Are ecommerce and wholesale enough to save DavidsTea?

The company is using its restructuring to accelerate a move from bricks and mortar, with hopes it will also address its pre-pandemic struggles.

DavidsTea is the latest Canadian retailer to see its pre-pandemic struggles be exacerbated by the closure of physical retail – but it’s also using a creditor protection filing as an opportunity to hasten its move towards becoming an ecommerce- and wholesale-focused tea company.

The company filed for creditor protection on Wednesday, with filings from monitor PwC not only citing pandemic store closures, but the fact that post-pandemic conditions are likely to make negative pre-pandemic trends in retail “even worse.”

According to filings, sales at DavidsTea declined by $28 million over the last three fiscal years. That includes a $16.3 million year-over-year decrease in sales, or 7.7%, in its most recent fiscal year. The filings cited many of the same things that have been regular challenges for retailers in recent years, and have frequently come up in creditor filings in recent months: there have been declines in brick-and-mortar traffic and sales, as retail shifts to online, competition increases and trends emerge in delivery and last-mile service.

The filings say that if DavidsTea were to maintain its “status quo” business model, it would continue to incur losses.

During the pandemic, DavidsTea furloughed all of its store-related employees, moved non-essential remaining employees to a four-day work week and reduced compensation for management and members of its Board.

Given the uncertainty related to when or if foot traffic picks up post-pandemic, PwC estimates that DavidsTea’s existing assets – namely, its retail locations – will not be not enough to settle the company’s liabilities.

As part of the restructuring, the company says it plans to “significantly” reduce its number of physical stores; it currently operates 186 stores in Canada and 45 in the U.S., all of which have been closed since March.

The company says transitioning its business model is necessary to return to profitability. While most retailers’ online sales have not been enough to offset their losses during the pandemic, permanently closing at least some stores is the fastest way to reduce the costs and liabilities associated with keeping them operational.

“We have to accelerate the transition of our business away from brick and mortar and focus on becoming the leading online purveyor of loose-leaf tea and accessories in North America, complemented by our growing wholesale business,” said Frank Zitella, CFO and COO at DavidsTea.

Having branded products available in grocery through its wholesale division is one asset that other struggling retail brands are less able to tap: the brand’s products are currently available in 2,500 grocery and drug stores in Canada. Sales from e-commerce and wholesale channels (which the company reports together) increased by $7.3 million, or 20.9%, in the 2019 fiscal year; $2.8 million of that was in Q4 alone.

In a business update released in April, DavidsTea said it had seen a significant uptick in online sales in the early days of the pandemic, which could be “a turning point for DavidsTea and significantly accelerate the anticipated evolution towards online sales,” according to Herschel Segal, the company’s founder, chairman and interim CEO. From the end of fiscal to May 31, the company had $26 million in online and wholesale sales, representing 63% of total revenue during the period and representing a year-over-year increase of 162.1%.