DAVIDSTEA CHAIN SEEKS CREDITOR PROTECTION.

Refocus strategy on e-commerce and wholesale

TORONTO • Davidstea Inc. on Wednesday announced it will seek creditor protection as the struggling canadian chain of tea boutiques retreats from bricks and mortar retail and tries to refocus on e-commerce and grocery wholesale.

the Montreal-based retailer with roughly 220 tea shops in canada and the United States appeared in Quebec Superior court on Wednesday and received an initial order under the companies’ creditors arrangement act, allowing it to proceed with a formal restructuring plan in coordination with its creditors.

that restructuring plan will include a “significant reduction” in davidstea’s store network, chairman and interim chief executive herschel Segal said in a news release.

“i sincerely regret the impact the restructuring of our business will have on some of our exceptional and passionate employees,” he said. “this has been an incredibly difficult decision to take, but a necessary one to ensure the long-term viability of our company.”

davidstea was already in trouble before the pandemic, posting net losses totalling $93.2 million in the past three years. in a quarterly update last month, the company said it had not paid rent for april, May or June and had received default notices from 37 landlords representing 53 of its stores.

the retail sector in much of canada is reopening, but davidstea has yet to reopen a single store since shuttering them all at the start of the pandemic in mid-march.

The chain’s store model has likely made it more complicated for it to reopen during the pandemic, since stores regularly offered samples and encouraged customers to lean in and smell open canisters of tea — part of the “distinctive retail experience” at davidstea, according to its latest 10-K filing in June.

The stores featured a “tea wall” with shelves lined with dozens of tea canisters. Store staff — called Tea Guides — grabbed canisters from the wall, opened them and let customers smell the tea inside, creating “a sense of adventure,” the company said in the filing.

But davidstea’s chief financial officer Frank Zitella in a news release said the “post COVID-19 retail environment creates significant challenges for our unique in-store customer experience.”

The company said it is trying to renegotiate better lease terms with its landlords, but “ultimately may terminate a significant number of our 222 leases as we seek to rightsize our retail footprint,” he said.

“We have to accelerate the transition of our business away from brick and mortar and focus on becoming the leading online purveyor of looseleaf tea and accessories in North America, complemented by our growing wholesale business.”

davidstea’s stock dipped to us58 cents in early morning trading on the Nasdaq, but recovered to close at us79 cents, down 11.9 per cent.

The tea brand is currently listed in 2,500 grocery stores and pharmacies in Canada.

The majority of its stores are inside malls, adding another hurdle to its bricks and mortar business during the pandemic.

Mall tenants generally aren’t seeing customers return at the same rate as stores with street entrances, said Fred Waks, a former president of riocan real Estate Investment Trust who now runs Trinity development Group Inc.

“All you have to do is drive by yorkdale or Sherway or any of these malls and see that the parking lots are still half empty,” he said, referencing two major Toronto malls. “It’s going to be a while until people start coming back to enclosed areas.”

In davidstea’s latest fiscal update in June, the company said its e-commerce and wholesale channels have provided the only bright spot during the pandemic, with online sales up 268.2 per cent and wholesale up 81 per cent between March 18 and May 30, compared to last year.

Total sales, however, were down 27.4 per cent to $41.2 million in the same period.

The company has said that it furloughed all store staff since March. It had 2,311 in-store employees as of its latest 10-K filing in June. It also bumped non-essential head office employees to four-day work weeks and reduced compensation for executives and board members.