STRATEGY

Mighty Leaf is a Darling of Upscale Restaurants and Natural-Food Stores

Should its creators sell their luxe tea in the cutthroat world of supermarkets?
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In late January 2007, Gary Shinner and Jill Portman, founders of Mighty Leaf Tea, called a meeting of their seven-person sales force. Since the couple founded the company in 2000, Mighty Leaf had become a hit in high-end hotels, restaurants, and specialty-food shops. For the past few months, though, the pair had been floating the idea for the company's next big move -- going mass market by selling its premium whole-leaf teas in supermarkets. Lipton Tea had just introduced a whole-leaf line in thousands of grocery stores. Shinner and Portman wondered whether Mighty Leaf should follow suit, a move that would require the company to spend big and fight tooth and nail just to stay on the shelf, with no guarantee of success. Or should the company stick to its rarefied knitting, which would protect the ultraluxe image it had worked so hard to create but might, in the end, marginalize the brand by cutting off avenues for growth?

The question had sparked impassioned debate within the company. Some employees thought rapid expansion through supermarket sales would be a great idea; another faction intensely believed such a move would risk seriously diluting the brand. "I'm really going to fight this, and I'll win," Charlie Woodruff, sales director for the eastern U.S. and a strong opponent of the supermarket strategy, often told his colleagues. Shinner and Portman were seeking a consensus. But even as the management and sales execs greeted one another in the conference room of Mighty Leaf's San Rafael, California, headquarters that January day, the sparring began anew.

How the debate played out would have big consequences for a tea company with modest beginnings and big ambitions. Shinner and Portman got their first taste of whole-leaf tea one summer day back in 1990. Shinner, an investment banker, and Portman, an interior architect, had met at a political fundraiser a few years before in their hometown of Chicago. Soon came love, then came tea. As the couple checked out engagement rings in the city's jewelry district, a salesman brought out a pot of fragrant Chinese oolong tea. They were hooked, and later, when they started having thoughts of starting a business, they knew tea was it. In 2000, after a false start opening a San Francisco teahouse that never turned a profit, they focused on supplying the upscale restaurant and hotel market, which proved thirsty for their premium tea.

Their first smart move was to rethink the dreary old paper tea bag. At the teahouse, Shinner and Portman had served their tea in large rectangular pouches that maximized the flow of hot water to the leaves, creating the rich taste of tea made from loose leaves but without the hassle and mess. Anticipating that competitors might imitate that design as Mighty Leaf grew, the couple trademarked a new one: a roomy mesh pillow stitched with natural cotton thread. The bag was strong enough to accommodate bits of herbs, spices, and dried fruit. Pretty packaging and names like Green Tea Tropical or Organic Breakfast also helped.

Mighty Leaf's gourmet take on tea was perfect for America's growing foodie class, and the organic flavors and biodegradable pouches endeared it to green-conscious consumers. Before long, Mighty Leaf was everywhere affluent consumers could be found -- in Ritz-Carlton and Mandarin Oriental hotels, at the cafés inside Nordstrom and Neiman Marcus stores, and aboard NetJets's private aircraft. "You could no longer throw a paper tea bag in front of people and expect them to accept it" in a high-end setting, says Portman. And it didn't hurt that medical research was showing that tea -- rich in antioxidants -- was a healthier choice than coffee. Mighty Leaf's sales more than tripled in the four years ending in 2006, reaching $13.5 million. It was late that year that Shinner and Portman began discussing a strategy to move into the mass market.

With a strong position in hotels, restaurants and natural-food stores, Mighty Leaf had firmly established its upscale bona fides. But now, the couple was looking to expand the business. And it seemed clear that the big winnings were in mainstream supermarkets. Their sales of high-end tea were already more than twice those of natural-food stores, according to SPINS, a market research and consulting firm for the natural-products industry. And Lipton had already beaten Mighty Leaf to the punch. Its new Pyramid line was being promoted at high-profile entertainment events, like the Sundance Film Festival, and had even been written up in The New York Times's food section.

Shinner and Portman were hardly panicking. They believed that Lipton's arrival would raise the profile of whole-leaf tea, ultimately expanding demand and benefiting Mighty Leaf. And Lipton's introduction of Pyramid signaled that supermarket chains were willing to give shelf space to this emerging niche. By following Lipton into supermarkets, Shinner and Portman estimated they could double the company's sales within a few years.

But there were risks, too. Moving into supermarkets would require a rapid increase in production. The company would need to procure substantially more tea leaves from suppliers in India and make more pouches at its factory in North Africa, which was already swiftly ramping up production. Mighty Leaf would have to hire a national sales staff with success in selling to big chains. And, as a newcomer to the mass market, Mighty Leaf would have to fight for shoppers' attention. Because Shinner and Portman believed consumers needed to be educated about their tea and would want to experience what made it so special before forking over $8 for a box of 15 bags, salespeople would have to be deployed to stores to hold tastings and demonstrations.

These in-store promotions, including coupons and discounts, would cost about $1.2 million, enough to require bringing in outside investors for the first time. Even then, Mighty Leaf would cost at least twice what Lipton was charging for its Pyramid brand. "It's one thing to get into a supermarket, especially in a crowded category," Shinner says. "But it's even more difficult to stay there and thrive."

Then there was the issue of maintaining the company's reputation as a premium brand. Though Mighty Leaf's comparatively higher prices in supermarkets might turn off cost-conscious shoppers, its mere presence in mass chains threatened to alienate the company's upscale fans. Woodruff, the eastern U.S. sales director since 2003, argued that seeing Mighty Leaf on the supermarket shelf would be deeply offensive to his most coveted accounts -- the elite hotels and restaurants that had helped build the brand. They would feel, he said, like "pioneers with arrows in their backs," and small high-end competitors would surely take that opportunity to woo them away.

Woodruff's opinion carries weight at Mighty Leaf. A tea-industry veteran, he knew the dangers of tampering with a brand's image. Shinner and Portman, too, recalled that several years earlier, after Mighty Leaf had begun selling to three- and four-star hotels, the company had found it necessary to create an ultrapremium line for its five-star customers.

Still, Shinner and Portman saw supermarkets differently. As consumers' tastes had evolved, the pair believed, the big chains had been forced to keep pace and were adding gourmet and natural products in droves. The result was that Whole Foods shoppers were making regular stops at Safeway or Publix for the sake of convenience or price. Prestige products had the chance to penetrate both channels and become what Portman likes to call masstige.

Most of the sales reps, eager for new selling channels, were gung ho for the supermarket strategy. Behind the scenes, they were lobbying Woodruff with a steady flow of e-mails and phone calls. But he arrived at the sales summit unconvinced. His sales had trailed the more developed West Coast market's for a couple of years. "I felt there were more customers I could get on board, more places I could wow, before I became a supermarket brand," he says.

The Decision Shinner and Portman heard out Woodruff one more time. He laid out his case against Mighty Leaf's becoming mass market: the move was premature, too costly, and ultimately would put the brand's well-cultivated cachet in jeopardy. But even though he made his case forcefully, Shinner and Portman just as convincingly pushed back. Mighty Leaf, they argued, was firmly established in the upscale sectors of hotels, restaurants, and specialty stores. Supermarkets were the next logical frontier. Shinner and Portman were ready to take the plunge. "There's a constant balance between maintaining your brand's halo and making your product accessible in more locations," says Shinner. "But with the right nurturing, they're not mutually exclusive."

Shinner and Portman began talking to investors. In May 2007, confident they would be able to raise funds, they hired their first national sales director, Rich Clark, the first of two salespeople Mighty Leaf wound up poaching from herbal-tea giant Celestial Seasonings. Clark, formerly a Celestial sales manager, would lead the ground game, hitting up supermarket buyers for the chance to make a presentation. Because buyers are responsible for hundreds of products at any given time, just getting an appointment can be a coup, and it's usually a positive signal about the chain's willingness to give a new product a go. Many buyers were already familiar with Mighty Leaf, either through seeing it in restaurants or at trade shows, or through word of mouth.

In the fall of 2007, Clark sent some samples to Derby Brackett, then a buyer for Ukrop's, a small Virginia grocery chain based in Richmond. Brackett had been looking to add some more expensive tea brands to the chain's existing specialty selection of Twinings, Bigelow, and Celestial Seasonings, and she liked what she saw in Mighty Leaf, especially the attractive packaging. "The same thing that happened in coffee five years ago is now happening in tea," Brackett says. "We have to go upmarket."

Brackett agreed to test Mighty Leaf in an upscale outlet Ukrop's operated in Richmond. If it did well there, she would put it in almost all of the chain's 29 stores. The trial was a success. By November, however, Celestial had already launched its own whole-leaf line, called Saphara. Shinner and Portman decided to accelerate their plans. Instead of trying to reach 6,000 supermarkets within two years, they would do it in one. "You start to worry about the entire category being saturated or other companies taking advantage of this opportunity or blocking space on the shelf," Shinner says. "We felt it better to take advantage of that opportunity rather than waiting till '09."

Meanwhile, Woodruff tried to assuage his customers' concerns about Mighty Leaf's going downmarket. "It was a couple of sleepless nights and a lot of worried conversations," he says. He lost some customers but gained new ones. In the end, he didn't lose any business on the whole.

The final piece of the puzzle -- financing the expansion -- came in December 2007, when San Francisco private equity firm VMG Partners bought roughly a 20 percent stake in Mighty Leaf for an undisclosed sum. The firm's principals had helped launch Vitaminwater into the mass market in 2003, where it fended off copycats from Dasani and Aquafina. "Just because a big guy comes in, it doesn't mean that the entrepreneur cannot compete and get his fair share," says VMG partner Mike Mauze.

Mighty Leaf won its first supermarket account in February 2008, and by October, it had landed in most Kroger, Publix, Safeway, and Stop & Shop stores. Sales were up 25 percent and were expected to hit $20 million for 2008. Within a few years, Shinner says, supermarkets should account for at least 40 percent of revenue. 

Mighty Leaf's mass-market debut has so far gone smoothly, but the economy's deep funk threatens to throw a wrench into the company's ambitious plans. Consumers are retrenching, hotel vacancies are rising, restaurants are closing, and gourmet grocers are struggling. Will supermarket shoppers still be willing to shell out $8 for a box of Mighty Leaf in the depths of a sharp recession? Shinner and Portman are betting yes. Even in an era of belt tightening, they insist, consumers still want to splurge on the little things. Says Mauze: "It's still 50 cents a serving. It's still a simple luxury that the consumer can afford."


The Experts Weigh In

Carpe Diem

The moment is right to move into supermarkets. People have always consumed tea, but there has never been this amount of focus on the health benefits of tea. There's an opportunity for a new player to emerge very quickly. It's wide open. People may turn away from a specialty outlet such as Whole Foods or Trader Joe's, but they are always going to shop in supermarkets. Where Mighty Leaf needs to engage the consumer is with the story of how its tea got to the shelf. This year might not be as conducive as a year ago or a year from now, but if Mighty Leaf goes into it with a longer-term view, it will be OK.

Brian Morgan
Senior Research Analyst
Euromonitor International
Chicago

A Tough Sell

All retailers are competing to demonstrate that they offer great value. I don't think they are going to be eager to be the home of the $8 box of tea bags. A lot of the premium grocery stores have tried to reposition themselves. They used to be about high quality. Now they are about quality for value. There will be a lot of pressure from the larger retailers to offer promotions and discounts. But now that Mighty Leaf has gone into supermarkets, there's no turning back. You generally get one crack at it, so it has got to work. Ideally, they would find a way to promote the tea other than on price.

Seth Goldman
Co-founder
Honest Tea
Bethesda, Maryland

Slippery Slope

Brands are fragile. Any time you play with the customers' perception of who you are, you confuse them, and confused customers don't buy your products. As Mighty Leaf moves downscale, for every two customers it may attract, it risks losing another upscale customer. The problem is exacerbated by lower margins in supermarkets. It's a slippery slope. There are limitations to what a luxury brand can do in volume. It doesn't mean Mighty Leaf can't grow. It should just be doing it under a different brand. When Mighty Leaf is everywhere, it won't be a luxury brand anymore.

Christopher P. Ramey
President
Affluent Insights
Coral Gables
Florida

Last updated: Jan 1, 2009




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