There’s no question about it: iced tea is a hot category.
Sales of ready-to-drink tea totaled over $3.5 billion in multi-outlet channels over a 52-week period ending on May 15, according to data provided by IRI, a Chicago-based market research firm. The figure represents an 8.24 percent increase in sales from a year prior, pacing growth from a similar period from 2014 to 2015, in which category sales jumped by 8.47 percent.
Companies large and small sense opportunity in the category. Although it already has a national RTD brand in Tazo, coffee giant Starbucks recently announced a joint partnership with Anheuser-Busch to produce and distribute a second national line of bottled teas under the premium Teavana brand, which it bought at the close of 2012.
Why the additional product line? Premiumization means opportunity. In a company release, Starbucks cited a Beverage Marketing Corporation report that found that premium RTD tea is the fastest-growing segment in the category, with a 16 percent compound annual growth rate over the past five years, generating $1.1 billion in sales. That shift comes as more conventionally priced teas, like longtime category leader AriZona, have started to face a slowdown as consumers turn their attention to products with lower sugar.
Armed with the production prowess and distribution muscle of Anheuser-Busch, Starbucks is positioning Teavana to make an immediate and significant impact in the category upon its planned launch in 2017. In a memo discussing the partnership, Bonnie Herzog, Managing Director of Beverage, Tobacco & Convenience Store Research, Wells Fargo Securities, wrote that Starbucks “expects to have more points of distribution with RTD Teavana than it has with Frappuccino, which is well over $1B in sales.”
It’s a very different dynamic for entrepreneurial tea companies. With neither the resources nor the clout of Starbucks, it’s hard for them to compete on a national level. But even if smaller companies can’t roll out a national, premium-priced brand over the course of a year, there’s still growing demand for innovative formulations to power growth, particularly among the uber-influential demographic of millennial consumers. According to trade group Tea Association of the U.S.A., 87 percent of millennials drink tea, and they want special varieties, flavors and functions from the drink, which they perceive as a healthy product.
Already, upstart tea brands are seeking traction through unique formulations and brand propositions that go beyond simple premium ingredients or packaging, marketing behind trendy processes like cold brewing or carbonation, or in some cases emphasizing their unique functional ingredients.
CAN COLD BREWED TEA BECOME A HOT COMMODITY?
A few early-stage tea brands are betting that the cold brew craze sweeping through the coffee category will make its way to RTD tea.
Based in Boston, Evy Tea is the brainchild of youthful entrepreneur Evy Chen. The brand markets a five-SKU line of organic, zero-calorie and unsweetened teas made from direct sourced, whole leaf teas that are cold brewed for 16 hours. The beverages are packaged in 10 oz. glass bottles and shelf-stable.
“Cold brew tea is… clearly labeled on the bottles, positioned close to cold brew coffee, so that consumers understand what we do faster, and therefore become curious quicker as well,” Chen said.
Chen isn’t the first to try cold brew tea: both organic juice brand Suja and Harmless Harvest, a producer of super-premium coconut waters, have each launched and scuttled cold brewed teas in recent years,citing a lack of interest and demand. How can Evy succeed where others have stumbled?
“It is more convincing to purchase cold brew from a tea company, versus from a juice company,” Chen riposted.
“We haven’t had much issue adding on distributors or retail,” Chen added, noting that she has become selective in terms of partnering with retailers who “understand the value of adding a zero-sugar option to their offerings.”
TEA STARTS TO SPARKLE
Indeed, amid declining sales of sugary sodas, retailers have increasingly embraced naturally formulated zero-sugar and zero-calorie beverages. Sparkling water products have led the charge, but some believe that fizzy tea products have a long runway.
Virginia Lee, a senior beverages analyst at market research firm Euromonitor International, analyzed the potential market for sparkling tea in an October, 2015 blog post. Lee wrote that “among these non-soda alternatives, carbonated RTD tea has one of the best future prospects, as it answers the call for a fizzy beverage with a better health image than carbonates,”
“Not only does carbonated RTD tea have a health halo, but it has a similar ‘mouth feel’ as carbonated soda, and lends itself to a wide variety of flavors,” Lee said. “As carbonated RTD teas have a light body, they are as refreshing as a carbonated soda.”
Sparkling tea has also been tried before, with Steaz being one of the last premium brands to take a shot at building the category. Currently, manufacturers are trying both conventional and artisanal propositions.
Last year, breakout brand Sparkling Ice entered the category with a line of zero-calorie carbonated teas, while Lipton also introduced a sparkling tea line, albeit of the mid-calorie variety. Both product lines are value-priced and formulated with artificial ingredients, something that Lee believes could appeal to some consumers, but she fears it could end up undermining tea’s aura of health. “Health-aware consumers who regularly read nutrition labels are likely to see that these lower-priced carbonated RTD teas are similar to a diet soda with a bit of tea flavor,” she wrote.
Salim Najjar, a co-founder of Sound Tea, is taking a high-end tack. Launched in 2015, Sound markets a line of all-natural, unsweetened and zero-calorie sparkling teas, marketed as “brewed organic tea + bubbles.” It’s a succinct message that Najjar hopes will resonate with consumers who want a carbonated tea “that is objectively good for you.”
“Most sparkling teas have essentially been ‘better-for-you’ sodas.” Najjar said. “Aside from being unsweetened, Sound is very much a tea-forward sparkling beverage with tea being the main ingredient compared to other sparkling teas that have tea being the fourth or fifth ingredient. [We’re] hitting the market at a point when consumer palates are continuously shifting towards less sweet, and demand for healthy bubbles are at a peak.”
FINDING FAVOR WITH FUNCTION
Euromonitor reports that in the U.S. carbonated, RTD tea experienced 18 percent off-premise volume growth in 2015, much of the growth coming from sales of kombucha, a fermented tea that is lauded for its probiotic benefits. Although kombucha has for years been a favored beverage within the natural channel, it is finding significant crossover appeal among more mainstream consumers, many embracing the fizzy drink as a lower-calorie and healthy option as compared to other products.
Kombucha brands embrace their core ingredient to varying degrees, but at least one leading brand, Health-Ade Kombucha, describes its products as “bubbly probiotic teas.”
But beyond fermentation, there is a growing range of brands that sell tea in a non-traditional format and market them as both functional and refreshing.
Early-stage brand Teaonic, for example, markets a line of functional herbal teas that employ esoteric ingredients previously unseen in RTD beverages.
Founded by Fleur and Desiree Chesler, Teaonic products are brewed from a blend of teas and herbs. Labeled as supplements and packaged in 8 oz. apothecary-style glass bottles, the drinks contain no sugars, sweeteners, artificial or natural flavors, or preservatives, and aren’t designed to be merchandised alongside the regular tea shelf set, according to Desiree Chesler.
Although Teaonic is sometimes merchandised within the RTD tea shelf set, Desiree Chesler believes the brand is best placed with other functional, specialized beverages, a strategy that will she believes will enable it to more effectively communicate its special functions, including gut health and skin health.
Meanwhile, Asi Yaupon Tea takes a more established approach than Teaonic, introducing its blend of wild-picked leaves and twigs from the yaupon, a type of holly tree native to the southeastern U.S. as modern-day versions of stimulating and antioxidant-rich beverages consumed by Native Americans centuries ago.
Asi founder Lou Thomann sees yaupon as an ingredient that, while still unknown to most Americans, is best identified as a natural caffeine source, similar to guayusa and yerba mate. Fused with positioning as a “locally-sourced, low-calorie, all-natural thirst quencher for health-conscious consumers,” Thomann views Asi as an on-trend option across the beverage spectrum. He’s already won over one major customer in Kroger, which carries the brand in 35 locations in the Southeast.
Placement in three dozen Krogers might be a long way from a partnership with the world’s biggest brewer, but you’ve got to start somewhere. Trends heading where they are these days, all kinds of success might be brewing.