The Good, the Bad, and the Ugly Behind Starbuck’s Teavana Closure
In a move that saddened tea lovers across North America, Starbucks announced on Thursday, July 27th that got brushed under the side of the storm of political news that has been coming out recently. Starbucks was closing all of their 379 Teavana retail stores after suffering operating losses for long enough.
Although representing only 3% of Starbucks U.S. stores and around 3,000 employees, a blip in the companies gigantic retail lineup, there is still some reason to worry amidst what looks like a move that will help streamline expenses.
Having bought Teavana in 2012 for $620 million and slowly expanding their store count, Starbucks found the stores “underperforming” in the malls they were located in. One press announcement said that “the company concluded that despite efforts to reverse the trend through merchandising and new store designs, the underperformance was likely to continue.”
What does this mean? Starbucks is streamlining back to what they do best — making coffee.
A small part of my mind does worry, however. Lewis Black had a joke once, going something like this;
“There was a Starbucks, and right across the street, on the other side of the road, was another Starbucks. That’s how you know it’s the end of the universe.”
That wasn’t the exact quote, but you get the gist of it. When will Starbucks grow to such a point where they can’t expect to expand anymore? There’s going to come a time, and that time may already be here in North America, where there will be such a saturation of Starbucks stores that they will have overextended themselves.
When Starbucks started off they had little in common with the drive-thru Starbucks you visit across the street. They actually had to persuade people to buy a $4 drink, and with fancy Italian names for their drinks and sizes that made you feel like you were in a Michelin star fine-dining Italian restaurant, they could pull it off. When Starbucks first opened in New York City, the times had to teach their readers was a latte was.
Now things are different.
Starbucks is the new McDonalds, and like all large-cap retailers is losing the magical charm it once had when it was a small, niche chain. The stale sanitizer of standardization has swept through, cleaning up the uniqueness that was so common in the chain. That means two things in the coffee world.
1. Niche Coffee Brands Will Nibble Away At The Consumer Base
I’m not sure where you live, but there has been a surge of smaller, niche coffee brands that all bring their own personality and panache into the industry. What’s happening is that Starbucks can no longer compete with these smaller coffee stores in terms of uniqueness and quality. These smaller chains will be poised to recapture some of the North American giant’s market share.
2. Competition From Large Scale, Cheaper, Coffee Services
Many of Starbuck’s current consumers don’t necessarily go there because their coffee was the best, but because it is the most convenient spot on the way to work. This essential attribute, convenience, is going to come under threat from other large companies such as Dunkin Donuts and McDonald’s who are large enough to compete in this area.
In other words, the Starbucks will most likely not see too much opportunity in heavily established markets such as North America. And without new ventures such as Teavana to broaden the scope of their offerings, coffee is the only thing they will have to rely on.
Sure, making coffee is what Starbucks does best, but so do many other coffee-stores, and many do it a lot better.
That’s why a part of me felt that Teavana was such an important experiment, it was to see if Starbucks could successfully branch away and diversify into other areas that can keep their North American market growth strong. Even if it was only a tiny sapling when corporate uprooted it, if successful, could have become something great.
Of course, that might not be Starbuck’s fault. Tea is still a relatively niche market in North America, so consumer demand might not have made it a justifiable venture. But in Asia, it’s exploding, and with Starbucks buying the remaining 50% share of its East China joint venture for a $1.3 billion dollar deal, they are putting big money into this market. Starbucks expects to open one new Starbucks in China per day for the next five years.
One can’t help but feel that Teavana’s closure was the canary in the coalmine for Starbucks North American market. Although the short-term prognostication is still good, and the practical reality of closing down Teavana means saving operating expenses for the company, it also stands as a message to the executive board that for those in the company looking for growth.
East is where the future profits shall lie.