Not Starbucks’ cup of tea: struggling Teavana to be closed

Refocussing on its core coffee-shop business, Starbucks on Thursday said it will close its struggling Teavana tea stores, even as it takes full ownership of all Starbucks stores in China in that rapidly expanding market.

In what is seen by analysts as another course correction, the company said it is closing all 379 Teavana locations, affecting 3,300 employees. Many of those stores are in malls, where traffic has been declining.

In February, Starbucks finally gave up on its five-year-old Evolution Fresh concept, a venture it had jumped into on the assumption that the "health" market for cold-pressed juices would grow forever. The juices themselves will remain, but the standalone stores have been shuttered. Neither that venture nor Teavana – which focussed on tea rather than coffee - grew as fast as the company had hoped.

Starbucks bought the Teavana chain (over 300 retail outlets, all in malls, no seating) for $620 million.

Most of the Teavana closures will be completed by spring 2018, and its employees can apply for positions at Starbucks stores.

The company will continue to sell Teavana drinks in its Starbucks stores as well as bottled Teavana beverages in grocery stores.

The moves came as Starbucks announced third-quarter earnings results which, despite record earnings, fell below Wall Street expectations for revenue and comparable sales growth. It met Wall Street expectations for earnings.

Earlier Thursday, Starbucks made two significant announcements: record quarterly earnings, and a plan to buy out the 50 per cent share of its Chinese partner, Shanghai Starbucks for $1.3 billion, which would be the single largest acquisition in the company's history. Despite this, SBUX shares fell as much as 5.8 per cent in after-hours trading.

Starbucks will now assume 100 per cent ownership of about 1,300 stores in east China - spanning Shanghai and Jiangsu and Zhejiang Provinces - in the country that represents the company's fastest-growing market, in terms of store count, outside of the US, the company said.

Starbucks currently has 2,800 stores in China. Aside from the 1,300 stores in east China, the remaining 1,500 are already fully company-owned. Future stores opening in the country will be as well, the company said. Starbucks plans to be operating 5,000 stores in China by 2021.

Starbucks' sales in China have been growing rapidly. In recent quarters, sales in stores there open for at least a year grew 6 to 7 per cent, versus 3 per cent in the US.

"Starbucks' growth potential in China is unparalleled," Kevin Johnson, CEO and president, said during a phone interview with The Oregon Times on Thursday. He cited the market's ability to sustain a large number of stores, long-term growth potential, return on invested capital and confidence in management team there.

Starbucks will be acquiring the 50 per cent interest from joint venture partners President Chain Store Corporation and Uni-President Enterprises Corporation.

At the same time, those joint venture partners will be acquiring Starbucks' 50 per cent interest in its Taiwan business, assuming 100 per cent ownership of Starbucks' operations there. That means the 410 Starbucks stores in Taiwan will be fully licensed, rather than joint ventures.

The move is similar to the company's 2011 decision to fully license its Hong Kong and Macau operations, Johnson said in a statement.

Both transactions are expected to close by early 2018.

Sales growth in China, as well as the US, helped account for an 8 percent rise in revenue in the third quarter, compared to the same quarter last year.

Same-store sales - sales at stores open at least a year - showed heartening growth as well, especially compared to the previous two quarters.

In the US, such sales increased 5 per cent, driven largely by an increase in how much an average customer spends. That's compared to 3 per cent growth the past two quarters.

Johnson attributed part of the growth to innovations in food and beverage offerings, such as sous vide egg bites and more lunchtime offerings.

The company has been focusing on lunchtime as an opportunity to sell more food. It has been testing a "Mercato" menu, featuring grab-and-go salads and sandwiches made fresh daily, at its Chicago stores. It will roll out the Mercato menu in the greater Seattle area in early August, Johnson said.

Same-store sales in China grew 7 per cent, about the same as the previous two quarters.

Globally, same-store sales grew 4 per cent, which came in below analysts' consensus estimate of 4.8 per cent growth, according to Consensus Metrix. Such sales also came in below analysts' expectations for the Americas region (5 per cent growth versus analysts' expectations of 5.2 per cent) and China and Asia Pacific region (1 per cent growth versus 4.3 per cent expected).