Teapuccino, Anyone? How Argo Got Americans to Drink Tea

Arsen Avakian believed that coffee-obsessed Americans could be taught to share his passion for tea — and built a $15 million business to prove it

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Argo Tea opened its first café in 2003 and now has over 20 outlets in Chicago, St. Louis, Boston and New York City

Fifteen years ago, Arsen Avakian arrived in the U.S. with $360 in his pocket and a Fulbright scholarship to study business. Today the 35-year-old Armenian-born entrepreneur is the founder and chief executive of Argo Tea, which in 2010 brought in $15 million in revenue from its upscale chain of tea shops in the Midwest and Northeast. Thanks to a new line of fruit-infused bottled teas that recently debuted in some 3,000 grocery stores around the U.S., including Whole Foods, Avakian expects his eight-year-old tea company to top $20 million in annual sales by year’s end.

While inventiveness is etched in Avakian’s DNA — his father Yuri, an alternative-energy engineer, holds multiple patents in wind and solar technologies — it didn’t exactly take an Einstein to come up with the idea behind Argo, which is named after the mythological ship that the Greek hero Jason sailed to retrieve the golden fleece. Avakian hit on the concept while working out of coffee shops a decade ago on the many business trips he took as vice president of business development for the software firm i2 Technologies. “I realized that I see a lot of Americans drinking coffee, but nobody in this country is drinking tea,” he says. “A nasty Lipton tea bag is all Americans knew about tea.”

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Indeed, Avakian’s big idea dovetailed with a growing thirst for an alternative to coffee: tea sales in the U.S. surged from $1.8 billion in 1990 to $7.7 billion in 2010, according to the Tea Association. The beverage’s perceived health benefits, along with the growing availability of ready-to-drink offerings at grocery stores and chains like McDonalds and Dunkin’ Donuts, were transforming the sleepy drink that only Granny could savor into a refreshing, midday pick-me-up. “Our goal was to make it easier for people to enjoy tea,” adds Argo’s director of product development, Daniel Lindwasser.

Financing it with their own credit cards, Avakian and his childhood friend Simon Simonian (then a software engineer also living in the U.S.) opened a 900-sq.-ft. tea shop across from a popular Starbucks in Chicago’s tony Lincoln Park neighborhood in June 2003. The store quickly gained traction with tea drinkers intrigued by offerings like Earl Grey vanilla crème (Earl Grey tea blended with vanilla syrup and milk), teapuccinos (the company’s trademarked name for tea and steamed milk) and whole-leaf selections like blueberry white tea (flavored with a natural extract). Unlike most retail tea outlets, which focused on selling tea in bulk to be brewed at home or offering traditional sit-down afternoon-tea services, Argo devised a Starbucks-like model of specialty drinks served in paper cups for a premium price — now about $4 each.

Things went so well that first year that Avakian decided to approach a local Whole Foods store to carry boxed versions of his whole-leaf mango mambo, green-tea strawberry and other flavors. “He was organized and had this attitude that he just wasn’t going to be denied,” recalls Perry Abbenante, then the grocery director for the Midwest region of Whole Foods. But less than a year later, Avakian pulled the line, he says, because he didn’t want to be pigeonholed as just another dry-tea-leaf seller. “It’s hard to say that our green tea is better than someone else’s green tea,” notes Avakian.

Instead Avakian focused on perfecting his one-of-a-kind tea drinks in-house. The Lincoln Park store became a tea lab to Avakian, who was both barista and flavor inventor. “I love creating tea,” he says. On vacation at Rio de Janeiro’s Ipanema Beach, for example, he recalls paying a juice-bar operator a few hundred dollars to close shop while he experimented with flavor combinations that resulted in the company’s mango mateccino, a mix of roasted yerba maté, milk, ice and chunks of mango.

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Even today, with some 26 outlets in Chicago, St. Louis, Boston and New York City, Argo’s flavor choices are its defining quality. The popular hibiscus steamer is a blend of hot herbal tea made from hibiscus blossoms, apple cider and caramel. Its white frostea combines white tea from China’s Fujian province with white-chocolate sauce and peppermint oil. While such sugary drinks aren’t exactly low-calorie, they typically have about a third fewer calories than a Starbucks equivalent.

As Avakian opened more stores in the Chicago area — he had 10 by the end of 2007 and says he was serving some 20,000 customers a week — he realized he needed a way to ensure consistency from one shop to the next. So he began brewing up concentrates in a central location that he would then supply to each outlet and dispense in a clever tap system also found in some craft-beer bars. And he started a “universitea” for employees that rewards them with raises for high marks on written exams about the company and product.

An infusion of cash from investors like billionaire Sam Zell, Oxford Capital and others in recent years has enabled the growing company, which now has close to 400 employees, to snap up prime retail space in iconic buildings during the recession, including the ground floor of Willis Tower in Chicago and the Flatiron Building in New York City. There are now Argo kiosks at Chicago’s O’Hare airport and a new store on the New York University campus in Greenwich Village.

Argo’s most notable success came in 2010, when it began selling a new line of bottled iced teas at Whole Foods in Chicago. To seal the deal, Avakian went back to Abbenante, the grocery director he had first persuaded to carry Argo’s dry teas back in 2003. Abbenante had moved on from Whole Foods by then, but he introduced Avakian to Whole Foods store managers in Chicago, who agreed to carry the new drinks.

Today Argo’s bottled teas, which sell for about $2.40 for a 13.5-oz. bottle, are in some 105 Whole Foods outlets across the U.S. “It is a lot sweeter than other brands,” notes the chain’s Midwest regional grocery coordinator, Chris Kopperrud, who says he carries Argo’s drinks in his stores because they have “interesting flavor combos that are based on pairing tea and juice flavors,” such as green tea with ginger, white tea with acai, and black tea with honey. The bottled teas, which come in an unusual oval-shaped glass container, are now sold in Safeway, Dominick’s and other stores across the country and, according to Avakian, already account for 20% of the company’s total revenue.

Avakian says his company is profitable and on track to reach some $20 million in revenue for 2011, but because Argo is privately owned, there is no way to verify his claims. What’s more, some analysts question whether tea can sustain an entire retail business. “To most consumers, tea is something available in lots of places. There are just not as many people seeking that experience,” says Ron Paul, president of Technomic, a food-industry market-research firm. The top six tea chains in the U.S. now have a combined annual revenue of $443 million vs. Starbucks’ $9 billion.
Others question whether the tea experience offered by Argo can have broad appeal. “They’ve built a place that is kind of cold. It’s too intellectual and industrial,” notes restaurant consultant Clark Wolf of Argo’s airy, green-walled stores.

Avakian begs to differ. “I am succeeding, and I never strayed away from my vision,” he says. Originally hoping to be the Pepsi of tea, he now sees Argo as more of the Apple to Starbucks’ PC. The secret to his success? “You need to be a little irrational. You need to be gutsy.” But the most important ingredient, he says, is passion. “Anyone can pour some liquid into a cup,” he says.