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Slowly, but surely, the tea category in the US continues to grow in value terms, even as consumption plateaued in the last year. Retail volume sales of tea in the US were flat in 2014, while value sales increased by 3%. The strong performance of higher priced black specialty tea and the shift towards premium fruit/herbal and green tea brands sustained positive growth despite a failure to increase overall retail tea volumes with US consumers. The mainstream, mass-market appeal of high-end tea remains unclear.

Starbucks – through both its Tazo brand of tea concentrates and through its upscale Teavana café chains and brand – has placed a great deal of focus on ‘chai’ flavour in recent product development. Chai tea – at least as defined by North American consumers – still represents a versatile avenue of value growth in the retail tea segment, particularly for those consumers seeking an indulgent, convenient and full-flavour hot beverage. Brands seeking opportunities in chai tea must focus on flavour and the single-serve product format in chai beverages in order to realize its mass appeal.

Indulgence Opportunity – ‘Sweet Meets Spicy’

In Western markets, chai has come to refer to black tea spiced with some combination of cinnamon, ginger, pepper, cardamom and other ingredients commonly found in traditional Indian chai masala. As a base, robust chai flavourings have proven to be successful in attracting tea consumers to the category. The format has been successful in specialty tea blends (including the Teavana Oprah Chai Tea flagship launch last year) and also proven especially suitable for the milkier, sweet hot tea lattes, and the rich, sweet flavours that consumers enjoy with espresso based latte products. Most of the leading retail brands in US branded tea – from Lipton, to Twinings and Bigelow – have one or more chai tea SKUs in multiple formats.

Why has chai flavour emerged as such a prominent part of US tea mix? Across retail food and beverages – in snacks, foodservice and other culinary choices – Americans have increasingly shown a preference for bolder, spicier flavours in their retail choices. Across the supermarket shelves, chipotle or jalapeno flavourings and the successful Sriracha brand have crept into products ranging from potato chips to chocolate. Within hot tea, chai is one of the most accessible flavour profiles available to mass market consumers that fit with consumer demand for intense, bold flavour. Brands have recognized this opportunity – Starbucks Tazo brand appropriated the Twitter hashtag #SweetMeetsSpicy for its latest chai focused campaign. This is an appropriate tag line for the wider chai category.

Variety and flavour create mass appeal

Part of the challenge in integrating more tea products comes from a lack of consumer understanding about teas. While Starbucks has had success with its Chai Latte, many coffee consumers are unfamiliar with the varying tastes and benefits of an oolong, pu-erh or Earl Grey. But it is in these subtleties that Starbucks can truly innovate. Teavana bars already feature a wealth of varying flavours such as strawberry cream white tea, Moroccan mint green tea, and chocolate chai. Making all these teas available to consumers may be overwhelming but by highlighting a different tea latte blend per month, or per season, Starbucks can further extend its reach to non-coffee drinkers and promote the category with mass-market consumers.

It is through this type of flavour innovation, rather than attempting to educate habitual coffee drinkers into the subtleties of different tea leaves, that brands could have a major impact on mainstream retail sales. Tea connoisseurs are already well versed in the flavours and types of tea they enjoy. For these consumers, discovering new teas at retail outlets like Teavana, DavidsTea or Argo Tea meet their needs. But for casual consumers, trying a Spiced Apple Cider Rooibos or Marshmallow Macaron Herbal Tea latte at their local Starbucks could lead to them exploring these flavours for home consumption.

From its birth in the chained coffee shop, chai teas and chai latte based beverages can take the next step forward – expanded in home consumption – through success in the single-serve format.

Single-serve & pod opportunity

To date, a large percentage of US chai tea volume has remained in tea bags or multi-serve liquid concentrates, frequently packaged in larger format cartons. As an occasional afternoon indulgence, chai flavoured teas may be best suited to the easy, convenient single-serve format that has proven popular with flavoured coffees and other powdered hot drinks. Proper integration into pod-based systems, while retaining bold flavours, is the natural next step to extend the growing appeal of chai tea to US consumers.

Chai’s success as an instant product in Australia is illustrative of this point. In Australia, there has been strong growth since 2009 in the instant tea segment propelled by chai flavoured products. Instant chai lattes appeal to consumers seeking a convenient and wallet-friendly alternative to their favourite on premium café beverage. At less than US $1 per serving in Australia, instant chai lattes are far less expensive than their on-trade counterpart, yet maintain a rich flavour. The premium taste and value-for-money aspects of instant chai lattes, in addition to its appeal as a rewarding indulgence, make it especially popular among females in the 20 – 40 demographic. Most brands are 99% fat free – even while containing milk and sugar – making instant chai latte an appealing guilt-free treat. Furthermore, the sachet format makes instant chai portable and portion-controlled, preventing consumers from over-indulgence. The instant tea category grew strongly over 2009-2012 on the strength of single-serve instant chai, although dipped in 2013-14 owing to the popularity of pod based coffee systems.

In the US, the instant tea category (much like instant coffee) has never won mainstream acceptance with consumers, despite on-trade appeal. Yet single serve hot drinks are growing rapidly thanks to pod-based coffee and tea systems. Pod systems allow for a closed brewing process, easily replicable, that avoids the deterioration of flavour from incorrectly brewing either coffee or tea. While the quality of the tea and coffee may not be of the same standard as comparable whole bean coffees or specialist loose leaf teas, the single-serve system has nevertheless won a loyal, mainstream consumer base through a focus on convenience and a broad portfolio of flavour profiles.

As with espresso based coffee drinks in the US, Starbucks will also be key in shaping the direction of the tea category. Growing its tea business globally is one of the company’s seven growth pillars, but the high-end Teavana tea brand has focused on specialty black and green teas with less focus on chai latte concentrates. Instead, the company’s lower priced Tazo brand has been the vehicle for these products in retail. In fiscal 2013, Keurig extended its business relationships with Starbucks to bring the Tazo brand to Keurig Single Cup brewers. A more aggressive push into the single-serve format and away from multi-serve concentrates may help to bring the chai category into more homes.

Chai flavoured teas – in both hot brewed, cold brewed and latte formats – offer a means of extending the ‘mass appeal’ of tea in the US. While there is little expectation of rapid volume growth in the coffee-dominant North American market, complex, on-trend flavours and indulgent product formats can increase the quality of the experience, driving more value in the category. With continued support for chai products, Starbucks and an increasing number of retail brands continue to place chai at the centre of a US growth strategy for tea.

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