For centuries, hot tea has been lauded as a healthy beverage due to its antioxidant content. These antioxidants are said to help boost metabolism and even fight cancer, according to a December 2014 report from IBISWorld, Los Angeles, titled “RTD Tea Production in the U.S.” As a result, this health halo has been a major contributor to sales of hot brewed tea over the years. More recently, ready-to-drink (RTD) tea has joined the ranks, boasting antioxidants and mounting sales numbers. However, these beverages will need to innovate past health and wellness trends in order to reach the next level of success, analysts say.

Retail volume of hot brewed tea in the United States has been flat or declining in the past two years; however, consumer preference for healthier, higher-value brands enabled the segment to gain 3 percent in dollar sales last year, according to Howard Telford, senior beverages analyst at Euromonitor, Chicago.

Likewise, health attributes combined with a convenient drinking format have set the stage for RTD tea growth. The canned and bottled tea segment increased 7.4 percent in dollar sales during the 52 weeks ending March 22 in U.S. supermarkets, drug stores, mass merchandisers, gas and convenience stores, military commissaries, and select club and dollar retail chains, according to data from Chicago-based Information Resources Inc. (IRI). In fact, Euromonitor’s Telford has identified iced tea as one of the major growth opportunities in the packaged soft drinks category.

“The health-and-wellness angle is somewhat newer in ready-to-drink packaged teas,” notes Telford. “Both Coca-Cola and Pepsi/Lipton have had big successes in 2014 with Gold Peak and Pure Leaf, respectively — both brands that have branded according to the quality and authenticity of their tea. Honest Tea, a premium, certified organic product, has also experienced strong share gains for Coca-Cola with a focus on ingredient quality and ‘natural.’”

As the government continues to urge manufacturers to lower calorie counts, consumer interest in a healthier diet is also on the rise. According to IBISWorld’s “RTD Tea Production in the U.S.” report, the healthy eating index is expected to increase in 2015, which means that the degree to which the average U.S. consumer adheres to a healthy diet is increasing. This could have a positive impact on demand for tea, it notes.

Nevertheless, in order to keep the positive momentum going for the long term, beverage-makers will need to innovate with new flavors
and formats.

“The tea and RTD tea market is seeing consistent growth as consumers seek healthful beverage options,” writes Elizabeth Sisel, beverage analyst at Chicago-based Mintel, in the firm’s July 2014 Tea and RTD Tea report. “However, many find tea as more of an occasional drink rather than a beverage staple, and health alone will not keep consumers’ interest for the long term. Tea and RTD teas will have to innovate with new flavors, functions and convenience to stay relevant with consumers and competitive with other beverage categories, while not overwhelming consumers with choices.”

Although this might sound like a tall order for the tea category, beverage-makers have already begun introducing new products that fit the bill. By launching differentiated tea offerings into the market, industry players can often charge premium prices for these products, thus boosting their revenue and profit, adds a January 2015 report by IBISWorld titled “Tea Production in the U.S.”

Unconventional flavors

New tea flavors go beyond the popular lemon and peach flavors that the tea category is used to seeing. For instance, Bigelow Tea Co., Fairfield, Conn., released a line of limited-edition bagged teas featuring popular Girl Scouts cookie flavors earlier this year. The flavor lineup includes Thin Mints herbal tea and Caramel & Coconut black tea.

Beverage-makers have also released exotic flavored teas to entice consumers. Honest Tea, a wholly owned subsidiary of Atlanta-based The Coca-Cola Co., recently launched two unsweetened, caffeine-free iced teas: Cinnamon Sunrise Herbal Tea blends organic Vietnamese cinnamon and Fair Trade Certified red rooibos from South Africa, and Ginger Oasis Herbal Tea combines organic Indian ginger, green rooibos and Egyptian lemongrass. The teas are available in 16 ounce cans with a suggested retail price between $1.49 and $1.79.

Tradewinds, a brand of Stamford, Conn.-based Nestlé Waters North America, recently introduced a line of tropical fruit-flavored iced teas. Jimmy Buffett Island Teas are available nationwide in five flavors: Pineapple Coconut White Tea, Tropical Citrus Green Tea, Peach Mango Black Tea, Strawberry Lime Black Tea and Paradise Punch Hibiscus Tea. An 18.5-ounce bottle has a suggested retail price between $1.39 and $1.69.

Additionally, New York-based Steaz recently released four new organic iced green tea drinks featuring exotic flavors. The lineup includes Lightly Sweetened Grapefruit Honey, Unsweetened Passion Fruit, Unsweetened Dragon Fruit and Zero Calorie Goji Blackberry. The canned teas hit Whole Foods Market shelves in March.

“With mass-market consumers, the flavor versatility of tea is key to growth in Europe and North America,” says Euromonitor’s Telford. “Lemon and peach remain popular flavors, but we’re seeing a wide range of new flavor blends, particularly in sweetened green tea. Interestingly, we’re also seeing unsweetened products increasing distribution in speciality channels. Flavors need to convey less artificiality, with simpler and less-sweet blends on the rise.”

In the mid-2000s, Woodbury, N.Y.-based Arizona Beverage Co. found great success by innovating with a half tea, half lemonade beverage called an Arnold Palmer. Although the beverage declined 6.5 percent during the 52 weeks ending March 22, according to IRI data, Arizona's Arnold Palmer was still the No. 5 top-selling canned or bottled tea during the timeframe. Now, other beverage-makers are bringing new creativity to the popular flavor combination.

Red Jacket Orchards, Geneva, N.Y., put a spin on the Arnold Palmer with the introduction of its Joe’s Half & Half Tea Lemonade. The beverage blends cold-pressed, unfiltered New York-style lemonade with apple and lemon juices and Fair Trade, organic guayusa tea.

Added convenience

Offering convenience also will keep consumers coming back to the tea category, Mintel’s Sisel reports. RTD tea options boast a fast and convenient format, which resonates with consumers. However, single-serve pods are a growing segment, according to Euromonitor’s Telford.

“Systems like Keurig have benefited the tea industry as well as coffee,” Telford says. “In North America, pods - which carry a much higher price per serving than individual tea bags … continue to increase their share of total retail value and provide a new avenue for value creation in the industry.” Pods accounted for about 6 percent of tea value sales in the United States in 2014. Coca-Cola’s partnership with Keurig has seen the ready-to-drink Honest Tea brand brought to the Keurig platform and may also be included in the forthcoming Keurig Cold system.

This spring, Seattle-based Starbucks Coffee Co. brought its Tazo Sweetened Iced Tea line to the Keurig single-brewing platform. Available in Sweetened Iced Passion and Sweetened Iced Blushberry Black varieties, the teas both blend tea, spices and botanicals over ice using a Keurig brewer.

Single-serve pods and RTD teas have proven to be some of the most convenient formats for tea, edging out instant tea mixes. According to IRI data, instant tea mixes declined approximately 7 percent in dollar sales in U.S. multi-outlets including convenience stores during the 52 weeks ending March 22.

“Instant tea mixes are the only sub-category that has experienced a decline,” says Todd Hale, former senior vice president of consumer and shopper insights for New York-based Nielsen. “As we are continuing to learn [that] consumers are looking for convenience in every product they purchase, the mixes are no longer the most convenient option when consumers are shopping. With the large availability of ready-to-drink options, it seems as though consumers are choosing the easy option.”

Category competition

Another key to long-term success for the tea category is outperforming other beverage categories.

Consumers have been increasingly shifting from carbonated soft drinks (CSDs) to sparkling waters, bringing significant growth to that category. The tea category is now encouraging both CSD and sparkling water consumers to switch to sparkling tea drinks.

Late last year, Preston, Wash.-based Talking Rain Beverage Co. unveiled the latest line extension for its Sparkling Ice brand: Sparkling Ice Tea. Available in Raspberry Tea, Lemon Tea and Peach Tea flavors, the lineup features a blend of brewed black tea, green tea and fruit juice. The carbonated iced teas made their national debut in January.

Later that month, the Pepsi Lipton Tea Partnership, a joint venture between Purchase, N.Y.-based PepsiCo Inc. and Englewood Cliffs, N.J.-based Unilever, rolled out Lipton Sparkling Iced Tea nationwide. The lineup is available in Lemonade, Raspberry and Peach flavors.

“My prediction is that we’ll see more in the way of sparkling iced tea launches in the near future,” says Euromonitor’s Telford. “I don’t think the extent of the opportunity in carbonated teas has been realized yet. We know tea enjoys a health halo with consumers, and we’ve seen former CSD consumers migrating from both full-flavor and diet drinks to sparkling and flavored waters, generating success for smaller brands. I’d expect more ready-to-drink tea launches that target those consumers with reduced-sugar, flavorful carbonated teas.”

Along these lines, as RTD teas expand into new retail channels, such as convenience stores and vending machines, consumers will have even more of an opportunity to trade high-calorie beverages for carbonated or still RTD teas, according to IBISWorld’s “RTD Tea Production in the U.S.” report.

Future performance

In the next few years, Mintel expects the tea category to experience double-digit growth at a slightly slower pace than it has the last few years. From 2009 to 2014, U.S. retail sales of tea and RTD tea grew 19.8 percent to $7.3 billion, it states in its July 2014 report. From 2014 to 2019, the market research firm forecasts a 16.8 percent rise in sales, mirroring slowing growth of the category’s most prominent category: canned and bottled RTD tea.

To build momentum, Mintel’s Sisel encourages tea-makers to innovate with new flavors, product attributes and packaging formats.

“Manufacturers must find a balance between providing consumers with the flavors, caffeine quantities and brand extensions they desire while not oversaturating store shelves,” she writes in the Mintel report. “New users to the category could easily become overwhelmed by the choices available. Simple, clear marketing will help new consumers find those health attributes they seek, with brands refining their product innovation in order to meet consumer demands (such as flavors, functions and availability of single-cup or bagged tea forms) while not overwhelming them.”

IBISWorld’s “Tea Production in the U.S.” report also points out that baby boomers and seniors will be “a strong source of future demand and will drive specialty product sales, particularly for green and herbal teas.”

 Furthermore, the category’s rising availability in specialty and non-traditional outlets will help to drive tea consumption over the next five years, the IBISWorld report states. For instance, a greater number of specialty teas can now be found in drug stores, gas stations and convenience stores, and vending machines, it notes. This will contribute to the popularity of specialty teas in the next five years, it adds.