Focus on tea leaves Argo chain with high growth potential

Nation's Restaurant News,  Sept 24, 2007  by Kate Rockwood

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Cappuccino, Frappuccino ... Teapuccino? If the owners of Argo Tea have their way, people across the United States will soon be turning to the tea leaf, rather than the coffee bean, to help get them through their morning commutes.

The Teapuccino, a blend of black, red or Earl Grey tea mixed with steamed milk and froth, debuted when owners Arsen Akavian and Simon Simonian first opened the doors of Chicago-based Argo Tea in June 2003. Childhood friends with a shared background in technology and management consulting, Akavian and Simonian had noticed while traveling abroad that tea cafes were as popular as coffee shops in Europe, though the idea hadn't yet caught on in the United States.

"Tea is still, for Americans, an unexplored area, though it's the second most-consumed beverage worldwide, after water," said Kari Ginal, director of marketing for Argo. In a nod to the owners' Mediterranean roots, Argo Tea takes its name from the ship navigated by Jason as he sought the Golden Fleece in Greek mythology.

Lacking the funds to conduct market research or invest in an aggressive advertising campaign, Akavian and Simonian drew on their entrepreneurial spirit for courage and the charisma of their baristas for street-level marketing. On most weekends, even now, a barista stands in front of each of the cafes, handing out 2-ounce tea samples to pedestrians.

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"Sampling is just an integral part of our strategy," Ginal said. "We have people out on the streets and we always sample at the counter as well. More than expensive advertising campaigns, we believe in guerilla marketing and in word-of-mouth."

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To lure latte-addicts out of their morning routines, the owners of Argo opened their first care, which can sit 24 people inside and an additional 20 on the patio, directly across from a busy Starbucks in Chicago's Lincoln Park neighborhood. With generous sampling, a sleek interior and a creative menu of tea-focused drinks, Argo quickly began drawing crowds of its own.

"I'm usually a coffee drinker, but they were sampling the pomegranate tea one day and I tried that, and it was pretty good," said Ryan Gallagher, a 25-year-old graduate student. Since moving to Chicago in January, Gallagher frequents the Argo Tea in his Lakeview neighborhood twice a week, and though his coffee consumption still outpaces his love of tea, he said Argo has opened him up to tea.

"They have a lot of original teas that you can't find at too many other places," he said.

In four years Argo has grown to include seven cafes in the Chicago area, with two more slated to open this fall. Its roster of nine employees in 2003 has also grown to an anticipated 200 by the end of 2007. The owners, who have funded growth themselves to date, plan to expand beyond Illinois in 2008.

"I think our dreams and our ambitions are very large, but we have a philosophy of one cup at a time, one store at a time," Akavian said. "I think probably in the next 24 months we will be talking about one city at a time."

The Chicago-area cafes are 1,100 to 1,800 square feet and seat 25 to 45 people. The average customer check is $4. For the owners of Argo, giving tea a generational facelift with broad appeal meant breaking away from the doily-filled stereotypes of a traditional tea parlor and designing a space that was modern yet familiar. Argo cafes offer free wireless Internet service and are decorated in mellow hues of green and dark wood, with a curvaceous bar and small, round cafe tables. Though patrons can still order a mug of oolong, the most popular drinks are creative concoctions that are ready in a matter of minutes.

According to Akavian, who would not disclose specific figures, each cafe has been cash-flow-positive from the very beginning, generating a return on each initial investment within the first or second year.

That's no surprise, considering the tea industry's tremendous expansion in the last decade. According to the Tea Association of the USA, the number of tea cafes in America has grown to 2,200 from 200 in the last decade. The bulk of tea cafes are single stores, although Cambridge, Mass.-based Tealuxe, which opened in 1996, now has three tea cafes in the Northeast, with plans to expand to Florida, Arizona and New York.

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For most tea cafes, though, Starbucks is the main competitor. The company, which opened 2,199 new locations in 2006 alone, recently acquired Seattle-based Tazo Tea and beefed up its tea offerings to include tea lattes and additional flavors.

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"What sets us apart is our focus," Akavian said. "We're not worried about Starbucks. Obviously, that's a phenomenal growth story and there's a lot to be learned from them, but I do believe we are successful because we focus on tea."

And in an industry where sales are expected to reach $10 billion by 2010, from $6 billion in 2005, according to the World Tea Expo, the owners of Argo hope that focus will continue to pay off.