Two weeks before his newest store was set to open, Peter Martino walked in and decided it was all wrong.
The first thing that caught his eye was a sink jutting out from a back wall. An industrial ice machine was a close second.
That wasn’t going to work.
“I said, I’m not going to walk into the store and look at kitchen equipment,” said Peter, who founded Capital Teas with his wife in 2007. “It had to be moved.”
That meant bringing in a jackhammer to demolish the floor, rewiring the store’s electricity and rerouting its plumbing lines. It ended up delaying construction of the store, a 1,000-square-foot outpost at Westfield Annapolis, by four weeks.
“When we first started talking about this store, I said to the architects, ‘There is no budget. I want the best design we can get,'” Peter said. “I meant that.”
By the time the store opened Oct. 28, it had cost an estimated $400,000 to build. The facade alone — a 16-foot tall, hand-carved rendering of the Maryland statehouse — came out to $100,000.
But, Peter says, it was worth it. The store, sandwiched between Macy’s and Dairy Queen, is the face of the company’s 15th location and provides a hint of the rapid expansion to come.
Capital Teas is set to double in the next year. The Martinos, who founded the company in 2007, have more than a dozen new stores in the works. Annual revenue, on track to total $5 million in 2015, is projected to exceed $10 million in 2016 as the company expands along the East Coast.
Increasingly, Annapolis-based Capital Teas is also looking beyond loose leaf tea and accessories to rack up sales. In July, armed with $5 million in private equity funding, the Martinos opened a spice shop called Sugar Daddy Spicy Mama in downtown Annapolis. In coming weeks, they plan to introduce fermented sweet tea known as kombucha in at least one of their stores, as well as a line of tea-infused cosmetic products.
“Our motto is to try a lot of things and keep what works,” said Peter, 52. “The important thing is to evolve.”
Eight years ago, the Peter and his wife, Manelle, signed the lease on their first store without a business name or a product.
It was mid-2007, and the corner shop off Main Street in downtown Annapolis was too perfect to pass up. “It was straight out of a Dickens novel,” Manelle said of the 300-square-foot store.
The Martinos had been toying with the idea of opening a tea shop for a couple of years. Peter, who had sold a software company for nearly $3 million in the late 1990s, had a bit of money to invest, and Manelle’s family in Sri Lanka had long been in the tea business.
When the right property came up, they quickly signed the lease. That evening, the couple went to dinner at Zed’s, the longtime Ethiopian restaurant in Georgetown, and came up with a name: Capital Teas.
But the timing was tough. The national economy was in free fall. Peter, who had recently graduated from Georgetown Law School, was studying for the bar. The couple had three children under the age of 4.
They took the leap anyway, investing $75,000 of their own funds to get started. Manelle manned the store while Peter commuted to New York every week to work as a corporate attorney. The beginning was slow, with the store bringing in about $45,000 in four months.
“It was this new product nobody knew anything about,” Manelle, 37, said. “When we first started the store, people were like ‘why are you doing this?’ But slowly they became intrigued.”
The second store came three years later at National Harbor. Peter spent a year negotiating the lease before cutting a deal with the Peterson Cos. to pay only a percentage of the company’s sales for the first two years with the option to renew at a fixed rent after that. It turned out to be a good bet: Sales rose every year as the surrounding area become a hotbed for travel and tourism. The Martinos recently renewed their lease to stay through 2020.
From there, new shops mushroomed throughout the region. Today Capital Teas has locations in Dupont Circle, the Mall in Columbia and the newly redeveloped L’Enfant Plaza. Same-store sales, a closely-watched retail metric, are up 50 percent from last year.
The company has been in and out of profitability as the Martinos invest earnings to support the chain’s expansion. Peter says it remains to be seen whether Capital Teas will turn a profit this year. Much of that will depend on the holiday season, Peter says, which can account for up to 40 percent of the company’s annual sales.
“Tea has become mainstream,” Peter said. “It’s no longer just something your grandmother drinks, and that’s helped us grow very quickly.”
The Martinos have found ways to put tea in chocolate bars, wine and beer. Next, they are taking on organic cosmetics, with products like calendula body wash and white tea body scrub set to hit stores in December.
Will it work? Peter says he’s not sure, but he wants to give it a whirl.
“This new cosmetics line — it sounds great on paper but who knows,” he said. “If it works, we’ll run with it. If it doesn’t work, we won’t. But at least we’ll have tried it.”
That willingness to experiment — and fail — has helped shape Capital Teas into the company it is today.
The Martinos came to the business from different backgrounds. Manelle studied opera at Julliard and has a degree in Latin American studies from Columbia University. Peter, who trained as a classical pianist, is a former nuclear submariner who enrolled in law school at age 40. Both have very strong ideas about where the business should go, and they’re not afraid to duke it out.
“We start off, both of us Type As, telling each other how bad the other person’s idea is,” Peter said. “Manelle and I both have strong instincts, but when we actually agree on something, it tends to be good.”
Sometimes, though, those instincts can be wrong. A couple of years ago, encouraged by the success of fast-casual eateries, the Martinos decided to add tea bars and lounge seating in their stores. They added lunch offerings to some of their locations and began selling hot and cold beverages.
That backfired. Instead of buying $40 to $200 tins of tea, people were spending just a few dollars on cups of tea. Profit margins shrank and overhead costs rose as stores added staffers and expensive equipment such as ice makers and water heaters. Months in, the Martinos scrapped the idea.
“What we learned is that Starbucks is very difficult model to replicate,” Peter said. (The company’s biggest competitor, Teavana, was acquired by Starbucks for an estimated $620 million in late 2012.) “We realized that our strength is in the retail tea business. It didn’t make sense to try to be a restaurant.”
With their most recent mall location in Annapolis, the Martinos have renewed their focus on the retail business. The flashy new store, they say, will serve as a model for upcoming locations all over the country. And while Capital Teas will continue to partner with restaurants such as Rose’s Luxury and Le Diplomate to put their teas on local menus, the company is largely sticking to what it knows best: Tins of tea.
“Will we continue to try new things? Of course,” Peter said. “But we’ve found a proven model we can be successful in.”