Site-Wide Activity Forums Tea Conversations How to start a tea company…perhaps not…

6 replies, 5 voices Last updated by  peter 4 years, 12 months ago
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  • #7103

    peter
    Keymaster
    @peter

    In addition to building and working on Tea Trade, I also have a full-time job that is not at all related to tea, but I also go to school full-time and am working toward a degree in business focusing on entrepreneurship. I recently finished up a course in Small Business Growth and Management. It was interesting and the final project was to write a feasibility plan for a business we would like to start (a feasibility plan is written well before any business plan as the potential business owner begins to research and develop the concept – it can be very much a living and changing document the way a business plan can be, but it is not as broad in scope). I wrote mine about one version of a tea company that I would someday like to explore (focusing on selling tea in bulk form in grocery stores).

    Like any decent college student who balances work, school and life, I procrastinated on preparing it and ultimately hacked it out in about 6 hours (and ultimately made a lot of assumptions about the costs…)….probably not the best way to research a business…

    Anyhow, as a matter of interest, I offer it up to you all for your reading: Feasibility Analysis: Random Tea Company

    Be critical of it, I’m okay with criticism (and I’m certain my financial assumptions are not detailed enough, and therefore wrong).

    I did get a score 95 out of 100 on it (giving me a final class grade of an A!), and my professor offered me these interesting comments as feedback (which I appreciate her insight and thoughtfulness in responding – not all college professors seem to care as much):

    ~ Whenever you must rely on “conversion”, marketing costs can be considerable. Perhaps you might segment the market in a different way…it may be easier to start with “foodies” who are naturally adventurous and enjoy interacting with ingredients. Additionally, these folks tend to have more sophisticated palates and will more readily appreciate the uniqueness of leaf tea without instruction or education.

    Foodies are an interesting target market. One I’m certainly aware of but haven’t given much thought to yet as I explore this model. She is right, of course in every sense of it and that is a group that will need to be sought after.

    ~ As such, specifically targeting grocers like “Whole Foods” may be a better fit; the market is upper-middle class and they are willing to spend on fresh, unique, and gourmet ingredients. Organic food markets and “New Age” type stores are also good possibilities. New trends generally start on the fringes and spread to the mainstream; conversion is costly and usually benefits subsequent competitors. I’m not sure what is included in your marketing costs, but you’ll need to develop a sales demonstration and hit the road. Securing sales from stores like Whole Foods can help you build your market and develop pitches for more mainstream grocers.

    It seems like Whole Foods sells a lot of different teas these days. We don’t have one near us, but I’m always reading about yet another tea company that has scored a contract with them. Do I consider loose tea a new trend, though? I don’t know if it is fair to consider it that way. In some respects, starting out in the New Age type stores may absolutely be a requirement, but may also do more harm than good to the brand when trying to penetrate more mainstream markets. I am confident that one of the things that holds back loose leaf tea in the US is the new-agey, barefoot, health-aspect marketing that has been the push. As an approach to market, this demands much debate and consideration on potential impacts, consequences and benefits.

    ~ I think it would be quite valuable to invest in focus groups from key targets. The results will help you understand your customer’s understanding of leaf teas and readiness level to explore. You can also determine if support materials (like demonstrations or point-of-sale displays) may be necessary. Groups can also reveal the specific nature of the benefits sought (e.g., adventure, unique taste, healthfulness, natural food, status, preparation ritual attractiveness, caffeine).

    Demonstrations and point-of-sale displays are practically going to be a requirement. This is something I know already, since, in the model, we are introducing what will appear to be an entirely new product to many consumers. They simply won’t know what to do with it. In store demonstrations and sampling is going to be crucial.

    ~ In light of these decisions, you may want to revisit pricing, especially if this market views this product as “special”.

    Yes, absolutely. My paper reflects only a small business start-up and my financials are all wrong. I based the model on starting-up in regionally in a local area (even basing real estate costs on those in my local area) and having a warehouse that serves a region within a state. My cost estimates for startup put this small, regional model in the range just below about $400,000 to startup and operate for three years to sell initial inventory. But based on costs from the stack of tea wholesale catalogs that I have on my desk, my model can’t hold – the costs are far too high to stay within the accepted price corridor for grocery store tea.

    The other side of this, is that any model taking the grocery store approach needs to leverage scale. A small, regional startup based on this model likely isn’t going to work because of labor costs (which are most expensive part of most industries). In fact, the company needs to expand like others and go into food service sales, online sales and other delivery channels – my initial assumptions state the over three years, a small, regional company needs to sell over 6 tons of tea in three years. To approach the grocery store market, I’m thinking that a startup actually needs to be larger and work into the millions of dollars and attempt to cover a broader area (multiple states and major urban centers) – unfortunately, because I’m so busy with all my commitments right now, further analysis to research the most efficient and practical scale of the company startup model is going to have to wait until another day.

    Anyhow, it is always a lot to think about and is always very interesting to me. If any of you have comments about any of this, I’d love to hear them!

  • #7112

    Robert Godden
    Participant
    @thedevotea

    Is $6 per pound realistic? I guess it must be.
    I liked the idea of a moving flavour. I think that would require also shifting packaging. Wine is able to be sold with 2005-2006-2007 next to each other so why not tea?

  • #7119

    Xavier
    Participant
    @xavier

    I just downloaded it and I will read it.

    Thanks for sharing your thoughts.

  • #7167

    Gingko
    Participant
    @gingkoseto

    I don’t know much about business, so there might be some misunderstanding when I read it. But here are what I think:

    * I think your professor’s comments are good!

    * I like the idea very much, and I think that’s exactly what’s missing in American market. Top quality products are also in short, but mid-quality is what reaches most middle class people.

    * Reading your budget, I see that your first year cost is $144,000, and $100,000 is allocated to tea. On one hand, I like this kind of business philosophy, since nowadays, too many businesses focus on fringing matters (such as furnishing a store, advertising…) rather than their own subject matter (such as tea). On the other hand, it seems businesses that throw money on fringing matters and marketing are the most profitable businesses. So in your plan, with only $10,000 advertising cost for the first year, I would be worried about whether the message can effectively reach target customers (supermarkets and local groceries). Besides, I heard many of them charge “placement fee” for any new product (most of them snacks or convenient food that can make money more easily than tea). So I wonder if that would be another potential cost. But if you can work it out, I think it’s great!

    * I think it’s good, and probably necessary to start as a regional model instead of national model. In my region, I can easily imagine stores that are more welcoming to these tea products would be those that focus on healthy food and local farm produces, frequented by college staff, graduate/adult students and foodies.

  • #7231

    Gingko
    Participant
    @gingkoseto

    I think it’s ok if the supermarket products are of decent quality but don’t have as good quality/price ratio as the ethnic store. For example, I would be happy if the supermarket 10 min. away from me could carry more fresh Asian vegetables even if they were a little more expensive. There are a few Asian stores within 45-60min driving distance from me, and there are whole foods, trader joe’s and a few nice farm stores 45min away from me. But I often feel too lazy to drive that far for grocery shopping. I usually hang on with the supermarket nearby for a few weeks with its very limited veggie and healthy food selection, and then, when I feel I can’t survive anymore, have my multiple-hour grocery shopping odyssey once every a few weeks. There are probably tea consumers who would like to pay more in a supermarket as long as it offers some good options.

  • #9174

    Warren Peltier
    Participant
    @tea-author

    *Interesting idea. I couldn’t read the feasibility study, because the link doesn’t work from China. But let me give you my thoughts:

    I would really sit down and try to define the business concept better (normally not part of a feasibility study – but crucial if you’re going to compete in the market (would you rather carve out a market niche and own it, or would you settle for the competition defining you?)

    Then, as your professor said, focus on the fringe rather that taking your product into mainstream grocery stores. Keep in mind a business is a long-term focus, you need to take little steps before you take the big ones. 

    I would try to stay out of the $5-$7 per pound price range. That might be fine if you had a very large scale, and secure suppliers that could guarantee inventory. $5-$7 price per unit product might be fine though (but not per pound) – is that even realistic? I’m in Fujian, China, I buy tea direct from the factory at that price – that’s the lowest priced drinkable-quality tea.

    The point of being in business is to generate profits. You need to give yourself a way to generate sufficient profits so that you can grow and expand in the future. If margins are pretty thin, then you might want to re-think the concept or find some other line of business.

  • #9178

    peter
    Keymaster
    @peter

    It’s been a while since I’ve had a chance to look at this plan and it’s nice that you brought it up again. I would certainly love to have the time to break the plan I created down and work through it a second or third time. 

    @tea-author, one of your comments is address in the plan itself (its unfortunate that you can’t access it since your input would be invaluable. You said:

    Would you rather carve out a market niche and own it, or would you settle for the competition defining you?

    The plan talks about taking an approach around the competition, here’s a quote from the relevant section:

    There are two primary customer groups in the grocery store which are the target market. These are tea bag consumers and coffee consumers. It is the opinion of the principals of the company that tea bag consumers represent a more difficult conversion market than coffee drinkers. It is this reason that the packaging will designed as a variant of typical bulk coffee packaging.

    In comparing the two groups, while tea bag consumers are already tea drinkers they have a disconnect with loose tea as a product. Brewing loose tea involves handling and measuring the dry product, heating water in an apparatus other than a microwave, brewing and straining the tea. Due to the expanse and maturity of the coffee section in the grocery store coffee drinkers already posses an appreciation of product, quality, method, technique and equipment. These are elements that a typical tea bag drinker does not possess but the coffee drinker does; these elements translate easily to the consumption of loose leaf tea. It is for this reason that the Company will seek to convert coffee drinkers into tea drinkers. Existing tea companies are marketing to and competing for a finite segment of tea bag consumers; Random Tea Company will divert around that competition, marketing to and competing for coffee drinkers who are on the edge of their market to begin with. This is the Blue Ocean strategic approach to the market that the Company will pursue.

    The approach of the plan is to come at the market employing a Blue Ocean strategy which involves attacking the market around the competition and working in a space where there technically is no competition. Creating a product (product meaning in a typical grocery store setting means the aggregate of tea, branding and packaging – the tea is not the only product) that addresses coffee consumers – people who don’t drink tea – is a blue ocean approach. I wrote more about in this thread here too.

    The idea is not to sell tea to existing tea drinkers since they lack the understanding of the product, but sell to non-customers, like whole bean, bulk coffee consumers. A brief discussion to understanding three possible segments of non-customers can be found here. Whole bean coffee drinkers fall into the third-tier of the Blue Ocean concept, and it is those customers, IMO, who are the potential core of the growth of tea. 
    The tea industry is growing in the US, but, in order for it to continue to grow, we have to identify and seek out who non-customers are – people who are not buying tea – and convert them. As long as tea companies continue to compete with the same product types, the industry will experience proper growth potential. We must create non-customer conversions.

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