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Starbucks' Teavana Fails to Thrive in Struggling Malls

Few people deal with driving to a mall just to get a pretzel from Auntie Anne's or a cookie from Mrs. Fields, but in a packed shopping plaza, those chains serve hungry people. But as chains like Sears Holdings close locations and consumers have fewer reasons to visit the mall, prospects for secondary stores like these become bleak.

This trend has been bad news for food courts and it has claimed another victim. Starbucks (NASDAQ: SBUX) has decided to close its mall-based Teavana stores. That's a not-too-surprising move from a chain that has struggled in launching non-coffee brands, having purchased and closed La Boulange, a bakery chain, and doing the same with its Evolution Fresh juice stores.

Starbucks is closing its mall-based Teavana chain. Image source: Getty Images.

What is Starbucks doing?

The coffee chain won't be getting rid of the Teavana brand the way it eliminated the La Boulange name. Instead, the Teavana name will be featured prominently on tea sold by Starbucks at its stores and through other retail channels. It will, however, be closing all 379 Teavana mall-based stores over the coming year. Those stores had not been performing well, according to CEO Kevin Johnson during the company's Q3 earnings call, which was transcribed by Seeking Alpha (registration required).

"We conducted a strategic review of the Teavana mall-based store business and concluded that despite our efforts to reverse the trend through creative merchandising and new store designs, the underperformance was likely to continue," he said.

What's next for Teavana?

While the stand-alone mall stores failed to draw enough business, Johnson remains excited about the prospects for the brand. He explained during the earnings call that tea was the company's fastest-growing category and he expected it to keep getting bigger.

"We expect to sell over $1.6 billion of Teavana branded, handcrafted beverages through Starbucks stores around the world this year," he said. "Overall, our tea business has grown 40% since we launched Teavana in the U.S. five years ago, and it is up over 60% since launching in China and Japan roughly one year ago."

Johnson expects tea sales to grow as Starbucks finds new ways to offer the beverage. He specifically cited the chain bringing bottled teas into grocery and convenience stores as well as a recent product launch in its own cafes.

"Innovation is key, and we continue to innovate around tea, just this month introducing Teavana Infusions, a flavor platform made from real fruits and botanicals that strengthens our lineup of healthy, less indulgent, premium cold beverages," he said. "We have big plans for tea in Starbucks retail and CPG (consumer packaged goods) globally."

Pleasing customers

Since taking over as CEO in April, Johnson has mentioned changing retail behavior in the United States in both earnings calls he has presided over. What the new boss has made clear is that Starbucks understands that it may be getting less spillover traffic from consumers who did not leave their home specifically to visit the coffee chain.

Adjusting to that new reality involves bringing Starbucks products outside its stores and into supermarkets, convenience stores, and wherever else people buy groceries. It's also about making its own cafes destinations that people choose to visit rather than stop by on their way from or to another retailer.

Tea fills part of that strategy as does the company's efforts to grow its premium Reserve brand. Johnson wants people to have more reasons to visit a Starbucks more often. Whether that's to get an iced tea or to try a $10 one-of-a-kind whiskey-barrel-aged coffee, it's about motivating people to leave their homes in a climate where shopping will continue to move online.

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Daniel Kline has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.