Starbucks’s (NASDAQ:SBUX) made its $620 million acquisition of specialty loose-leaf tea retailer Teavana Holdings (NYSE:TEA) with the intention of strengthening its product base, but the coffee company may have bought itself a dud.
In a press release announcing the purchase the company stated, “Just as Starbucks pioneered a new retail experience for coffee and espresso, the company’s acquisition of Teavana provides the opportunity to do the same with the rapidly growing $40 billion global tea category.”
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The deal made sense for Teavana as well; before Starbucks’s intended purchase was made public, shares had been trading around $10, and the stock was on a downward trend. Over the last year, the company’s stock price has lost more than 50 percent of its value. However, shares rose close to 60 percent, reaching a high of $16.06 on November 14 after the agreement was finalized.
But Teavana might not be the purchase that Starbucks thought it was. Glaucus Research Group reported on Tuesday that independent laboratory tests have shown that Teavana’s teas contain more pesticides than U.S. and European Union regulatory limits allow. Not only is the pronouncement shocking given Starbucks’s well-advertised commitment to ethical sourcing, but also given Teavana’s own statements.
The tea retailer has built its brand on the idea that its teas are healthier than those of other companies because they are pesticide free. In a 2011 Annual Report filed with the U.S. Securities and Exchange Commission, the company said that its teas “undergo rigorous testing based on food safety specifications established by European Union regulations for the presence of pesticides.” Furthermore, as stated in the firm’s research, Glaucus contacted salespeople at more than 80 retail stores of which 98 percent “stated unequivocally that the Company’s teas are pesticide free.”
However, tests conducted on a sample of 13 of Teavana’s most popular teas by an accredited German lab showed that 100 percent of the tea samples contained pesticides, many of which are classified as possible human carcinogens by the Environmental Protection Agency. Monkey Picked Oolong was the most contaminated, with 23 different pesticides found in the sample. Even more alarming, 62 percent of the tea samples revealed traces of Endosulfan, a pesticide that has been banned in the United States, China, the EU, and 144 other countries.
The lab also tested Starbucks’s Tazo teas as a basis for comparison, and the results showed those teas to be better quality. The average Teavana tea is priced at a 368 percent premium to Tazo, yet they contain three times the number of pesticides.
Based on this news, shares of Teavana are down 3 percent in early afternoon trading, and Glaucus recommends that Starbucks abandon the deal for the sake of its brand. The research firm now holds a Strong Sell rating on the stock.
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