by Seth Goldman, co-founder and President of Honest Tea
“I’d like to teach the world to drink organic”.
In March of this year Honest Tea was purchased by The Coca-Cola Company, completing a transaction that began with Coke’s minority investment back in 2008. While the Coca-Cola and Honest Tea relationship is still new, it’s not too soon to share some observations about what it feels like to build our mission-driven enterprise within the planet’s largest beverage empire.
If a fortune teller looked into my future sixteen years ago when I graduated from the Yale School of Management and told me I would end up running a mission-driven organization that helps to: 1) Eliminate billions of calories from the American diet; 2) Protect thousands of acres of agricultural land and surrounding ecosystems from chemical toxins and; 3) Create economic opportunity in the developing world, I would have asked, “What’s the non-profit creating all this exciting change?”
The surprising answer is that the enterprise isn’t a non-profit, but is in fact a beverage company, quite an unexpected twist for me since my only prior beverage experience was a lemonade stand in elementary school. And yet the story of Honest Tea’s evolution provides a window into how change can happen in corporate America.
Back in 1998 it didn’t take focus groups to understand consumers were buying sweet drinks. Yet my co-founder Barry Nalebuff and I were thirsty for something different, and we suspected the big corporations were missing the opportunity for a less-sweet alternative. We brewed five thermoses of tea in my kitchen and brought them, along with a repurposed tea bottle with a label pasted on, to the local Whole Foods office near my Bethesda, MD home. The buyer placed an order for 15,000 bottles, and we were in business – provided we could figure out how to make that much tea!
Our insistence on sticking with our less-sweet taste profile made it challenging for us to grow. We received more than our share of rejections from distributors and retail buyers who didn’t think we were peddling what the public wanted. So instead of getting to stores via beverage trucks, we had to arrange/beg for our drinks to be delivered through alternative distribution channels – natural food distributors to health food stores, cheese distributors to gourmet stores, corned beef distributors to delis, and charcoal distributors to supermarkets.
As a result of our piecemeal distribution network, we were unable to cover many grocery and restaurant chains that were interested in our brand. Our path to growth was slower, but we eventually gained some traction and when we did, our less-sweet drinks had a clear point of difference on the shelf.
We began to gain momentum just around the time the rest of the population started to pay attention to what they were putting in their bodies. Though the low-carb craze faded in 2000 – an all-bacon diet eventually loses its appeal – it helped train consumers to read nutrition panels.
Our commitment to organics also resonated with consumers who were becoming increasingly environmentally aware.
But even though we were growing, we kept losing money. Our margins were thin because our buying power was weak compared to the big brands, and we needed to hire people to keep building the brand up and down the street. To stretch our limited funds, we were extremely frugal – sharing hotel rooms when we traveled and cramming quite a few people into one open office filled with used desks. Our ability to survive on fumes was critical because more than a dozen bottled tea brands came and went during our first five years, many of them well-funded, including Mad River, a brand Coca-Cola bought in 2001 and discontinued a few years later.
But the main reason we were able to stay in business was because we had dozens of angel investors who kept writing us checks for equity and debt. We received a bit of support from members of Investors’ Circle who liked our mission, but certainly not enough to keep us afloat. Some investors wrote checks because they liked our drinks and wanted to keep their fridges stocked, but most supported us because they believed there was a good long-term investment opportunity.
Given our margins, dividends weren’t going to be an option, so an exit would have to come either via acquisition or IPO. For a few months in 2007, it seemed like going public was a viable path for an emerging beverage company. Jones Soda Company (JSDA), which had sales of $40 million, had a market capitalization of more than $700 million. But the 2008 market correction brought that notion and several companies, including Jones, down to earth.
Ultimately, distribution is the key to winning in the beverage industry, and Jones also struggled to grow with a patchwork of independent distributors. So when Honest Tea was approached by The Coca-Cola Company in 2007 as a prospective investor, and possible acquirer, we knew this was a partner worth talking to.
Given our small size and prospects for continued fast growth, we weren’t interested in exploring an acquisition. Instead we negotiated with The Coca-Cola Company’s Venturing and Emerging Brands unit to make a minority investment with an option to buy the rest of the company three years later. As we were preparing to announce the Honest Tea-Coca-Cola transaction back in 2008, some suggested that perhaps we wouldn’t want to disclose the relationship – there was a concern that the Honest brand might suffer a backlash from fans who loved our mission-driven approach but might not support a brand connected to a large multi-national not known for its commitment to organics. But I argued that if we genuinely believe in our mission of democratizing healthy organic drinks, then we were obligated to find a way to take it to scale and Coke was the best partner to help make our drinks available wherever beverages are sold.
We heard from some of our hardcore loyalists (there are people out there with Honest Tea tattoos) who threatened to stop supporting Honest Tea if Coca-Cola purchased the rest of the company. I didn’t want to lose those consumers because we wouldn’t have been able to build our company without them. So I posed two challenges to them – if we are still selling a low-calorie, organic, Fair Trade beverage, don’t we deserve your support? And second, to the extent you are concerned about the role that big food companies play in our society, isn’t it better to have them investing in solutions like Honest Tea?
The only way Honest Tea was able to operate as a “non-profit”, both in terms of mission, and in terms of financial performance, was because we were able to find a partner who made the investment opportunity worthwhile to our investors. And now that our investors have been rewarded for their faith in us, Honest Tea begins a new chapter where our goal is to reach national scale and deliver meaningful margins to Coke, while continuing to expand our mission and its impact.
In early March, we held a press conference to announce the transaction. I noted that while the event was an important day for our shareholders, it was also an important day for our stakeholders – community and national non-profit partners, whom we will continue to invest in through our continued, and now expanded presence in the community.
At the conclusion of the press conference, we unveiled a big, red, environmentally-efficient, co-branded vending machine developed by The Coca-Cola Company. It was half-filled with Coca-Cola drinks (including Dasani packed in the PlantBottle, Coke’s first fully recyclable PET bottle made partially from plants) and half-filled with Honest Tea products. Despite the fact that we\’ve been working with Coke since 2008, when I pushed the buttons to order a drink, it was the first time I\’d seen an Honest Tea bottle come out of a Coke machine. As the bottle emerged from the machine with that characteristic thud, I thought of the tens of thousands of Coke machines around the world, and at that moment the scale—of what we are doing, and what we can achieve—really hit home.
So far the day-to-day business of running Honest Tea feels much the same way as it did for the first thirteen years – though of course the numbers are larger. We continue to create new drinks, such as our launch of Honest CocoaNova, a line of organic and Fair Trade certified cacao infusions. We still are finding unconventional and cost-effective ways to create brand awareness, such as our rap video or this summer’s Honest Cities guerilla marketing/social experiment in 12 U.S. cities and we are still finding new ways to ratchet up our mission, whether it’s converting our entire tea line to Fair Trade certification or identifying more sustainable packaging options.
The transition from a small business to being part of a much larger family of brands does mean new ways of doing some things. We have had to adjust to longer timeframes for planning cycles and to introduce new products. And we occasionally have had to explain why we believe organic agriculture helps create healthier ecosystems.
But, I still awake each morning fired up to change the world. Our company’s mission remains the same. And coupled with the reach of the Coca-Cola brands and the sustainability initiatives that Coke already has in place, our joint visions for the environment are that much stronger. In the last three years alone, Coca-Cola has obtained organic certification at three facilities where our product is made and established a state of the art tea brewing and filtration system at a Coca-Cola/Honest Tea bottling plant.
Bottle by bottle, we are seeing our mission spread. When we took on Coke as an investor in 2008, Honest Tea was sold in approximately 15,000 stores, primarily natural food stores in the Northeast and the West coast. This year, Honest Tea, Honest Ade and Honest Kids will be available in more than 100,000 outlets across the country, bringing low-calorie, organic, and Fair Trade products to millions of new consumers. And we are excited to announce that in 2012 Honest Tea will be using the PlantBottle in our recyclable PET bottles.
So what does the future hold for me personally? If Honest Tea is able to keep growing and I continue to be excited about the mission and the brand, I intend to keep guiding Honest Tea from our home base in Bethesda, MD. If we falter in meeting our business goals, or if my passion for the business gets diluted, then my own plans may change – but that’s a reality I’ve lived with since I started the company back in 1998. And I take heart from a Chinese proverb that I first heard from Wayne Silby, Founding Chair of the Calvert Funds, which is printed underneath our bottle caps and appears as both a greeting and a warning on the front wall of our office. It speaks to the skeptics who thought we’d never make it, as well as to those who argue there is no way a mission-driven enterprise will survive inside the walls of a publicly traded company. It reads, “Those who say it cannot be done should not interrupt the people doing it.”
More information on the company and its products go to http://www.honesttea.com
Article by Seth Goldman, co-founder and President of Honest Tea and board member of the Calvert Foundation
