Sage Group: Tea Sales are Bigger than you Think

July 12, 2012 No Comments Data Dan Bolton

WINNIPEG, Manitoba

Every retailer knows tea carries an outstanding markup – it’s even more impressive on the grand scale of continents.

In 2011 the United States consumed 116,184,737 kilos (net) of whole leaf and bagged tea, and an estimated 8.6 million kilos (leaf equivalent) of instant tea. Canada imported 19.1 million kilos, re-exported 1.7 million, mainly to the U.S., and drank the remaining 17.5 million kilos accounting for sales of $412 million.

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In the U.S. the tea industry’s wholesale value exceeds $8.2 billion.
So how much is all that tea worth at retail?

It is much higher than you think, according to Brian R. Keating, founder of Seattle-based Sage Group Networks.

Market analysts consistently fail to account for several billion in tea sales, according to Keating.

“The total tea market size has been grossly under-reported” and is actually greater than $27 billion, said Keating who last week released Specialty Tea Is “Hot” Report®, the seventh in a series on specialty tea dating to 1993. He and researcher Dan McKeon identified several billion dollars in tea commerce they say is commonly missed by other market researchers.

“Quantification of the tea industry in the United States – all segments, channels and product types – has always been an arduous undertaking with a wide range of estimates as a result,” according to the report. “Some sources report ridiculously low totals; others are very high. Few analysts provide details on how they arrive at their conclusions and to be fair, there are many reasons tea market quantifications have historically been disparate and contradictory.”

So How Big is the Markup?

Assuming a wholesale cost of goods of $8.2 billion on total sales of $27 billion the gross profit is $18.8 billion and the margin is 70% with a markup of 230%.

RETAIL MARKUP
Selling price: $27 billion
Wholesale cost of goods: $8.2 billion
Gross profit: $18.8 billion
Gross profit margin: 69.63%
Markup: 229%

In its Tea and Ready-to-Drink Tea in the U.S. 2012, market report, released last October, research publisher Packaged Facts predicted “tea – instant, leaf, liquid concentrate and ready-to-drink – is expected to heat up over the next five years, growing from an estimated $7.4 billion in sales in 2007 to nearly $15 billion in 2012.”

Keating said the U.S. blew past those sales total years ago.

Wholesale tea sales totaled $1.84 billion in 1990 and have since grown four-fold, according to the Tea Association of the USA. Tea’s retail value has certainly climbed as well, but none beside Sage place the total anywhere near $27 billion.

Packaged Facts and Sage Group agree that tea is “one of the most underdeveloped beverages in the United States. Tea barely compares in size to beverage categories such as carbonated soft drinks, coffee, and water.”

“The specialty tea industry is booming across North America. Virtually every distribution channel and product type is experiencing growth and high velocity. Our analysts estimate the U.S. tea industry is substantially larger than anyone has calculated previously,” said Keating. “No one has ever taken the effort to drill down into the massive foodservice segment of the tea industry. Yet, industry trade groups estimate more than 75% of all tea consumed in North America is iced or cold. The total tea market size has been grossly underreported.”

So just how big is foodservice?

Foodservice sales are huge say experts, but so is the discrepancy in sales estimates.

All agree that black and flavored black iced tea is by far the most popular with restaurant patrons with green the fastest growing segment in hot and cold. The Tea Association reports 85% of the nation’s 65 billion annual servings are iced with 65% percent brewed from tea bags.

Keating thinks iced tea sales alone amount to $17 billion based on his calculation that 43% of the dry tea imported into the country winds up as iced tea. The newly developed market quantification model assumes a dry tea retail price (extrapolated all the way down to grams used per serving and subsequent dollars captured) of $350 per kilo.

Servings of iced tea in all restaurants were less than 4 billion annually in 2001 according to market research firm NPD Group which calculated 5.6 billion foodservice servings in 2011, based on its CREST Commercial survey of Servings & Menu Importance of Foods.

Using an industry-standard $2.50 per cup as the average retail price, iced tea would account for $14 billion in sales.

This is $3 billion less than Sage Group’s tally.

In its “Coffee and Tea Foodservice Trends in the U.S.,” published in March 2012, Packaged Facts estimated coffee and tea beverage sales at $18.7 billion with coffee contributing $10 billion (53.5%) share and tea accounting for $8.7 billion (46.5% share). This forecast did not include foodservice sales at food retailers, convenience stores, non-commercial foodservice, etc.

This calculation is $8.3 billion below the Sage Group estimate.

Package Facts defends its estimates, explaining that non-alcoholic beverages account for 11% share of restaurant and drinking places sales of $496 billion “which aligns fairly well with Census estimates and the market which consists of a higher percentage share at Quick Service Restaurants (QSR) and much lower at full-service restaurants, where alcohol sales come into play.”

Data is obtained from the Bureau of Economic Analysis, U.S. Census Bureau, International Trade Centre and U.S.D.A., as well from consumer survey usage tracking analysis and trade interviews.

“At 14%, our market size for tea would be about $11.25 billion,” according to Packaged Facts.

“The variance of estimates by virtually every B2B report and source on U.S. total tea sales is massive, with zero chance of alignment occurring anytime soon,” said Keating. He recommends analysts examine closely the relationship between dry tea imports and the most stringent estimates of servings that same tea produces into finished servings.

“Tea industry veterans have reviewed our analytical methodology and consider it entirely plausible,” said Keating.

New methodology

There is general agreement on the amount of tea that arrives in the U.S.
with totals based on Customs declarations of wholesale value and quantities calculated in the GATS (Global Agricultural Trade System) database maintained by the Foreign Agriculture Service.

In 2011 the declared value of all tea (except herbals) was $641,960,000 on imports of 211.5 million kilos. The International Tea Committee (ITC) in London which tracks exports and imports from every producing country reported U.S. tea imports at 127.5 million kilos (excluding powdered/instant tea primarily used to make bottled tea). The U.S. re-exported 11 million of this total.

The Tea Association of the USA estimates the industry’s wholesale value at $8.2 billion. It is comprised of the following four segments, derived from several industry sources and a useful benchmark.

Traditional packaged tea sold in supermarkets, drug stores, convenience outlets and mass market accounts for $2.20 billion of this total. SymphonyIRI Group, a Chicago-based market research firm, estimates supermarket sales of tea bags at $806.8 million of this total [excluding Wal-Mart] with instant tea accounting for $269.8 million and the remainder sold as loose leaf tea.

Ready-to-drink tea also sold in supermarkets, drug stores, convenience outlets and mass market totals $3.5 billion. SymphonyIRI Group estimates the supermarket share [excluding Wal-Mart] of canned and bottled tea at $1.30 billion excluding gasoline/convenience. Sales of refrigerated teas were $442.8 million last year.

Foodservice sales of both hot and cold tea, excluding convenience are estimated at $1.07 billion and specialty tea, comprising a broad range of premium loose leaf and packaged tea, excluding RTD, amounts to $1.43 billion of total sales, according to the Tea Association.

Grand total: $8.2 billion.

“We’ve undertaken a new effort to produce a revised estimate of the total U.S. tea industry annual sales, using 2011 as the base year,” Keating explains. He also breaks the tea industry down into four segments:

Retail dry tea in tea bags, loose leaf and other non-RTD formats tallied $4 billion last year.

Ready-to-drink tea, sold in cans and bottles amounted to $5 billion in retail sales.

Foodservice hot tea, served in restaurants of all types including tea rooms amounts to $1 billion in sales.

Foodservice iced tea, sold in restaurants of all types, including fast-food and convenience topped $17 billion in 2011, according to Keating, making a grand retail sales total of $27 billion for the tea industry.

“We started with U.S. tea imports and deducted export to determine the quantity of tea inside U.S. borders in 2011 – a proxy for total 2011 tea consumption,” according to the report. “Though there are many factors that may cause actual tea consumption to vary from this number, it will likely be quite close. We then extrapolated this figure into various distribution channels and product types to generate a clearer picture of the tea industry’s probable values (dollars generated at point of sale).”

More than just numbers

The new Sage Group report features extensive coverage of the burgeoning growth of retail tea chains, major investors seeking tea-related deals, and interviews with specialty tea industry masters, pioneers, and experts. Significant coverage of the Canadian specialty tea industry is also part of the new report.

Regardless of the actual retail value, “fresh investment capital will go from a trickle to a stream as cash-heavy investors become more comfortable with the upside potential that specialty tea represents,” said Keating. Mergers and acquisitions will pick up speed and retail operations will expand, he predicts.

Very large companies are now diving into diverse tea ventures and “fresh capital sources are lowering their usual minimum investment benchmarks as they discover solid bottom-line profits and untapped growth potential,” he said.

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