Pepsi Looks to Build on Its Ready-to-Drink Tea Business

Deal With Starbucks, Unilever Lets It Market and Distribute Tazo Line

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A correction has been made in this story. See below for details.

CHICAGO (AdAge.com) -- Pepsi has gained a powerful ally in the tea wars. The company, through its partnership with Unilever, will now manufacture, distribute and market Starbucks' Tazo teas.
As part of the new licensing agreement, Starbucks' Tazo will be bottled by a Pepsi-Unilever partnership.
As part of the new licensing agreement, Starbucks' Tazo will be bottled by a Pepsi-Unilever partnership.

Kraft previously distributed the ready-to-drink teas and will continue marketing and distributing Tazo tea bags and latte concentrates. Starbucks spokeswoman Elise Chisholm said the new agreement should make Tazo ready-to-drink beverages available to a "larger audience." The new licensing agreement between Starbucks and Pepsi and Unilever was announced yesterday.

Starbucks has worked with PepsiCo since 1994, when the companies created a joint venture to develop and distribute Frappuccino, DoubleShot espresso and DoubleShot Energy & Coffee. The tea beverages will be bottled through a Pepsi and Unilever venture known as the Pepsi/Lipton Tea Partnership.

Brands' strengths combined
"As the leading marketer of tea beverages in the world, we're always looking for opportunities to bring our global expertise to more tea lovers," said James Wong, VP-business development, Unilever Americas. "We're really excited about this opportunity to expand the Pepsi/Lipton Tea Partnership and enter into this agreement with Starbucks, whose brands and mission we genuinely admire."

Starbucks' CEO, Howard Schultz, promised an array of healthier beverages since returning to the company's top spot in January. He has described energy and wellness drinks as a relatively untapped market for Starbucks.

Ready-to-drink tea is a booming business. The beverages now account for 75% of the tea market, with $7.4 billion in 2007 sales, up from $4.6 billion in 2003, according to Packaged Facts. The category is expected to swell to $15 billion in sales by 2012.

Pepsi ahead on ice-tea front
Pepsi, which bottles Lipton, already has a healthy lead in the ready-to-drink tea category, said John Sicher, editor and publisher of Beverage Digest. In the first half of 2008, Mr. Sicher said Pepsi had nearly 40% of the market to Coke's 9%. Coke has Nestea and Gold Peak.

McDonald's has also been experimenting with tea, with the highly successful launch of its sweetened iced tea. It's also conducted preliminary tests of bottled teas in a number of locations.

Starbucks acquired Portland, Ore.-based Tazo in 1999. Tazo is currently the coffee giant's in-store tea brand. Kraft, in addition to distributing the aforementioned Tazo products in stores, also distributes Starbucks and Seattle's Best Coffee outside of the chain's cafes.

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CORRECTION: An earlier version of this story incorrectly stated that Sweet Leaf teas are bottled by Pepsi. Sweet Leaf is an independent Austin, Texas-based company. Pepsi also doesn't bottle Honest teas. The earlier version also misspelled the Starbucks spokeswoman's name. This version also clarifies Kraft's distribution of Starbucks and Seattle's Best Coffee.
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