Though Starbucks sells tea, the company is famous not for that but for its selection of high-quality coffee offerings. With 17,454 locations in the US and 29,324 across the globe, Starbucks is a juggernaut. But the global coffee chain is just that – a coffee chain. True, Starbucks does offer teas as do many other chains. But tea-lovers have no true “Starbucks of Tea” to call home. On top of that, no dominant player has stepped forward to seize the crown.  

Enter Black Momma Tea and Cafe Inc.  Prior to embarking on her retail ambitions, Vanessa Braxton, the company’s founder, started a DTC business under the Black Momma banner aimed at delivering an assortment of high-quality teas to the company’s clients.  From there, she expanded into a variety of other products, not only focusing on loose leaf teas and tea bags, but also flavored agave, vodka, and CBD hemp vape cartridges.  

Specific financials have not been provided related to her DTC business but she claimed that, since starting the company, it has raked in sales of more than $2.9 million and served in excess of 33,000 customers.  Having used that opportunity to prove out demand for her goods, she decided to launch a physical retail presence – two stores in fact. 

With the capital raised from her crowdfunding push, Braxton intends to open at least two retail establishments in New York, one in East Northport and the other in Wheatley Heights.  One location is estimated to cost between $450,000 and $550,000 to build, while the other has been estimated at $295,000. Management also stated a planned build in New Jersey, but no information has been provided related to that location.  Each location is expected to have an alcohol license, so selling the company’s vodka through its retail establishments shouldn’t be an issue.

Selling the Black Momma brand straight to consumers through retail units creates significant value-generating potential for the company’s shareholders.  

Not only can the business generate sales and profits through these locations, it can also set the stage for growing the brand through franchising arrangements.  According to Braxton, the company has already received 293 franchise requests. While the picture may change, the goal is to charge $75,000 as an initial franchise fee, plus to allow the business to collect a 5% royalty on gross sales, plus another 2% to cover national marketing initiatives under what will be a 10-year agreement for each franchisee.  

Granted, franchising comes with its own risks, the biggest of these being that it reduces control of the parent company over the brand, but many consumer brands decide that those downsides are well worth the high margin cash flows brought in by royalties.  Starbucks, as of the end of its latest fiscal year, had 45% of its stores located in the Americas licensed out, while that number globally was higher at 48%.  

Licensed locations are still far different from full-on franchising, but in some international markets the company does offer franchises.  Of Starbucks’ company-owned locations, average revenue per year is about $1.28 million. If Black Momma can replicate that kind of sales figure per store, including with its franchised locations, franchising 293 shops would generate one-time cash of $21.98 million, plus annual franchise and marketing fees of $26.25 million.  

Including franchised / licensed locations, Black Momma’s goal is to see to it that the company has 500 tea shops opened in its first five years of operations.  In our estimation, such robust growth is improbable, even in some of the best circumstances.  

For evidence, we looked at two comparable firms: Starbucks and Teavana.  For Starbucks, if we count its true start as being 1987, the year that Howard Schultz acquired the business, it took until the second quarter of the business’s 1995 fiscal year to reach its 500th store.  Teavana, a provider of high-quality teas, opened its doors in 1997, but even when Starbucks acquired the business in 2012 in exchange for $620 million, it had only 340 units in operation, all of which were located in shopping malls and similar formats.  These stores were all subsequently closed and the Teavana brand is now sold through Starbucks namesake stores.  It is possible that if the franchise requests to come in strong for Black Momma, it could surprise on this front, but it would represent a truly extraordinary growth story if that ends up being the case.

The company and its own brand aside, the tea business is large, is growing rapidly, and offers consumers and investors alike significant benefits that cannot be overlooked.  Although tea consumption in the US is only one-quarter of what coffee is, on a global scale the opportunity is massive.  In 2016, it was estimated that the space generated annual sales of $46.39 billion and that through 2023 it will see revenue expand at a CAGR of 5.5%, eventually hitting $67.75 billion by the end of the forecast period.  Coffee, today, is about $82.8 billion in size, a decent chunk greater than the $54.5 billion tea market, but its growth rate over the next few years, at 4.3% CAGR, is slower.  By 2023, that market will reach $102.3 billion in size.  

There are several reasons for the strong sales growth being experienced by the tea market.  The first is cost. The estimated cost per serving for tea brewed at home is just $0.03.  Even for the most expensive commercial teas available, the price rarely exceeds $0.10 per serving.  The second reason why tea is looked upon in such a favorable manner comes down to the health benefits associated with it.  One Harvard study, for instance, found that having more than one cup per day resulted in a 44% reduced risk of heart attack.  Another study found that having more than two cups per day reduced the risk of death from cardiovascular disease by between 22% and 23%.  Having any amount of tea has been shown to reduce LDLs (low density lipoproteins), otherwise known as the bad fat in our bodies.  Regular consumption of tea also helps reduce the risks of certain types of cancer, can aid with diabetes, and help when it comes to weight loss, and it has been associated with reduced neurological decline.  WebMD has also listed the drink as one of its 10 Superfoods offering Super Health Protection.

Due to these reasons and more, four out of five consumers in America drink tea (with 87% of Millennials drinking it).  An estimated 51% of all Americans drink it daily, and that has turned the consumption of the product into a $12.66 billion industry, up from $12.5 billion in 2017 and from only $1.84 billion in 1990.  Between 75% and 80% of the product is iced, with the RTD (ready-to-drink) category comprising $6.20 billion of the revenues generated by tea in the US last year.  

The foodservice category, which is where Braxton’s Black Momma Tea & Cafe Inc. business is now focused, is considerably smaller at only $1.55 billion, but that’s because a full 65% of tea is prepared at home using teabags.  The role that Big Momma Tea & Cafe Inc. must play is the same that Starbucks succeeded in playing over the past few decades: being the party that convinces consumers that it’s worth paying a retail provider a premium to make it in-store and serve it to you in a relaxing setting over spending a few cents to make it at home.

The structure of the capital raise being undertaken by Black Momma is simple.  In exchange for cash, the company will be issuing common shares of itself to investors at a price of $7 per unit.  The minimum investment per person, though, will be $500. Major investors in the firm (those who invest $25,000 or more), will have pro rata rights that give them the ability to buy more stock during subsequent rounds of financing in order to stave off dilution.  

In all, the company is looking to raise a minimum of $50,001 (which has been surpassed) and a maximum of $1,069,995, all at a pre-money valuation of $24.9 million.  The first investors into the firm, providing aggregate capital of $99,995, received more favorable terms, with a pre-money valuation of $21.7 million. 

In addition to this current round, the company is already planning for the future.  If it is to grow as rapidly as management expects, it will need to bring on significant capital, which will likely end up resulting in shareholder dilution.  To do this, the firm has already filed for a ticker symbol with NYSE Global Listings. When the time is right, and with the aim of raising up to $50 million, the firm will launch a Reg. A+ offering, also known as a mini-IPO.  Unlike traditional IPOs, an A+ tends to be significantly cheaper and requires less financial disclosure, but like them it will allow the company to have its stock be publicly-traded and to benefit from regular access to financial markets.  

This new offering type is uncommon and was made available only as a result of the 2012 JOBS Act signed into law by then-President Barack Obama.  SeedInvest has an excellent article that explains why, for consumer-facing companies like Black Momma, this type of offering could be advantageous.  

Some companies are built around a key figurehead, while others are built around a team.  Black Momma appears to fall more in line with the former. The star of the show is undeniably Vanessa Braxton, the founder of the Black Momma concept.  Prior to her time there, she served as a structural engineer for 20 years, working with annual budgets for contracts and projects of up to $350 million.  Outside of that space, and more along the lines of her current venture, she has had franchise experience at both Burger King and Red’s.  

Working with her, both at her DTC business and now at the Cafe concept, is Darryl McCoy II, the company’s Vice President of Advertising and Marketing Technologies.  Prior to his time at the Black Momma family of companies, he worked in the category of web development, was a front-end software engineer, and has worked on business branding and identity functions for firms.  In addition to McCoy, the company has a VP of Government and Licensing Organization, a VP of National Sales and Marketing, a Producer of Commercial Media, and an Executive of Marketing Sales and Customization.  

Black Momma Tea is a Deal To Watch. Strong DTC sales, an accomplished founder, an emphasis on a large and fast-growing market, and more all combines to make a promising startup. 

The course here is clear: To succeed, Black Momma must prove to consumers, the same way that Starbucks did, that buying tea from a retail establishment is worth it.  The downside, if the company is wrong, cannot be understated, but with the DTC serving as an initial test, investors should be cautiously optimistic.  

Another key risk investors should be aware of relates to ambiguity from management regarding everything that is included in this offering.  Throughout the offering documents, Braxton makes clear that she intends to roll up her DTC business into the retail one, but she never specified if what crowdfunding investors are currently buying into already includes that or if she will use her ownership over the DTC business to leverage a larger share of ownership over the company at a later point in time.  

We reached out to her twice for comment, once by email and the other by phone, seeking an answer to this question, but management has not provided us with an answer.  More likely than not, the DTC business is not currently included in the deal because the financial statements included in the offering don’t include revenue figures that would match what she alleges the DTC business has achieved.  

The other issue on this front is that, even if the DTC business is included, Braxton, even when asked in the filings, does not say how sales have been over the past year. The figure we have to work with, $2.9 million in sales over the lifetime of a brand, are great. But how much of those sales have come over the past year and are sales growing or shrinking and at what rate?  The mystery remains, and despite our enthusiasm about this early stage company’s potential we are forced to rate it a Deal to Watch.