Time to Brew the New: Innovative, Sure, But When Do Next-Gen Tea Brands Take Over?

When Honest Tea first hit the marketplace in 1998 with its organic, low sugar proposition, the idea of a better-for-you iced tea was novel, innovative, and ultimately disruptive. Today, at least in the natural products space, those qualities are fast becoming the standard for all beverages, but this shift has been a long one — a 22-year industry transformation full of fits and starts. Even today, the U.S. ready-to-drink tea category reportedly recorded $3.96 billion in dollar sales, down 0.2%, during the 52-week period ending June 14, according to market research firm IRI, but many of the leading brands, such as AriZona, Pure Leaf and Lipton, still thrive on added sugar and traditional flavor tea profiles.

“Tea is one of the most popular, consumed beverages in the world, but there is the feeling in the community that it’s kind of been waiting to follow in the footsteps of coffee,” said Arif Fazal, founder and managing partner of investment firm Blueberry Ventures.

Though yerba mate and kombucha, both tea-based, have broken out into the mainstream, traditional iced tea has not yet found its next generation of innovative products. Attempts at introducing cold brew to the category, which proved to be a catalyst for RTD coffee’s revival, fell flat for tea, Fazal said, and many of the most exciting trends such as bubble tea have yet to make the transition from on-premise to the retail shelf.

But that doesn’t mean there aren’t startups in the wings with fresh, differentiated products looking to make their mark. Small brands have drawn in growing consumer bases by blurring the category lines, testing new functionalities and introducing uniquely sourced products with international origins.

HopTea Seeks to Blur the Category Lines

Founded in 2018, Boulder, Colorado-based Hoplark HopTea has begun tackling national distribution for its line of canned teas brewed with hops. Recalling the taste profile of a craft beer with no added sugar and tea-styled flavors such as The Green Tea One, The Calm One (with chamomile), The White Tea One and The Hoplemousse One (with grapefruit juice), last fall the brand went nationwide in all Whole Foods Market stores and has begun working with Presence Marketing to help grow its footprint in retail.

According to co-founder and CEO Dean Eberhardt, the company has grown significantly during the COVID-19 pandemic; despite some hurdles in retail during the early days of the crisis the brand grew its ecommerce sales over 6.5 times between February and June to make up almost half of the company’s entire revenue.

“I think that we have an opportunity, because of what’s happening with these market leaders in the non-alcoholic race, and because there is a really strong opening from a consumer perspective on that business,” Eberhardt said. “But the tea category itself, I think, is undergoing a bit of a revitalization.”

For HopTea, the brand has often been met with skepticism from investors and advisors that the company needs to “pick a lane” and choose whether to focus on being a non-alcoholic beer or an iced tea, Eberhardt said. Though it’s formally classified as the latter, HopTea’s experience in market to date has shown that the conventional wisdom around messaging might not apply, as many consumers have intuitively adopted the product for multiple uses throughout the day.

Having launched the brand in local Colorado farmer’s markets, Eberhardt said he and his co-founder, Andrew Markley, used that early platform as an opportunity to gauge consumer feedback on a recurring basis, learning that many of their customers would drink HopTea in the morning as a wake up beverage, at lunch for refreshment and at night as a beer replacement.

“We didn’t have to necessarily teach them that,” he said. “They were kind of mapping out how easily it works and kind of informed us that we didn’t have to overthink it.”

According to IRI, non-alcoholic beer has grown 34.9% to $153 million in sales during the 52-week period ending June 14. A former craft beer drinker himself, Eberhardt noted that many beer consumers are now looking for healthier options, whether that’s lower calorie spiked seltzers like White Claw and Truly or non-alc brands such as Athletic Brewing. However, as consumers gravitate toward the space, HopTea has invested little in education efforts — assuming that the consumer base intuitively “gets it” and that the company’s early farmers market experience has continued to influence how the brand positions the product in national retail.

The brand has tried to straddle the line: playing as a non-alcoholic beverage has opened new channel opportunities for HopTea in on-premise accounts that would have been likely unachievable otherwise, Eberhardt notes. And like many craft beer makers, the company also operates its own taproom and brewery in Colorado; typically open to the public, the taproom is temporarily shut down due to the COVID-19 pandemic. The company even sponsored the 2019 Great American Beer Festival in Colorado last October where it sampled over 4,000 cans.

“The one thing I get challenged on the most is ‘you need to choose a lane,’ and what the customers have taught us is no, we don’t,” Eberhardt said. “And that’s the most controversial position of where we stand relative to the rest of the market, because I do agree with that in theory and that statement in most every case. But for us, the power has been in not choosing that lane and allowing the customers to choose it themselves.”

Fazal noted that, as an investor, he would typically advise a brand like HopTea to choose a single identity. However, he said, as new innovations across all beverage categories continue to push traditional boundaries and create cross-category products, the old standards could be shifting. He cited the rise of energy tea brands, such as Zest Tea and Tea Riot, as well as the yerba mate space led by companies such as Guayaki, as one example of the category blur in action.

HopTea, he suggested, has found a new angle playing in the non-alcoholic space — he pointed out that even the brand’s packaging, 16 oz. aluminum tallboy cans, recall the craft beer segment — and that the company may be able to successfully navigate a double identity. Whether that potential will pan out will come down to the company’s ability to implement its shelf strategy and monitor how consumers use the drink as it expands.

“Historically, I would have said, pick a lane and go be really good in that lane,” Fazal said. “But, I think it’s important to test if you can get your secondary placements, find your tertiary placements and find yourself merchandised in these different subcategories. Where is it working better and where are consumers responding to it?”

Dandelion Tea Finds Its Audience Online

While HopTea is continuing with its retail rollout alongside its online strategy, other alternative tea makers are finding their footing through a focus on internet communities.

Lion, a maker of RTD dandelion teas, often found itself struggling to compete in crowded cold cases in grocery retail, founder and CEO Ray DeRosa said, noting that despite positive feedback from retail partners on the product itself, the company was frequently told there wasn’t space for the brand. Though the drink is shelf stable and could be stocked on the dry shelf, Lion struggled to drive trial without cooler placements.

This year, following a recent rebrand that added new flavors and emphasized dandelion’s functional benefits such as gut health and immunity, the company has turned to Amazon and direct-to-consumer ecommerce as a core revenue stream. Since the winter, DeRosa said Lion has gone from selling about 450 cases per day to up to 4,500 cases per day, with about 20% of individual customers accounting for 40% of all sales. About 76% of all customers, he added, were adding Lion into their daily diets without replacing another product.

“It’s not every day that somebody just incorporates a functional product into their life without replacing something else,” DeRosa said. “So most of our customers are just thinking ‘okay, this is part of my lifestyle now.”

Though dandelion is still a niche ingredient with educational hurdles, DeRosa said the brand has found its audience primarily with women, notably young mothers and baby boomers, as well as early adopters of other natural products trends such as apple cider vinegar drinks. Some consumers, he said, are already familiar with dandelion tea and have nostalgic connotations to grandparents who would brew the beverage for them as children, while others are brought into the brand through marketing that emphasizes functionality and flavor.

Like many other beverages, COVID-19 has proved to be a growth driver online, and Lion has leaned into immunity as a core benefit, DeRosa said. To drive trial, the company offers sample kits with one of each of the brand’s six SKUs, and consumers will frequently choose one or two favorites to then order in bulk. In addition to social and digital marketing, word of mouth has increased online as some consumers become evangelists for the product.

Lion is still available in retail, but expansion plans have been pulled back as online has given DeRosa the opportunity and necessary data to assess its long term strategy.

“If I could convey one thing to other brands, it’s just how much unique data and you can learn about your product by shifting your model to direct-to-consumer,” he said. “Looking back, I’m kind of just kicking myself, like man, why didn’t we start with this?”

Unique Sources and The Buzz of Non-Caffeination

In June, Hawaii-based Shaka Tea raised $2.3 million in a financing round to fund a nationwide distribution expansion for its line of iced teas made using mamaki tea leaves, a plant native to the Aloha State. The brand is currently available in about 2,000 stores nationwide with an additional 1,000 accounts approved for rollout this year, and has also recently launched in Japan.

According to co-founders Bella Hughes and Harrison Rice, same store velocities for the brand grew 18.2% for the 13-week period ending in the first week of July. While Shaka’s local sourcing and sustainability message have become core pillars of the brand identity, among the strongest growth drivers have been the product’s clean label, zero sugar and non-caffeinated properties. In particular being caffeine-free, they said, has taken on a form of functional benefit in itself as consumers look to destress and get better sleep.

“One of the things we’re surmising is that during this COVID pandemic, there’s so much of our life now, almost all of it, that happens at home,” Hughes said. “So the need for restful sleep, the need, to really ensure that you’re going to not be kept up at night — and people already have so many worries and concerns — it’s more prominent than ever. So being caffeine free is huge.”

New York-based Dona Chai has also framed its lack of caffeine as a form of functionality with the launch of its new Tisane line this summer. The drinks, marketed as “tea without tea” are made from a blend of spices, herbs, flowers and fruit and are available in Cardamon Mint, Elderflower Fennel and Turmeric Cherry varieties. According to Dona Chai founder Amy Rothstein, the line meets the trend for clean label, relaxing and wellness-oriented products.

“What I’ve noticed throughout the years about the tea market is that people are starting to move away from caffeine,” Rothstein said. “A lot of people make the choice to drink something totally herbal.”

Chi Nguyen, founder and CEO of Texas-based Purpose Tea, said her brand has aimed to emphasize the antioxidant properties of purple tea sourced from Kenya. Purpose Tea, along with fellow purple tea maker Kabaki, has sought to educate consumers on the health benefits of their key ingredient. Nguyen noted that since the onset of the pandemic, the brand has begun emphasizing purple tea’s low caffeine content relative to green tea as a selling point as consumers report increased anxiety.

Launched in 2018, Purpose Tea is still finding its footing in the marketplace and is aiming to increase its online presence as a means of attracting and educating new consumers, particularly as the retail space proves to be increasingly competitive.

“The retail space, I feel like, is now seeing some level of normalcy and category review schedules are back on,” Nguyen said. “There are some stores that will cut us in opportunistically so we’re still attacking the brick and mortar distribution plan, but we are really augmenting that with a lot of ecommerce and digital efforts.”