Food & Beverage

Tea titans: One chain’s plan in face of Starbucks offensive

When Argo Tea CEO Arsen Avakian opened his first tea cafe, competition was scarce. Fast forward a decade and now he's facing a Goliath in the coffee industry: Starbucks.

In January, Starbucks CEO Howard Schultz provided a glimpse into Starbucks' blueprint for tea to analysts as it seeks to capitalize on the global tea market, which measured roughly $87.5 billion last year, according to Euromonitor data.

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"A year after the acquisition of Teavana, we are more convinced than ever that we have the opportunity to transform the tea category the way we have transformed coffee—all around the world," said Schultz about a category he's described as "ripe for innovation."

Over the next decade, Starbucks plans to open an additional 1,000 North American locations of Teavana, the tea company it bought last year for $620 million as part of its latest effort to diversify beyond lattes. These new stores will include two types of locations: The tea retail stores that the company is known for and a tea bar concept, which launched in New York City and Seattle late last year.

Argo Tea
Adam Jeffery | CNBC

Starbucks' goal is to combine Teavana's experience in tea merchandising with Starbucks' strength in retail store development and handcrafted beverages. Schultz noted that the two tea bar concept stores have already provided insights into this goal.

The move makes sense too as coffee consumption has sputtered over the past few decades while tea consumption has risen.

Since peaking in 1946 at 46.4 gallons, per capita availability of coffee, an indicator of consumption, decreased to 24.7 in 2011. This level has stayed roughly constant for the past decade, according to USDA data. Meanwhile, tea availability per capita in the U.S. climbed to 9.3 gallons in 2011, its highest level since 1918, according to USDA data.

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Starbucks' rapid expansion plans have put it in the crosshairs of Argo Tea, a tea cafe chain that began in 2003.

After more than a decade in which "a lot of the giants were kind of asleep," Avakian said he does have concerns about Starbucks' upcoming growth.

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Ironically, Avakian drew part of his inspiration for his business from his time frequenting Starbucks locations when he worked in the tech industry. After observing Americans make tea incorrectly with poor-quality ingredients, Avakian said he understood why U.S. tea consumption lagged much of the rest of the world.

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To fill what he perceived as a void, Avakian recruited mixologists to design tea-based drinks with all-natural ingredients. Thus, the Mojitea, Teappuccino and other drinks with puns were born.

Since the company's first store opened in Chicago, the company has grown to nearly 40 locations in five countries.

Since Starbucks' Teavana acquisition, it has ramped up its own expansion plans. This year, it plans to open between 15 and 20 stores with an emphasis on the Boston and D.C. markets.

"We are hitting on all the cylinders we can with the resources—obviously compared to them, the midget resources—we have," Avakian said.

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While Avakian said he isn't concerned Starbucks will steal his business, he does worry about the coffee chain's potential to grow incredibly quickly.

"It won't matter if I'm the best or not. If they just amass ... mediocrity out there (quickly), American consumer psyche will settle on that," he added.

—By CNBC's Katie Little. Follow her on Twitter @KatieLittle.