The Next Starbucks? Bruce Fernie wants to do for tea what Howard Schultz did for he kidding?
By Julie Sloane

(FORTUNE Small Business) – You feel a certain magic the minute you walk in the door. Nestled into college towns and chichi shopping streets, a chain of tea bars celebrates in classic dark woods and copper accents the refined American tea culture that never was. The elegant, down-to-earth atmosphere has an old yet timeless feel, with mirrored walls and colorful porcelain teaware emitting a warmth that sidesteps Zen and frumpy Victoriana to fulfill the company motto: "Tea for All."

If married co-founders Bruce Fernie and Katherine Walsh have their way, the heir to Starbucks' gourmet coffee craze will be Tealuxe, with its 100-plus varieties of premium loose tea, prepared by "teatenders" to the highest standards of water temperature and steep time. The Boston-centered chain combines Fernie's vision and Walsh's store design. (For more on spouses in business, see "Till Death [or Bankruptcy] Do Us Part," page 92.) On the surface, four-year-old Tealuxe is a burgeoning hit. According to the company's CFO, Bob Kliewe, its top stores bring in $1 million to $1.2 million per location, revenues comparable to those of thriving Starbucks outlets.

All the customers we met, including ourselves, spilled praise on the stores. But a thriving local business is a long way from Starbucksian success. One big problem is that while tea may be the second most popular beverage in the world after water, not so in the U.S. And there are other challenges, among them solidifying leadership, management, and a solid economic model. There Tealuxe is also on shaky ground. Organizational troubles derailed its expansion plan in late 2000, leaving it in a holding pattern with seven stores and culminating in the ouster of CEO Greg Keenan. Whether Tealuxe can succeed in doing for tea what Starbucks has done for coffee hinges upon finding that silent cult of tea drinkers and focusing Tealuxe's management on capturing them nationwide. The moral of this story? A cool niche business may not translate into a great one for the masses.

Changing Americans' tea-drinking habits will be no small feat. Americans don't often grumble, "I'm grouchy until I get my morning tea," and analysts think that's dangerous ground to tread. "You want any retail concept to operate in an established market, not one that you have to invent," says John Ivankoe, an equity analyst for J.P. Morgan covering restaurant concepts. "Starbucks succeeded by offering a superior brand of what people already drank every day."

Tea's image, though, is that of a sore-throat remedy or Grandma's musty parlor drink, which gives Tealuxe a major educational chore. When asked how Tealuxe is going to find its audience, Fernie invokes Starbucks. "They said Howard Schultz was crazy 10 years ago, when he was selling another brown water. Why would anyone pay $1.50 for a cup of coffee when they could get it in 3,000 places for 50 cents? He told them this is better, and here's why. That's exactly what we're doing." Unfortunately for Tealuxe, the to-go tea market doesn't have that same head start.

The burden of making tea for all will not rest with Fernie. Unlike Howard Schultz, who was both the vision and the motor driving Starbucks, Fernie, 48, has no interest in running Tealuxe on a day-to-day basis. He shares an office with Walsh in Boston; Tealuxe corporate headquarters is 45 minutes away in Franklin, Mass. "If I spend too much time in Franklin, I'll screw it up," he says, "because I've done it before."

A look at Fernie's past reveals a remarkable eye for creativity and concept, but a spotty record of taking those concepts to the big time. In 1983 he built a small chain of bakeries similar to Au Bon Pain, specializing in European-style baked goods. Two years later Fernie sold that business after discovering that "going to the bakery at 5 a.m. wasn't my idea of fun." In 1986 he opened a chain of eight stores called The Brassworks, selling designer-quality hardware and home decorations, a concept similar to Restoration Hardware's. The Brassworks collapsed in 1989's recession. Fernie had been its hands-on CEO. While Au Bon Pain and Restoration Hardware went national, Fernie's businesses never left New England.

With Tealuxe, Fernie sought business leadership that complemented his creative strengths. He and his board members from the Boston VC firm Halpern Denny, which poured more than $7 million into Tealuxe, made the key hires: CFO Bob Kliewe from Strawberries Records; VP of Operations Steve Morgan, who ran Ghirardelli Chocolate's shops; and CEO Greg Keenan of Brueggers Bagels and Pizzeria Uno. Wooed by the success of the Harvard Square store and by Fernie's enthusiasm, each signed on believing that the Tealuxe concept had legs.

Starting in April 2000, the company, led by Keenan, unveiled its growth strategy, rolling out six stores in eight months--until a series of disasters showed that they simply weren't prepared for the big time. Expansion into suburban Boston has been initially disappointing. In August, Tealuxe opened an experimental store in New York's Citicorp Atrium, the food court of a giant office building. After abysmal sales, it closed in January. Fernie estimates they lost a total of $150,000 on that store alone.

Company execs admit they didn't do enough due diligence before diving in. "We knew sales in the food court were slow, but we thought that was possibly because there was not a good offering," says Fernie. As Tealuxe discovered, Citigroup has a popular corporate cafeteria. Both Fernie and Keenan readily accept blame for the Citigroup debacle.

That failure and other execution problems led Tealuxe to cut bait on growth, leaving the company with five stores in the Boston area, one in New York City, and one in Providence. A store setup that had been built off-site for a location in New York's World Financial Center now sits in a warehouse, and two other deals that had yet to be signed were scrapped. A week after shuttering the Citicorp store, while Fernie was on vacation, the board fired Keenan.

Now the company raves about how wonderful it is to be able to get its house in order before seeking big growth. This is, of course, the wonder of hindsight. Their newfound wisdom may have something to do with Rick Sherman, who joined the Tealuxe board in November and became interim CEO following Keenan's exit. Sherman is a legend in the restaurant industry, having been a major player in Papa John's Pizza, Rally's Hamburgers, and Church's Chicken. Immediately, Sherman sized up the situation.

Real estate problems appeared paramount. Sherman feels the push into the New York market was "premature," particularly with the $130,000 annual rent for a store near Columbia University. (That's roughly 74,250 cups of Moroccan Mint, and it's double the rents in Boston.) "We have to have the discipline to say, 'Hey, we'd love to be certain places, but the rent has to be X, not 2X,' " Sherman says. He also found a lack of discipline in store operations. "They weren't taking inventory frequently enough, weren't tracking the difference between ideal food costs and actual food costs," he says. "They simply weren't in there doing a lot of basics of the business." Keenan acknowledges these comments are fair, but notes he was already working to remedy this before his departure.

Although Sherman would seem to be the ideal CEO, he doesn't want the job long term. Based in Louisville and involved with several other companies, he flies to Massachusetts every other week and consults via phone. The search for a new CEO, by all accounts, will be casual until the next stab at expansion, later this year. Meanwhile, the board is running the show, with Morgan and Kliewe in Franklin.

Even if Tealuxe can find the right leader, other challenges remain. Its location strategy is still cloudy, as its corporate-office-building experiment caused some company insiders to question whether that strategy will ever work. Without a corporate market, Tealuxe is limited to upscale college towns and affluent urban shopping districts, where its model has worked--a nice business, maybe, but a far cry from the ubiquity of Starbucks.

As much as Tealuxe wants to define its own niche, it can't help but lean on the analogy to Starbucks. But tea is not coffee, and as Keenan puts it, "they're coming at this aggressively wanting to mirror the coffee model, and the danger is you actually start to sound like coffee. That will turn off tea drinkers." Company plans for new drinks such as teapuccino and tea latte illuminate Keenan's point.

This year clearly holds some soul-searching for Tealuxe as it goes back to basics. The customers waiting five deep in line for cups of Mango Mist in the Boston stores are testament to Tealuxe's potential success, but will the company's concept and management provide a foundation for hypergrowth? Until Tealuxe gets a plan, its future may be known only to the tea leaves.