Tea Sales Slow Online as Stubborn Inflation Nudges US Economy Toward Cliff
Tea brands should brace for a downturn as core inflation increased this month, undermining consumer confidence. A steep drop in tea sales online reported by DAVIDsTEA is a bellwether for what lies ahead.
By Dan Bolton
The sound of crashing stock markets this week reinforced the likelihood that a recession is just over the horizon.
Retail sales rebounded in August, bolstered by low unemployment and higher-than-expected savings. As a result, in-store expenditures (excluding automobiles and gas) grew by 12.3% compared to August 2021. MasterCard projects that holiday sales will increase by 7.1%, which will cushion the next quarter. The latest SpendingPulse report anticipates eCommerce sales to increase by 4.2%. In-store purchases will increase by 7.9%, but there will be a slowdown in retail sales in 2023 as interest rates jump.
Inflation is the culprit, stubbornly remaining at 8.3% in August, down from June and July, but energy and food prices accelerated to 6.3%, up from 5.9% in June and July.
Wholesale tea prices remain firm due primarily to scarcity due to a decline in the production of Sri Lankan orthodox tea. Monthly tea auction prices averaged $4.01 per kilo in July and $4.21 in August, well above last year. Sri Lanka’s Minister of Plantations, Dr. Ramesh Pathirana, told attendees at this week’s Annual General Meeting of the Sri Lanka Tea Exporters Association that tea exports totaled $695 million by the end of July.
Demand from the Russian Federation has returned to pre-invasion levels, and Russian buyers are paying a premium for Indian orthodox tea without flinching. India tea exports increased by 22% through June, up by more than 10 million kilos, of which 8.9 million kilos were orthodox grades. Demand will exceed the 113 million kilos of India’s annual harvest. Kenya has escaped weather extremes and has sufficient stocks and low auction prices but is an unfortunate victim of transport costs that curb demand. China's spring teas were spared, but yields from the summer harvest in much of southwestern China, Hunan, Hubei, and Zhejiang declined.
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Online Tea Sales Slump
DAVIDsTEA, North America’s largest tea chain adopted a digital-first strategy with a big investment in technology and a sizeable online marketing budget, making it a tea retail bellwether.
The company reported a second-quarter net loss of $3.5 million this week to $15.2 million, down 18.7% year-over-year. Sales in Canada decreased by $2.2 million to $12.8 million (down 14.7%). US?sales decreased by?$1.3 million?or 35.1% compared to the prior-year quarter. Gross profit as a percentage of sales decreased to 42.5% for the quarter. Revenue from the sale of mainly loose-leaf tea and herbal blends declined by $2.1 million; teaware sales declined by $1.1 million compared to the prior-year quarter.
CEO Sarah Segal told investors, “After successfully navigating through the COVID-19 pandemic, we are now coping with additional headwinds, notably mounting inflationary pressure and recessionary fears, affecting consumer habits.”
She explained that our second quarter sales declined 18.7% year-over-year as evolving consumer buying patterns post-pandemic impacted e-commerce revenues. “Sales and profitability decreased year-over-year mainly due to an uncertain macroeconomic environment dampening demand in the short term,” she said.?
According to Frank Zitella, President, Chief Financial and Operating Officer, the company is executing a winning strategy. In a press release, he notes that “we have secured a?$15 million?line of credit with a major Canadian bank to assist with working capital needs and help us along our path to profitability.”
Ominously the declines were primarily online. Sales from e-commerce decreased 43.9%, down?$6.5 million?to?$8.3 million compared to?$14.8 million?in the prior year’s quarter. Last year eCommerce sales represented 79.1% of revenue. In 2022 the contribution year-to-date is 54.6%. However, sales at the company’s 18 brick-and-mortar locations grew by $1.1 million to $4.2 million. Revenue in the wholesale channel grew by 238% to $2.7 million. Brick-and-mortar transactions accounted for 27.6% of total sales during the quarter, compared to 16.6% in the prior-year quarter.
BIZ INSIGHT – Retail consultant Joseph Camberato advised readers of Entrepreneur Magazine to do the following six things in anticipation of a downturn. First, reduce expenses, prioritize cash flow, and consider a line of credit. Next, lower your supply chain risk and automate what you can to reduce labor costs. Finally, focus on employee retention; in their annual Compensation Best Practices Report, Payscale found that 76% of organizations experienced labor shortages in 2021. Turnover averaged 24%, much of which was voluntary. In addition, the report found that 44% of US companies say they are losing employees over pay as wages drop in actual value month over month.