Those who reach for tea without thinking are drinking unconsciously

Conscious Tea North America is awakening to the taste of fine tea

and investors are seizing the opportunity

By Dan Bolton Editor & Publisher

World Tea News | Tea Magazine www.WorldTeaNews.com www.TeaMag.com

Conscious Tea Seeking variety – most diverse beverage market in the world. Aspirational Motivation America rewards suppliers of convenient/quality tea. Game Changer in Foodservice Martin Bauer/Beverage House deal will energize concentrates. Tipping Point Investors see tipping point. Realigning. M&A to speed it along. The Opportunity Convenience: Key to chilled. Education: Key to specialty. Timing is Now Recession reinforced health, drove home value: Tea is both.

OVERVIEW

Five Key Market Facts

The U.S. Tea Market hit $8.6 billion in 2011 (Canada $400 million) packaged tea accounts for $2.15 billion, specialty tea $1.3 billion. Mintel International predicts tea to grow 50% between 2011-16.

Accelerating growth: Projected at 6.6% in 2012 – 8.7% in 2014.

U.S. is now second largest global importer of tea (volume).

The declared value of imported teas rose 10% on steady volume.

Convenience: RTD sales were $6.5 billion in 2011, up 5.2%.

Investors are working feverously to develop new products and build retail infrastructure with unprecedented cash.

Marketing soon to follow.

Source: Mintel International Customer Survey, Tea Association of the USA Fact Sheet

PART I: Egalitarian Tea North America is a diverse, egalitarian tea market where matcha and rooibos attract the same demographic: 157 million drink tea daily.

85 % of tea is consumed cold

60 % prefer sweet fruit flavored tea

37 % prefer organic tea to conventional

Green tea imports up 200% in 10 years, worth $1.5 billion (2010)

Retailers know taste is tops but variety and constant innovation are critical now that health benefits are well understood. Offerings must accommodate cultural preferences such as greens for Asians and fruit blends for Hispanics… today retailers also must offer flavors by season and for several holiday occasions and recently by origin/estate.

Source: Mintel International Customer Survey, Tea Association of the USA Fact Sheet

TREND: EVOLVING MARKET Healthy Blends: Blended with fruit and vegetable juices, tea benefits from health-halo attributes such as freshness, local, all natural, anti-oxidant-rich ingredients and add-ins with functional benefits.2

Hard Tea: Mixing beer, hard lemonade, hard apple cider and other alcoholic bases with tea just got a big push from Molson (Coors Beer Iced T), Anheuser-Busch (19th Hole) and Samuel Adams (Wicked Tea).

Millennials: Nielsen reports 72% of Millennial households drink tea. The mix of men and women is nearly even among 17-34 year olds.1

Beverage as Snack: Tea-based smoothies (matcha) attract consumers seeking beverages as a between-meal snack or light meal.2

Anti-energy: “Relaxation” drinks are positioned as a way to take a break and relax for consumers with a hectic lifestyle.2 Tea is relaxing.

Sources: 1) Nielsen MarketTrack 2011, 2) Technomics: Canadian Beverage Consumer Trend Report.

TREND: Beer Iced Tea This month Molson Coors Brewing will introduce Coors Light ICED T Beer in Canada. It contains 4 % alcohol and no caffeine and follows Anheuser Busch’s announcement they are rolling out 19th Hole, a mix of tea and hard lemonade. Not to be out done, Samuel Adams is expanding distribution of Wicked Tea to the entire country. The company reported a 54 % sales jump in 2011 earning $85.6 million in F/D/C/MassMarket.

A real opportunity lies in the fact this is a continent of well educated, high-minded individuals who make notoriously bad beverage choices. You are in a position to help cure what ails us…. and perhaps save us from ourselves. You can help us to regain our health.

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2003 2004 2005 2006 2007 2008 2009 2010

Total U.S. Tea Imports

Black Tea Imports

Green Tea Imports

22,169 Kg (000)

Kg (000)

12,054 Kg (000)

127,468 Kg (000)

TREND: Imports Up

TREND: Tea Incline In 2011 importers brought in 212 metric tons and valued their tea at $641 million. This marks a 10 % increase in value over 2010 and a an accelerating upward trend.

Source: US Department of Commerce GATS database, compiled by FAS. Stats generated March 11 2012.

Value of Tea Imports from China

$-

$20,000,000

$40,000,000

$60,000,000

$80,000,000

$100,000,000

$120,000,000

$140,000,000

All Tea

Black Tea

Green Tea

$114,451,000 (2011) 24% increase over 2010

$74,027,000 65% of total value

$40,424,000 35% of total value

Source: USDA/FAS Global Agricultural Marketing Database/GATS Stats retrieved March 31, 2012

TREND: Value Up Imports rose in value in 2011. Asian green teas show big gains: Japan up 30 % S. Korea up 27 % Taiwan up 25 % China up 24 % India up 12 % Argentina 10 % UK down -21% Kenya -12%

Source: US Department of Commerce GATS database, compiled by FAS. Stats generated March 11 2012.

PART II — Investment Opportunity The market for convenient/healthy/quality tea is underdeveloped.

The seven-year retreat of soda extends to even diet soda — creating a rare opportunity to gain market share. Soda: $74.2 billion (2010).* RTD is fastest growing beverage segment, now $6.5 billion (2011).

Innovations in tea concentrates will soon revolutionize

foodservice preparation and energize botanicals.

A pioneer in organic tea concentrates and a very clever marketer told me the other day that “given the current vitality of the industry and the fact that the big players are starting to get serious about strengthening their positions in tea, it is entirely possible that the RTD category will grow by 6 % to 7 % a year which would bring the industry to a projected $10-11 billion dollars by 2016.”

Source: Per capita consumption of soda peaked in 1998 at 864 eight-ounce servings.2008 – 760 | 2009 – 736 | 2010 – 728. Beverage Digest. Stats sheet.

Investment Activity Spells Opportunity Coca-Cola’s acquisition of organic Honest Tea (which grew to 100 million bottles in 2010) changed the landscape for market leaders Lipton and Arizona Tea and partner Nestle. In January declining sales of Nestea led Coke to dissolve its long-standing partnership with Nestle, a move that followed Nestle’s successful acquisition of $50 million organic SweetLeaf and Tailwinds. Tata is now closing in on Arizona tea and Coke is investing heavily in Gold Peak, its refrigerated ice tea while launching a line of cold-fill teas under its FUZE brand to replace Nestea. Meanwhile the Pepsi-Lipton Tea Partnership now holds 24 percent of the market, a share worth $653 million. What’s next? The lights in Unilever’s R&D labs are burning late into the night.

Source: Per capita consumption of soda peaked in 1998 at 864 eight-ounce servings.2008 – 760 | 2009 – 736 | 2010 – 728. Beverage Digest. Stats sheet.

Teavana Consolidated Statement Teavana Holdings operates 200 stores: 184 in 37 states are company-owned with 16 franchised locations (13 in Mexico). Expansion: 54 stores in FY 2011 with 60 in 2012 growing to 500 with franchise growth in the Middle East and Canada. Sales: Net $168.1 million (FY2011) Sales & Administration expense: $50,571,000 (FY2010) Net income: +48% to $17.8 million Online sales growth: 56% (7% of net, goal is 10%) Average store net: $82,193 Same store sales: +8.6% Sales per sq. ft.: $994 History: $63.8 million (FY2008)

$90.2 million (FY2009) $124 million (FY2010) $168 million (FY 2011)

IPO Asking Price: $17 (July 28 - NYSE)

Share Price: $20-$25 ($22.36 on 3/30/12)

Market Cap: $800+ million

Fiscal year-to-date (March 31, 2012)

Net Sales: +35% to $168 million Net operations: +34% to $31.6 million

Fiscal 2012 Revenue: Est. $208 million

Source: Second Quarter Financials, Sept. 2, 2011, Teavana 2011 S1 NYSE, Ticker Symbol: TEA FY2011 Report 3/31/2012

Barriers to Entry are Lowering

DISTRIBUTION: Distribution is the most significant barrier to expansion for mid-tier suppliers and can only be overcome through acquisition by majors. Majors are eagerly buying innovative lines.

MARKETING: Marketing is very expensive in the highly competitive beverage segment but this is a rare opportunity to grab share. Soda last registered growth in 2004 and continues to decline. Per capita soda consumption has fallen to 728 eight-oz. servings. Consumers are spending on either value or premium drinks: Tea offers both.

RECESSION: Consumer cash is once again on the table (retail sales are rising despite job market) making this a good time to act.

TREND – Foodservice Concentrates Eighty percent of tea leaf is consumed as fresh brewed ice tea. More than 50 of that volume is brewed in foodservice outlets.

Loose leaf (& pods) Concentrate Inconsistent (fresh taste) Consistent (stale taste) Labor Training, Cleanup Minimal Food Safety Closed system: Food Safe Discard leaf/pods Little waste disposal (discard/recycle)

Advantages of concentrates: Easy to mix. There is no time away from the sales counter, you make only what you need. Ease of introducing next generation botanicals.

Martin Bauer & Beverage House

Beverage House: Proprietary process, supplier since 1984. Martin Bauer: Botanicals, tea, extracts supplier 135 years.

“The biggest challenge to the concept of replacing brewed leaf with a liquid concentrate has been quality, but today’s technology allows us to produce authentic tasting tea products that are difficult to tell apart from a fresh brewed tea,” – Richard Enticott, President & CEO of Martin Bauer Inc.

Healthy Beverage Format

In March Starbucks opened the first of what will be many Evolution Fresh shops. Starbucks acquired Evolution in Nov. 2011 as entry into the $3.4 billion and growing cold-crafted juice category. A patented interactive juice dispenser is used to personalize orders. TAZO has a spigot.

Jamba Juice & Talbott Tea

Jamba Juice Company will retain the Talbott Tea name and phase out Mighty Leaf Tea, now in 440 of the company’s 750 locations. These include 307 company-owned and operated stores and 443 franchise-operated stores with 19 more overseas. Talbott a 10-year old specialty brand is expected to expand its retail presence in specialty grocery, gift stores, hotels, resorts and spas.

Shane Talbott, 40, right ,and 15-year partner Steven Nakisher, 42, founded Talbott Tea 10 years ago. It was named a favorite by Oprah Winfrey in Nov. 2010.

Argo Tea Argo Tea, headquartered in Chicago, Ill., is a pioneer in tea concentrates in foodservice, offering tea lattes and food. There are now 20 locations in the Midwest and 5 in New York City.

PART III – Specialty Retail Drivers

Source: Tea & RTD Tea in the US. Packaged Facts, Oct. 2011.

TASTE. Media & marketers keep the health attributes of tea top-of-mind but taste remains the primary attribute cited by 77 % of respondents who purchase tea. Others buy it because it is refreshing (68 %) and healthy (42 %)

AVAILABILITY. The more readily available, the greater overall sales. Canadian grocers stock larger selections of specialty tea and advertise tea more aggressively. Convenience stores with high CSD see some RTD tea growth and even vending is embracing tea.

CONVENIENCE. Tea travelers, FUSO® tetrahedral and pyramid tea bags, bottom dispensing infusers for loose leaf in restaurants and premium bottled and canned teas (Ito-En, Numi, Republic of Tea) make it much easier to find and enjoy premium quality tea.

Urban success. San Francisco’s three Samovar Tea Lounges promote tea culture amid 150 teas and gourmet food and together gross more than $3.2 million annually.

From left: James Norwood Pratt (Author), Joshua Kaiser (Rishi Tea), Jesse Jacobs (Samovar), David Lee Hoffman (Phoenix Collection), Ahmed Rahim (Numi Organic Tea).

DAVIDSTEA Expansion to a national chain of tea stores seemed destined for 25-year-old David Segal, founder of DavidsTea. Sales at the first Toronto store in 2008 quickly topped $3.8 million. Backed by retail veteran Herschel Segal (Le Chateau) the Mont-Royal, Quebec-based firm has opened a half dozen annually locations annually since then.

DavidsTea stocks 120+ varieties of tea with many flavored and seasonal blends. A 50g pouch of DJ-1 from the Jungpana Estate sells for $15 and a 250g tin is $75 ($300 kg). A Japanese Iwachu Hailstone Teapot sells for $108. The company operates 76 stores in Canada’s provinces and recently opened two new stores in New York City.

Queen St., Toronto

Lansdowne St., Peterborough

CAMELLIA SINENSIS, MONTREAL Annual buying trips mean all 250 teas are sold within a year. A $20,000 air exchange system ensures perfect conditions in their 32-seat space. Tables for two focus on the tea. The shop’s four owners, tasters all, limit expansion to three shops and 30 staff. The retail/wholesale operation makes up 85% of sales. The teahouse earns 5% of gross sales and online sales contribute 10%.

Tea is sold in 50 and 100g pouches. Rare teas in 25g pouches. The average ticket is $12-$15. Online sales average $10-15. An organic Fairtrade DJ-1 Darjeeling is $16 for 100g or $320 per kg. More than 95% of Camellia’s teas are purchased direct from growers around the world.

AMERICAN TEA ROOM This California tea bar seats six. A pot sells for $5. Tea service with scones and snacks is $20. Top selling Nirvana, a blend of Japanese Sencha, berries, figs and kiwi retails for $15/100g. Food is 4% of sales. Yet the American Tea Room grossed $1.5 million in 2010 and 2011 selling premium loose leaf and teaware. How does he do it? A typical transaction consists of

four $15-20 bags of tea with an accessory. Average ticket is $89 and topped $100/Q4 (2011). On Mar. 20, 2012 he grossed $17,000 ($907 per sale) his best day yet.

Exceptional online sales. Relentless marketing. Ever-changing offerings.

AMERICAN TEA ROOM “We paid $340 per kilo for a white Darjeeling, and the rest in the $200 range. We are ordering several first flushes. I will be in Japan to inspect the first flush Sincha on sight in late April and we will be bringing in both white and slightly more oxidized first flushes from Darjeeling. Our prices for pre-Qing Long Jing are $35 to $80 for 100 grams. We have been fortunate to sell more than 40 kilos of various first flush between May and July (when we usually run out). We would buy more but much of the finest and rarest first flush goes to Germany so it is not so easy to get the quality we want. Our Arya Pearl (white Darjeeling) was extraordinary last year. It really helped out with sales.”

David Barenholtz, founder of the American Tearoom, Beverly Hills, Calif.

Arya Pearl: $52 – 2 oz $144 – 7 oz $256 – 14 oz

Inventory 7 kgs.

Specialty Tea Growth

Store count will rise to 4,500 with Teavana +500 and new format stores Jamba Juice +450 and Evolution Fresh +?

Expansion of distribution has made organic and specialty brands widely available (Honest Tea and Sweetleaf Tea)

Renewed emphasis at coffeehouses to upgrade tea offerings

Increased menu choices in restaurants (green|loose leaf)

Continued recognition of tea’s healthy properties leading to a switch to tea from carbonated soft drinks.

Americans are making a conscious choice in teas.

“The horizons for tea indeed look bright.” Packaged Facts

Source: Tea & RTD Tea in the US. Packaged Facts, Oct. 2011.

+1 204 788-1359 (CAN) +1 650 576-0306 (US) Skype: dwjbolton 1108-21 Roslyn Road Winnipeg, MB R3L 2S8 Canada

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Dan@WorldTeaNews.com

www.TeaMag.com

Dan@TeaMag.com

THANK YOU FOR ATTENDING North America Awakens to the Taste of Fine Tea

Investors Seize the Opportunity

Dan Bolton Editor and Publisher