Added On: Friday, November 21, 2008

Tea Party

Dorothy Pomerantz 11.17.08, 12:00 AM ET

For some luxury goods, the more you charge the more people want the product. Vodka is like that. So is tea

Jill Portman and Gary Shinner used to associate tea with romance and relaxation. They recall shopping for wedding rings in Chicago in 1990 when a jeweler served them an aromatic pot of oolong. Later, when they were married and Portman was pregnant, she enjoyed drinking rooibos tea, an African blend that is supposed to help with digestion. Today tea brings other associations: profit and loss.

Portman and Shinner are cofounders and 85% owners of Mighty Leaf Tea Co., a San Rafael, Calif. company that peddles overstuffed, overpriced organic tea bags. These megasacks, made out of corn starch, hold 2.5 grams of tea, flowers, herbs, dried fruit and sometimes cacao nibs. A box of 15 retails for $8. Mighty Leaf's sales last year rose 27% to $16.5 million. Its pretax profit margin: 10%.

This is the company's second act in the tea business. The first--a sort of Starbucks for tea--flopped.

Shinner, 53, chief executive, spent seven years as a mergers and acquisitions investment banker. Portman, 50, the president, worked as a construction management consultant. At a juice bar one day in 1992 they were struck by the market for healthy beverages. Two months later they decided to work toward quitting their jobs so they could start a retail business. They settled on the idea of opening a tea cafe. "This could be a concept that could be on every street corner, like Starbucks," Shinner remembers saying.

They didn't have any retail experience, so Portman got a job at a Starbucks store in Evanston, Ill., some 15 miles from her office so clients wouldn't see her. She spent three months waking up at 4 a.m. to work a three-hour shift. She was impressed by the retail chain's training program, which emphasized selling the gourmet experience of coffee.

In 1995 the couple took $200,000 out of their personal savings and borrowed $200,000 from family. Where to put the store? The Midwest is for Dunkin' Donuts. To sell gourmet tea you're better off in a blue state. They headed to San Francisco.

It took them 12 months and $300,000 to open Tea & Co., which served its first $1.75 cup of tea in 1996. At its peak in 1999 the Fillmore Street store was serving 300 customers a day, bringing in $400,000 in annual revenue--and losing money. The $54,000 rent, for 1,900 square feet, was a killer. It also hurt that they couldn't tart up the tea into $4 fancy drinks.

But a sideline, packing and selling bags containing tea and exotic ingredients, saved them. Because of Tea & Co.'s prime location, they were able to sell the rights to their lease for $200,000. The couple changed the name of the venture to Mighty Leaf and retreated to an industrial warehouse in Sausalito.

Then they went to work injecting the razzle-dazzle they had picked up in the retail business into their tea-packing venture. When pitching stores, hotels and restaurants, their demonstration often includes cutting open a paper tea bag, containing only broken leaves and tea dust, from a mass-market brand. They then compare it to one of their biodegradable tea bags, with its aromatic whole leaves. They brew the teas and do a taste test. Servers in fancy restaurants are instructed to present a Mighty Leaf tea box and rave about the various tastes and aromas. Portman and Shinner even provide test tubes from which restaurant customers can get a whiff. Mighty Leaf is carried in 17,000 hotels and restaurants and 6,000 food stores.

Selling ritzy tea is like selling premium vodka or perfume: Marketing and price are important. This outfit spends 10% of revenue on marketing. But look at the margins. Mighty Leaf spends 20 cents on an average tea bag--the couple contracts out the production of the bags. Mighty Leaf sells bags at an average 40 cents. Is the restaurant going to complain about the price? No. The theatrics enable it to sell the resulting beverage for up to $7.

Last year Mighty Leaf got its first outside investment. VMG Equity Partners, among the first investors in VitaminWater, spent $7.5 million for a 15% stake in Mighty Leaf, valuing the company at $50 million. (The investment from family is considered debt; they get interest.)

Trouble looms on the horizon. Celestial Seasonings (part of Hain Celestial) and even Lipton (part of Unilever) are elbowing their way into the deluxe tea business. And then there is the recession that is probably now under way. This couple is likely to prevail. Says Shinner: "Passion is a little bit like a drug. It eliminates the fear factor because it focuses you."



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