Sylvain Toutant knows the beverage business. He led the The Société des alcools du Québec (the provincial retailer of alcohol in Quebec), and later oversaw Van Houtte Inc. as chief operating officer of its Canadian business unit. He then was president of Keurig’s Canadian operations before joining DavidsTea last May.
Toutant was brought on ahead of the company’s public debut in July. Shares of the company now trade on the Nasdaq, which some say is the reason behind the muted reaction in Canada. The company recorded a net loss of $93 million in the first quarter, but Toutant believes it’ll make up for the rocky start as the company continues its big push to expand in the United States. (In 2014, company had 130 stores in Canada and 24 in the U.S. The plan is to have 250 stores in Canada and 320 in the U.S. over the next 10 years). Toutant starts his day with his favourite tea blend: Jumpy Monkey—“roasted peaberry coffee beans with Argentine maté, and laced with almonds, white chocolate and other roasted barks and roots.”
Before joining DavidsTea you were steeped in the coffee business. Why’d you switch teams?
I fell in love with the brand. I have three sons and my two older boys were engaged with DavidsTea since 2010 and it was amazing to see the company evolve. I had a chance to join as CEO and I couldn’t refuse.
This is your first time taking a company to market. What was the experience like for you?
Taking a company to market takes a lot of time. You have to get the company ready in terms of accounting, in terms of compliance. It’s really energizing. It creates a lot of excitement around the company, with the staff and everyone in head office. It’s a great experience but it’s a lot of work to get to.
Why did the company decide this year was this the right time to IPO? What indicators were you looking at?
You make the decision to go public based on your results. After eight years in business we looked at the performance of our company in the last three or four years, we had a lot of growth ahead of us, but still we had enough maturity to know that our concept is very resilient, very solid. It’s a concept that’s really portable. [We have stores] coast to coast in Canada, we’re in four or five markets in the U.S. so we felt really that the company was ready to be taken public.
You had a first-mover advantage in Canadian tea market but now that your brand is more established, you’re up against the biggest competitors, like Teavana (owned by Starbucks). Can you give an example of how DAVIDsTEA has differentiated itself?
First of all, when you look at the competition landscape, tea is an evolving category and much of the tea purchased in North America is purchased in a grocery store. We do compete now with other speciality tea retailers but I think as tea becomes more popular, it’s actually helping Davids Tea carving out our own place. We have a very different approach to tea. We want to make tea fun and accessible. And as you can see the design of the store, it’s very young, it’s very open, it’s very design-focused. We’re not traditional and we want to make sure people can have fun.
How is that different from the experience of going to Starbucks?
In our case 80% of what we sell is consumable, but everything is consumed at home. It’s an on-the-go type of beverage. Our approach is to offer the largest and widest selection of tea. We have about 150 teas, we introduce 30 new teas every year. Every year—we don’t do more or less.What we’re trying to do is double down on our best sellers. This year we took our pumpkin teas from one [product] to four. We’re trying to make it interesting from season to season so that customers come back. It’s a sensory experience that we offer to customers, really.
What has the company learned about its customers—the tea connoisseurs—in the last seven years?
It’s really about the health and wellness trends and offering consumers an alternative to multiple types of beverages, whether it’s coffee, soft drinks, energy drinks—so for us it’s all about share of stomach. It’s not just about tea. We sell a lot of tea but they’re not all tea-based. They’re an infusion of fruits and they’re based on other herbs. Our customers are very young, they’re looking for an alternative drink, they’re looking for something tasty. That’s why we can get them to discover all of our teas and discover different taste profiles.
What you mean by “share of stomach”?
People won’t drink more liquid in a year. They’ll drop something to go for something new. It’s about share of stomach.
DavidsTea has started offering new products, including some body-care products. What else do you have in the pipeline?
We’re looking at food that’s tea-infused. We are testing product line extensions based on customer feedback. We want to have scented candles, for example. That’s been a demand for many, many years.
When you were new to the scene people liked that you focused exclusively on tea. Are you worried about diluting your brand?
We’re not worried about brand dilution as long as the demand for new products exists. The new products we’re getting into is coming from our customer base and fans and superfans—80% our customers are members of our Frequent Steepers club. We get a lot of information from them. Most of it social media information or direct feedback. Every week we have feedback information coming from our stores. And when we launch a new product it’s based on what they’ve told us. We never enter a new product category full steam ahead, we launch in a season, we try it out, what’s postive, what’s negative. We adjust and we keep moving.
About your growth in the U.S. Has it been challenging to adapt the product to suit U.S. consumers?
It’s interesting because when we look at North America, when we look at the mix of what we’re selling, if we look at our top ten teas, in the U.S. versus Canada, it’s really very similar. There’s probably more difference between Cornerbrook and Vancouver than there is between Toronto and Chicago. Because we’re going after millennials, they’re a very very similar customer base and they’re reacting the same way to our concept.
It’s challenging for any foreign company to break into the U.S. market—and the U.S. is not a nation of tea drinkers. Why do you think DavidsTea will be different?
There’s room for about 550 stores in North America and 250 will be in Canada and 320 in U.S. If you start looking at the math, if the U.S. was as developed as Canada probably you could open 2,300 stores in U.S. If you look at the 550 versus the 160 we have now, you’re still looking at a decade of growth. And the growth of the category is the same. The base is lower but the growth is in the double digits.
The company had several positive quarters before going public. After the IPO, the company has only posted losses. What happened?
First of all, the big losses came from non-cash losses. Before going public, we had common shares and preferred shares, which were convertible. When you go public every share has to become common shares. When you do that you have a charge of non-cash to the value of those preferred shares and it doesn’t impact your P&L sheet. We actually made money in Q1, and we lost money in Q2, and we have always lost money in Q2. We make most of our profit in Q4 historically, which is holiday season. So in terms of performance, we’ve beaten the top line and the bottom line and the sales expectations of the market. The rest was non-cash based losses on the IPO.
What kind of company do you want to leave for your successor?
When you look at this company, it’s a lifestyle. It has an impact on our society. We now have 2,000 employees. Hopefully by the time I leave this company it will have 10,000 people, and tea will now be a beverage that is extremely popular in five, 10 years. And that David’s Tea will have contributed to that new more healthy lifestyle.