Victoria Posavad (L) helps Cordilia Ngegwe with tea selection at the DAVIDsTEA location in Toronto’s CF Sherway Gardens shopping centre, on Jan. 11.Fred Lum/The Globe and Mail
It has been more than two years since DavidsTea Inc. DTEA-X completed its pandemic-era restructuring, having shuttered more than 200 stores and refocused on e-commerce and wholesale partnerships. But according to its top executive, a promised turnaround at the company still needs more time to brew.
“That’s something I’m very focused on, is making sure we’re profitable,” chief executive officer Sarah Segal said during a recent interview, on her way to visit one of just two stores left in Toronto.
It’s a far cry from the presence DavidsTea had before the pandemic, with its teal signs on storefronts across Canada and in parts of the United States. The company now has just 18 brick-and-mortar locations in Canada. E-commerce accounts for nearly two-thirds of its total sales, which are a fraction of what they once were.
Now, DavidsTea is looking to gradually open more stores, and is once again eyeing expansion into the U.S., this time on grocery shelves. But sales are still falling, and the company continues to lose money. And one prominent shareholder believes the founding Segal family should sell the business and make room for new leadership. After so much upheaval, what comes next for DavidsTea?
Montreal-based DavidsTea was first launched in 2008 by Herschel Segal, the founder of Le Château Inc., and his cousin David Segal. The company went public on the Nasdaq in June of 2015 at US$19, and initially traded in the high US$20s, but over the years the stock price has fallen steeply. The company has since voluntarily delisted from the Nasdaq and now fetches just around C$0.40 on the TSX Venture Exchange.
The chain expanded its presence significantly through the 2010s, but some U.S. stores struggled, and the company was losing money. Eponymous co-founder David Segal left the business in 2016. (David has since launched a new e-commerce tea brand, called Firebelly.)
By late 2017, the company announced it was considering strategic alternatives, including a possible merger, sale of assets or restructuring the business. A bitter proxy battle emerged for control of the company. From the IPO through 2018, the company went through three CEOs.
In June of 2018, Herschel Segal took over as interim CEO after winning the proxy fight, as a majority of shareholders voted out the company’s board, and elected a new slate of directors put forward by Herschel.
After that battle, the company continued to lose money, as store traffic declined – especially in malls – and online competition heated up.
The pandemic was disastrous for retailers that were already on shaky ground, and many – including DavidsTea and Le Château – sought creditor protection, and closed stores. DavidsTea held on to 18 locations under renegotiated lease terms. Sarah Segal, who had been working in product development with the company, took over from her father as CEO in December of 2020. The company emerged from restructuring the following summer. Herschel Segal stepped down as chair of the board, replaced by his wife and Ms. Segal’s mother, former Le Château CEO Jane Silverstone Segal. Herschel still owns more than 44 per cent of the company’s shares.
“It was heartbreaking to close those stores,” Sarah Segal recalls of the restructuring. But she adds that she still believes in brick-and-mortar stores. “It’s something that is really important, in such a sensory product. And we’re looking forward to enhancing that.”
DavidsTea is hoping to open new stores in Canada, though Ms. Segal declined to specify a target for how many locations the retailer should have.
“We are being very careful to make sure that where we invest, it is the right place. … The best locations are harder and harder,” she said of negotiations with landlords. Finding new customers through e-commerce channels is expensive. Physical stores act as their own form of advertising. But Ms. Segal wants to avoid some of the mistakes of the past, particularly during the company’s rapid expansion in the U.S., where it locked into some overly pricey leases.
The primary way DavidsTea has been expanding its store presence in recent years is on grocery and drugstore shelves: Its packaged teas are in more than 4,000 stores in Canada. The next step is canned, ready-to-drink tea products that are in development, with a plan for a test launch in mid-2024.
The grocery market for tea in Canada is worth $350-million annually, according to the Tea and Herbal Association of Canada. While always trailing far behind coffee, tea consumption has been growing, said association president Shabnam Weber.
“There has been an increase in interest and consumption among younger drinkers,” Ms. Weber said. “That’s really a great opportunity for the industry.”
While DavidsTea has no immediate plans for storefronts in the U.S. – where it still sells online – it is now taking its wholesale strategy south of the border, recently announcing a deal with more than 150 Stop & Shop grocery stores and looking for more partners.
Still, grocery is a tough business, with tight margins and stiff competition for shelf space. Even with a presence in hundreds of stores, wholesale makes up a very small percentage of the DavidsTea business. But Ms. Segal believes it will be an important source of growth.
“We could never open that many stores,” she said. “So this is a really fast-track way to get into people’s hands.”
Online sales are the core of the DavidsTea business. But its operations were forced to undergo a major shift. At the end of 2022, the company was flooded with customer complaints after crucial holiday orders were delayed. DavidsTea worked with a third-party company for order fulfilment at the time. It ended that relationship and began handling orders in-house. While its social-media feeds still contain some complaints about delays and missing products, Ms. Segal says delivery has improved significantly.
Even as DavidsTea works toward a turnaround, it is selling a premium product at a very tricky time. The company lost money in 2022, attributing declining sales and profitability to the economic environment, in which persistent inflation and higher interest rates put a curb on customer demand. It is not the only retailer to note such trends over the past couple of years, as shoppers have pulled back on non-essential purchases – including, perhaps, pricey flavoured loose-leaf teas – as household budgets are squeezed.
“Customers are definitely looking for a deal. We’re trying to just be as reactive as possible. And we’re trying all kinds of offers,” Ms. Segal said. While DavidsTea is pricier than some other teas, she added, it can also be seen as a relatively affordable treat. “We’re not in the luxury category.”
But 2023 has remained tough: In its first three quarters, DavidsTea continued to report falling sales and net losses. The company, which has no debt, has been cutting spending, and is on track to meet its goal of taking $8-million to $10-million in annual costs out of the business by the end of the fiscal year. And it may not be done.
“We reached that target, but it’s an ongoing focus,” Ms. Segal said. “If sales are a challenge, then we’ve got to look again.”
One of DavidsTea’s shareholders believes the board should consider an entirely different track. Justin Dopierala, president and portfolio manager at Domo Capital Management – which holds roughly 11 per cent of the company’s shares – said in an e-mailed statement that he’s aware of an interested buyer who contacted the company in the past several months, but did not receive a “meaningful response.”
“DavidsTea should immediately consider and thoroughly review any and all offers they have received from interested parties before all brand value is permanently lost given the continued shocking rate of decline in revenues,” Mr. Dopierala wrote.
Ms. Segal said the company has responded to everyone who reaches out, and is “open to all ideas.” But she believes now is not the time to sell.
“I can’t say that we’re not open to it, that we’re not considering people’s opinions. But it has to be a compelling and interesting discussion. We don’t want to be distracted,” she said. “… I’m just focused on, really, looking at the turnaround of the business.”