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Coffee giant Starbucks Corporation (SBUX - Analyst Report) unveiled its first ever tea bar in Manhattan, New York. The first-of-its-kind tea bar combines Starbucks’ signature expertise in store design and customer experience along with Teavana’s age-old proficiency in tea sourcing and blending.

The tea bar will offer a wide range of hot brewed and iced teas, tea lattes and distinctive sparkling and tea fusion beverages. The retailer will also serve pastries and breakfast items, salads, flatbreads, macaroons, shortbreads and other desserts. As per Associated Press, while the food items will range between $3 and $15, drinks will range from $3 to $6.

Starbucks acquired Teavana in Dec 2012 with the objective of capturing share of the $90 billion tea category. Teavana was a specialty retailer of tea, which operated only through mall-based stores. Starbucks opened a few stand-alone Teavana neighborhood stores, going beyond its mall-based focus).

The acquisition complemented Starbucks’ core tea business of Tazo tea. Over time, Starbucks plans to create a two-tiered business, where both the Tazo and Teavana-branded products will co-exist within the CPG channel.

We are encouraged with Starbucks’ endeavor in the tea business. The tea industry is thriving in the U.S. with the tea makers producing newer flavors, strengths and sweeteners. Moreover, the high product differentiation of tea enables the makers to earn high profit margins despite recessive conditions.

The ageing population of America is drawn to tea as the product is positively linked with health and disease prevention. As per market research firm, Euromonitor, the tea industry is projected to grow 10% in on-trade volume terms by 2017.

However, Starbucks’ Teavana and Tazo tea will have to compete with major players like Unilever plc’s (UL - Analyst Report), R.C. Bigelow, The Hain Celestial Group Inc. (HAIN - Analyst Report) and Tata Group. Moreover, we feel that the high-end teas might do well in markets like China, which is more accustomed to such teas, but it would be a challenge for Starbucks to popularize the drinks in the American market, which is more accustomed to coffee.

Starbucks currently holds a Zacks Rank #2 (Buy). Another stock in the retail restaurants worth considering are Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report) carrying a Zacks Rank #1 (Strong Buy).

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