The Rise of DavidsTea

Has a pair of Montreal cousins created the Starbucks of tea?

FOR PURVEYORS OF A TYPICALLY SOOTHING, grandmotherly beverage, the DavidsTea head office is buzzing with young, overly cheerful go-getters marching around with purpose. Periodically, they congregate at the office’s fully stocked tea counter to brew their favourite blend or discuss the merits of matcha, a powdery green tea that must be whisked like a French sauce. Currently, there is more staff than office space, so the company is spilling into another building nearby, while expanding its warehouse for the second time. Since launching its first tea shop in 2008, DavidsTea has been consistently bursting its seams. Last year, the chain went from eight to 40 locations across the country, from Vancouver to Halifax. This year, at least 20 more will open, signalling a concerted push in the company’s quest to dominate the burgeoning retail tea market.

Until recently, loose-tea shops could be roughly categorized as either delicate cafés run by retirees or high-end boutiques for aficionados. “Tea had a stodgy reputation,” says DavidsTea founder David Segal. “It was either very British or Asian. We made it North American and modern.” The company’s teal-coloured logo is now becoming a recognizable brand on street fronts and in malls. The stores have a bright, streamlined Scandinavian aesthetic. The back wall is a veritable library of tea canisters, which employees pluck down with the verve of a spirited bartender, and dole out samples to customers in a sleek shot glass. Peddling some 120 varieties (with cutesy names like Read My Lips or Jumpy Monkey) DavidsTea is bringing specialty tea to the mainstream akin to Starbucks’ popularization of speciality coffee in the 1990s, when the North American palette graduated from Folgers and Maxwell House to lattes and cappuccinos.

A similar awakening is now brewing in the world of tea. In Canada, almost all tea consumed is the bagged grocery-store variety à la Twinings and Tetley. But over the past decade, we’ve been drinking more of it, while warming to loose tea—greens, blacks, oolongs and herbs, which, like wine, all have their own regional variations, flavour depths and proclaimed health benefits. This shift could be characterized as the second wave of tea, a movement being steered by companies like DavidsTea and a growing number of larger chains bringing specialty tea to the masses. DavidsTea is making an assertive debut. Backed by the wisdom and financial clout of a veteran retailer and his young, marketing savvy cousin, the company may be poised to take the coveted position as the “Starbucks of tea” in the race to move a boutique beverage to street-corner ubiquity.

As a private company, the founders won’t divulge sales figures but only say that each store is profitable and the business as a whole is “extremely profitable.” Judging by such rapid expansion, its early success partly reflects good timing. Industry analysts like to joke that “tea is hot.” For the past six years, it has been one of the fastest-growing menu items in Canada, with out-of-home consumption at 584 million servings over the past year, versus more than 500 million in 2007. Compared with coffee (more than 1 billion servings per year), tea is a meagre—but growing—segment. A recent Agriculture Canada food-trends study predicted tea consumption will jump 40% by 2020, a rise attributable to many factors, not the least of which is our aging population.

“Baby boomers are retiring,” says Louise Roberge, president of the Tea Association of Canada. “They’ll be at home now, and they will likely be drinking more tea.” Already fond of warm beverages, boomers are also increasingly mindful of their health. According to Roberge, during the past decade a glut of studies proclaiming the health benefits of tea has also helped drive up consumption, aligning with a larger societal leaning—even among younger demographics—toward healthy living. Further boosting the tea trend is an increasing influx of immigrants from Asian countries, where the beverage is a staple.

Naturally, businesses have caught on to the buzz. “Ten years ago, it was retirees or tea-lovers opening tea shops,” says Roberge. “Now, it’s retailers; they don’t necessarily love or know tea, but they know business.” The guys behind DavidsTea are no exception. David, who recently turned 30, is a McGill commerce grad and entrepreneur who started in retail selling shoes at Athlete’s World during high school. He still has a wiry teenage frame and delicate nail-bitten hands that come alive when he talks. His 80-year-old cousin Herschel Segal (who looks about 10 years younger than his age) is his senior partner and financial backer, not to mention a retail stalwart who founded the Le Chateau clothing chain five decades ago. Herschel, also petite and well-groomed, talks with the soft, unhurried manner of someone who’s been through it all. He weathered 50 years in the clothing business, finally handing over control of Le Chateau to his wife in 2006. Not one for an aimless retirement, Herschel started a private-equity firm with David less than a year later. It kept them engaged in the entrepreneurial community, but like the coach who longs to get back in the game, Herschel still had an itch. “[Investing] can be frustrating because you don’t actually do anything, and we wanted to do something,” he says. “We’re retailers, we’re vertical developers. We like to start with a raw product and bring it to the shelf with our name on it.”

A tea concept had been in the back of David’s mind for years, but his vision really took hold when he visited a Montreal tea boutique called Camellia Sinensis (the Latin name for the plant from which black, green, oolong and white teas are derived). Considered one of the top tea purveyors in North America, this is a labour-of-love operation run by four professional tea-tasters who go on annual buying trips in search of the finest regional varieties. “I immediately saw how great of a business it was and that nobody was doing it mainstream,” David says. “Eventually, Herschel turned to me and said, ‘You do it, and I’ll back you.’”

In September 2008, DavidsTea launched in Toronto on Queen Street West, obtaining a fortuitous sublease from Le Chateau in some of the city’s best retail real-estate. “On Day 1, we were making money,” says David, who spent those early days in the store scooping tea. “I mean, we hustled, and we were not shy about promoting tea, but we had the right look, the right feel, the right staff and the right product at the right time.”

The Segals entered the market with an aggressive business mentality and bluster not yet seen in the sleepy world of tea. Early on, they surrounded themselves with a team of experts in all angles, and tapped a sought-after American tea industry consultant named Richard Guzauskas to help navigate the complex world of tea buying and distribution.

David travelled to tea-growing regions in Sri Lanka and India, where he crouched in tea gardens, attended tea auctions and met wholesalers. Eight months after the inaugural opening, they launched a shop in Montreal, added two more units in Toronto and debuted in Vancouver, before spreading out to malls and smaller markets, like Prince George, B.C., and Guelph, Ont. Today, the company has a handful of North American and European suppliers, and outsources all its blending (the process of adding fruits, spices and other pretty bits to the tea leaves). David personally tests most blends in a stark white “tasting room” set up with little infusion bowls and spittoons. There, he and his team “slurp and swirl” dozens of teas, some of which they send back to the blender several times before getting the desired flavour, scent and look.

“The key for them will be maintaining the consistency of the product,” says Kevin Gascoyne, one of the founders of Camellia Sinensis. “DavidsTea is a much different concept from us—they have to make their product sexy and smell really nice.” Whereas top sellers at Camellia Sinensis are regionally distinct, pure varieties like Darjeeling white tea, DavidsTea moves more flavoured blends that smell like toasted walnuts and chocolate. They have widespread appeal and work well to draw rookie tea drinkers who may not yet appreciate a high-grade Japanese gyokuro green tea. “There’s a huge market for coco-chai rooibos and chocolate mint and crème brûlée,” says David. “And we’ve sort of embraced that.”

Making the Starbucks comparison is tempting when discussing two companies that deal in hot beverages and share a distinctly honed brand. But David is quick to discount the likeness. “Starbucks is more of a restaurant than a retail store,” he says. “We’re more focused on retail; people buy our products and take them home.” Bulk tea and brewing accessories make up the majority of DavidsTea sales, whereas Starbucks, like any coffee shop, makes most of its money on cups of coffee, which can run up to nearly $5 for some of the large, flavoured or highly caffeinated options.

Despite these differences, both companies have benefited from customers’ willingness to pay higher prices for what they consider to be a superior product, whether it’s a grande double-shot cappuccino or a mug of organic Saigon chai tea. “People perceive specialty tea as a high-quality product,” says Robert Carter, a food-service industry expert with market research firm NPD Group. “And they are willing to pay for it.”

Like coffee, tea is a profitable commodity. Store footprints are usually small, while markups and profit margins are high, ranging from 50% to 70%. According to Carter, “if any operator, from DavidsTea to a full-service restaurant, has a tea program, they are going to experience sales increases.”

Indeed, DavidsTea wasn’t the first to capitalize on our growing fondness for tea. There are dozens of small chains across the country, along with independent boutiques that have always been around. But in terms of a neck-and-neck competitor, the closest to DavidsTea is a Toronto-based outfit called Teaopia, which was founded in 2005—also by a seasoned businessman also named David (last name: Bellisario).

Teaopia is up to 35 locations, and a dozen more are slated to open this year. It offers a similar tea collection, but stores have a darker, Asian-inspired decor. “We’re a little more Zen,” says Bellisario, a longtime retailer in the key engraving business. “We’re like the Williams-Sonoma of tea,” he says, referring to the luxury housewares company that projects a classic gourmet aesthetic. Unlike its competitor, Teaopia offers in-store cafes, which serve tea lattes and tea-infused “wellness tonics.” Both companies have grown predominantly in shopping centres, though Bellisario notes “there is room for only one tea concept in a mall,” unlike the vigorous coffee market, which can support multiple brands under one roof because of greater demand. With that in mind, Bellisario is working to expand Teaopia’s street presence, as well as its geographic reach. His stores are concentrated in Ontario, with several in B.C. and Alberta, while DavidsTea extends into the Prairies and Maritimes.

While it’s great to have brand exposure in Manitoba or New Brunswick, there’s still plenty of critical growing room in Ontario and Quebec, where most Canadians live. “If you’re going to be successful in Canada…you can’t ignore those big markets,” says Neil Lester, an expert on quick-service restaurants. “In the Greater Toronto Area alone, they’re going to need 20 to 40 stores.”

Success for DavidsTea will also mean keeping a safe distance from big players like Tim Hortons, which have ramped up tea offerings in the past few years. By sheer number of units, Tim Hortons currently takes the lion’s share of out-of-home tea sales. McDonald’s and Starbucks are close behind. If any of these giants launched a loose-tea counter in just a fraction of their top-selling stores, they could easily gobble the market. “DavidsTea is going to have to keep up the service, selection and atmosphere that will keep the tea drinker engaged to the point they’ll drive by 15 Tim Hortons to get to one DavidsTea,” says Lester.

If DavidsTea can maintain a distinctive edge, growth in the gaping tea market should be certain. But given that tea is a narrow niche within the huge beverage category, the trick, experts say, will be how to build sales over the long haul. “This is a high-growth market, but it’s really, really small,” says Lester. Innovation is key, as any good retailer knows, and the Segals are open to product expansion. Already, they are looking to broaden the baked and packaged goods, and develop a line of tea lattes to keep in step with the competition. But for now, David says, “there’s still a lot we want to do with tea.”

There is merit in sticking to one product and doing it well, Lester says. Honing specialty status as the tea place can build sales by clinching customer loyalty amid what is sure to be a rush of new tea outlets in the coming years—in Canada and beyond. It’s already happening. In the U.S., an Atlanta-based company called Teavana has opened some 170 locations in 34 states and Mexico since launching in 1997. Overseas, specialty tea chains have come out of Germany, France and Taiwan. And most have either debuted in North America or plan to. The Segals remain undaunted by the surge. “I don’t think the competition has really shown itself,” says David. “In this market, there’s no Starbucks equivalent—yet.” Cousin Herschel chimes in, his tone almost indifferent. “If Sweden can do it with Ikea and H&M, we can do it with DavidsTea,” he says, casually suggesting global brand domination à la Starbucks. “Why not?”

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