year without government assistance.
“The tea industry never found a reliable, replicable business model,” observes Charles Cain, a management consultant at Building Oz and former Starbucks executive responsible for retail operations. Starbucks acquired Teavana in 2012 and expanded to 379 stores before closing the venture in 2017. Teavana closed its online store at the time, citing the upsell advantages of serving customers face-to-face.
“Teavana came the closest on the retail [bulk tea] side,” he said. But Teavana’s winning formula was more about gifting than about tea. Like so many other novel gifting concepts [think olive oil, popcorn, coffee, nuts], there’s a consistent enthusiasm curve.
“DAVIDsTEA, like most tea retailers, never really completed more than two-thirds of a sustainable business model,” said Cain. The novelty factor of premium, loose leaf tea, and accessories allowed these incomplete businesses to succeed… for a while. Now the novelty is worn off.
There will always be excellent, fashionable, independent cafes and small chains, but the replicable business model in coffee service is heavily supplemented by food, tea, dessert drinks, and anything else they can throw in to become more like a quick-service restaurant than a shrine to the bean.
“Where is the tea bar or café with a credible, competitive assortment of coffee drinks, and food for different dayparts?” he asks. “I’ve seen only a few independents pull that off, and they appeared to be doing very well.”
Customer acquisition concerns
It takes “each one, to teach one,” according to author Norwood Pratt, whose Tea Lover’s Treasury introduced modern specialty tea to the North American market. The African proverb refers to literacy education, tutored one-to-one, but suggests the importance of educating tea drinkers by example. Guided tastings live-streamed to customers are the latest adaptation by tea retailers.
Miriam Novalle is the epitome of tea promotion. In April, “with the pandemic at my door,” herT Salon in New York City hosted “Tea, Taste, and Zoom,” a $25 per person online tasting session that included a tea kit mailed to participants. The event drew a crowd. Novalle said that she mailed 47 kits for her second “Tea with the Masters” Zoom event in September.
In 1992 Novalle founded the T Salon tea bar and retail shop with seating for 40 indoors and 20 on the patio at Chelsea Market. She opened a second 30-seat location on Melrose Ave. in Los Angeles in 2009. In 2010 Novalle reported 40% of the company’s sales were from beverages, 30% from dry tea, and the rest in food and accessories. Four years ago, she closed the physical locations and has since marketed exclusively by email, on Facebook (1,000 followers), on Tumblr, and on Twitter (2,600 followers).
“My stores closed four years ago, a lucky turn,” she writes, “Wholesale and retail online was the future.” Since moving online, she has funded her venture by catering to birthday parties, conducting Qi Gong sound healing, hosting cooking demonstrations, developing mixologist recipes, teaching meditation, and conducting children’s art classes, “with tea being the thread of it all.”
Her new High Tea line of cold-brewed bottled CBD blends offers “healing and taking out the fear all around us,” she writes.
“Discovery is challenging online, but I see this as an opportunity for every independent retailer to step in and provide that experience for consumers,” writes Weber. “We are living in a Covid world where discovery seems to be paramount - people are making bread from scratch in droves - they’re pulling out recipes that take an entire day to prepare - they are filling their time to discover. This is an opportunity for everyone who wants to share the specialty world of tea to their customers and be creative about it. If your store is closed due to restrictions, then offer online cuppings - send samples to customers and schedule experiential online events. If your store is open, use the thirst for discovery people have at the moment and leverage it,” she advises.
Like Novalle at T Salon, “small independent operators need to get creative and think beyond ‘the usual way’ of doing things,” says Weber.
Dugarr in India created domestic tea brands to serve local markets unfamiliar with specialty blends. He was forced to close a profitable retail location at the Mumbai airport temporarily but supplies six markets in Pune, a dozen in Bangalore and 31 in Mumbai. Only Leaf is a premium loose leaf green tea marketed to upscale drinkers growing about 60% to 65%, month-on-month, he said. His premium chai is marketed like Tupperware, employing homemakers selling to friends and family. Multi-level marketing by Steeped Tea in Canada, perfected by founders Hatem and Tonia Jahshan since 2006, elevated their Sipology brand to more than $20 million in annual sales, thanks to a network of more than 10,000 “sipologists.”
Ready-to-drink tea
Market researchers predict a combined annual growth rate of 4.5% through 2026 for ready-to-drink tea, reaching $98.5 billion from $93.8 billion in 2020.
Revenue is dominated by Asian brands marketed by Suntory, Ting Hsin International, Ito En, Uni-President. Nestle and Unilever and Danone own the bottled coffee and tea segment in Europe, gradually shedding its “high-fructose” and artificial heritage.
In the US, Beverage Marketing Corp. notes that “through partnerships, acquisitions, and organic growth, the leading soft drink firms now dominate the ready-to-drink market.”
By 2018 the Pepsi-Lipton partnership commanded a 31.8% share. Coca-Cola brands, including Pure Leaf and Honest Tea, accounted for 21.4% of market share, and Keurig Arizona was next at 11.8% and Dr Pepper (Snapple) held 7.1% of the market.
In Boston, Evy Chen brews and bottles organic, sustainable, artisan cold-brewed tea at an unprecedented pace. Smaller brands like Evy’s Tea make up about 28% of the overall market.
“There has yet to be a contender to take on the big boys, and if Evy Tea does it right, we can be that brand,” says Chen. “I believe the future of RTD tea lays in better-for-you, clean ingredients and a brand narrative,” she says. Chen is doing multi-serve packaging and direct-to-consumer sales. Retail partners include Amazon, meal delivery services, and grocery delivery, she says.
Prescription for success
Bob Phibbs, The Retail Doctor, is troubled by the expense and difficulty digital retailing presents. Tea websites are static. Messaging has got to be compelling. Change it out daily, make movies making tea, not static messaging. You have to go to get my attention,” he advises.
“Too many retailers are jumping into the game at half time,” observes Phibbs. “You need to get them at the kickoff when then they have questions. Get in front of the consumer,” he said.
He suggests studying websites designed by vintners and cigar aficionados. “Tea is a sensory product. It must be experienced to be judged. Sip it and tell them what image comes to mind but don’t give up on the physical.
“While initially online car purchases surged, shoppers are returning to showrooms as the economy reopens. The same pattern is unfolding in food, with Americans going back to neighborhood grocers and restaurants after dabbling online,” he said.
The same will be true for tea.