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Posted: 7:46 a.m. Friday, Nov. 23, 2012

Teavana’s transformation into a tea titan



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Teavana tearoom photo
Teavana
Over 15 years, Andrew and Nancy Mack turned their single storefront into the Teavana chain of more than 300 tearooms across North America

By Greg Bluestein

It was a series of visits to tranquil tearooms overseas that made Andrew Mack decide to turn over a new leaf when he returned to Atlanta.

Mack quit his job, and he and his wife, Nancy, poured their life savings into a 700-square-foot store in Buckhead in 1997 where curious Southerners wandered in to sip tea that wasn’t served over ice.

Over the next 15 years the husband-and-wife team turned the single storefront into what became the Teavana chain of more than 300 tearooms across North America. While most entrepreneurs fail within their first few years, the Macks managed to build a tea brand so successful that coffee colossus Starbucks agreed last week to acquire it for more than half a billion dollars.

They did it with a business model that relied on virtually no advertising and a rabidly expansionist strategy hinged on their desire to cultivate a culture of tea. Along the way, the Macks fought to retain close control of the company, buying back franchisees and even refusing to join the tea trade groups that promoted their industry.

The Starbucks deal isn’t finalized yet, and the Seattle-based company said this week that it was reviewing claims — made by a research group that could profit from the merger’s collapse — that Teavana’s products are tainted by pesticides. Teavana firmly denies the report.

If the deal survives — and both companies have said they expect it to be approved by year’s end — Teavana is poised to introduce its tea to millions more customers and propel the Macks into the ranks of Atlanta’s most successful entrepreneurs with a payday that could top $300 million.

“The reality is it takes money, and he had good funding that allowed him to expand,” said Joe Simrany, the president of the Tea Association of the U.S. “He’s very single-minded and he focused on what he wanted to accomplish. A lot of people know their stuff, but they don’t have the vision or fortitude to carry it forward. He did.”

From its very start as the Elephant Tea Co. in a studio apartment-size store off Peachtree Road, the Macks made clear they didn’t just want to sell customers a beverage. They wanted to sell the ritual of tea. Mack declined to comment for this article, but he said in past interviews that he wanted his stores to be a haven for tea and “tea gadgets” that sweetened the company’s bottom line.

“Coffeehouses have done so much to raise people’s awareness of coffee,” Mack said in an interview with The Atlanta Journal-Constitution months after opening that first store. “We want to do the same for tea.”

The store drew a small but devoted crowd as one of the few places in Atlanta where customers could buy specialty loose leaf teas.

In the late 1990s, the recently formed Southern Association of Tea Businesses met occasionally at the Macks’ tea shop in Buckhead, even though they did not join the group, because “it was one of the few places you could get some of the specialty teas,” said Susan McKeen, a co-founder of the small trade association for tea shop owners.

“We thought he was on the cutting edge,” McKeen said. Mack didn’t go out of his way to socialize with customers, she said, but he knew the tea business like few others.

From that store sprang a steady expansion to more shops in malls across Atlanta and then the nation. The strategy was questioned at a time when coffee shops and cafes were opening in strip malls and office buildings, but in hindsight analysts and experts say the built-in foot traffic that a mall offers helped build the brand at a crucial stage.

“He had stores that were attractive and had good eye appeal,” said Marty Kushner, the retired president of Marietta-based Southern Tea Co. “When you taste tea, which of your senses are engaged first? Not smell and not taste, but sight. And if you see a store that looks appealing, chances are you’ll have a good experience.”

The stores are designed with crisp imagery and colorful designs to lure in passers-by, and sales associates are often positioned outside to offer samples to visitors. Inside it’s easy to see how the chain manages a typical average sale of around $40. There’s no store-brand tea bags here that go for a few dollars. Instead, there are loose-leaf tea blends that top $50 for 8 ounces, along with pricier accessories such as cast-iron teapots.

As the company grew in the early 2000s, it changed its brand to Teavana, a heavenly name reflecting the couples’ plan to bring their version of a tea nirvana to a wider audience. The chain’s mission statement echoed that vision: It was “expanding the culture of tea across the world.”

The Macks at first fueled their growth by offering franchises to other entrepreneurs, said Lisa Boalt Richardson, the author of several books on tea. But she said they apparently had second thoughts after a few years and began buying out franchise locations.

The timely infusion of capital from private equity in the mid-2000s set off a frenzy of exponential growth. The chain more than doubled in size between 2005 and 2008, with more than 50 stores. By the time it went public in July 2011, the company had about 180 outlets across the U.S. and Mexico.

An initial public offering that raised $121 million pumped the company with funding that helped buy a 46-store Canadian tea company and backing to negotiate a deal to develop stores throughout the Middle East.

During quarterly earnings calls, executives seem to almost boast about the company’s success despite no major advertising campaigns or customer loyalty programs. Even calling the company’s marketing department today yields a recorded message saying that Teavana doesn’t do “paid advertising, sponsorships or paid marketing efforts.”

The company’s growth has been guided by a tight-knit leadership group that has remained largely unchanged over the years, something Mack is quick to cite as a guiding principle. He’s kept the team intact partly by offering stock options and other perks to senior executives.

“We’re very proud of the promoting-from-within people culture that we’ve built,” Mack said at a recent awards ceremony.

That unbridled growth isn’t without risks. Some analysts worried that the company’s rapid expansion could stretch the firm too thin, and it’s almost single-minded focus on malls leaves other fertile markets untapped. Some ex-employees have complained of a harsh corporate culture, and one took to the Internet to describe overly aggressive sales goals and tough grading systems.

Starbucks, which has long wanted to use tea to capture more caffeine lovers, saw an opportunity in Teavana’s unfettered growth. The beverage giant’s chief executive, Howard Schultz, made overtures to Teavana in June, and within a few weeks he was talking with Mack about a merger to help Starbucks lure more tea drinkers.

The negotiations heated up as Starbucks executives scouted Teavana’s offices in Atlanta in late October and the two sides haggled over the price. A Starbucks executive initially indicated an offer of up to $17 per share, but after digging into the financials came back with a final offer of $15.50. The deal, valued at about $620 million, was approved by Teavana board members on Nov. 14. The Macks, who own more than 21 million shares, stand to make more than $330 million.

“I don’t think anybody in the industry is super surprised,” said Simrany, the trade group head. “There was an indication that Starbucks was looking to get into the tea business more seriously, and you’ve got a ready-made model out there.”

Starbucks faces its own questions with the purchase. It already owns the Tazo tea brand, which commands about $1 billion in sales, and many analysts question whether this latest purchase could muddy its marketplace.

For his part, Starbucks’ Schultz said the risk is more than worth the cost. He told CNBC over the weekend that the Teavana purchase is another way to capture caffeine fans who have shied away from the coffee chains’ beverages.

“Once it’s powered by Starbucks capability, we’re looking at a huge opportunity domestically and internationally that will serve our shareholders well,” he said, adding that the expansion will be beyond malls.

“We strongly believe we can build urban neighborhood sites around the country and around the world.”

Staff writer Russell Grantham contributed to this article.

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