Did Honest Tea Sell Out to Coca Cola?

Location: Bethesda, Md.

Founded: 1998

Employees: 140+

2015 Sales: $170 million

Structure: Coca-Cola invested 40% in the company in 2008 and bought the company in 2011

Fun Fact: Honest Tea is the nation’s top-selling organic bottled tea

Maryland-based Honest Tea sets the bar high, demonstrating how a company can scale through acquisition while staying true to its mission and values. Bought by Coca-Cola in 2011, Honest Tea is now an independent operating unit within the company. Its co-founder, Seth Goldman, also remained in control as “Tea-EO” — a first for a company acquired by Coca-Cola. In November 2015, Goldman reduced his day-to-day role with the company, stepping into a new role as Tea-EO Emeritus. We spoke with Goldman about scaling a company through acquisition, maintaining core values, and the challenges associated with growth.

How did Honest Tea get its start?

Seth Goldman: The main idea actually started in business school in 1995. We were doing a case study of the beverage industry and just talking about what was and wasn’t out there. I ran track and cross-country in college, so I was always thirsty and felt like the drinks were so sweet.

My professor at the time, Barry Nalebuff, became my co-founder. I had gone up to him after class and said, “This is what’s missing.”

He totally agreed: “Yes. Let’s make some samples. Let’s do focus groups.” I was in my second year of business school. I was not in a place where I was able to really pursue the idea, but it stuck with me.

I then left business school and went to work with Calvert Investments, a mutual fund company. I was in charge of marketing and sales for their socially responsible portfolio. I loved the mission, loved the work, but felt the need to do something more entrepreneurial. I was just waiting for the right idea.

After giving a presentation to a bunch of entrepreneurs in New York City that kind of fell on deaf ears, I went for a run and was thirsty and went to a beverage cooler. I was with a classmate from college and I said, “This is still missing. There’s still nothing here.” I reached out to Barry, who had just come back from India, and he had come up with the name Honest Tea. He’d had the insight that most of the bottled tea sold around the world is just the dregs — it’s mainly the tea leaves, not the high-quality tea.

If you’re spending 25 cents to make a bottle of tea and, of that 25 cents, 1 cent is tea, why not spend 3 cents on the tea and make it higher quality? Organic wasn’t really an option at that time, but why wouldn’t you at least try to get better tea and not sweeten it up with high-glucose corn syrup? That was why the name Honest Tea made sense.

I was excited about the idea and about Barry’s willingness to invest, and — things happen for a reason — in the fall of 1997, I ended up with a little windfall from an investment my father had made in 1972. All of a sudden, I got a check for $50,000. I thought, “Wow. That has to have happened for a reason. That’s my start-up money.”

I left Calvert and started the company out of my house. It was a funny conversation I had with the head of Calvert when I told her I was going to do this. She said, “Wait. You’re going to leave a mutual fund company for bottled tea?” We told the founder of Calvert on a conference call, and there was just silence on the other end.

It was challenging to start up. I had no idea what the beverage industry was like and had never done anything like it. We started small, but we got up and running and got into Whole Foods as our first account. We did okay in natural foods, but we didn’t do so well elsewhere. We kept growing, though. People kept saying no, and we kept persisting until we wore them down. In the first 10 years we grew to become the best-selling tea in the natural-foods world.

We were always looking for continuous improvement. We kept thinking about what more we could do around our mission. How could we take it up a notch? We kept evolving, and that’s still how we think about it. We’re on the journey and we’ve made a lot of progress.

Where have the challenges been with growing at every stage and trying to focus on continual improvement?

SG: For the first 10 years, the biggest challenge was distribution. One thing about the beverage industry that’s really unique is that no matter how good your product is, if it’s not available to people, it’s a thought experiment; it’s not real. This was what drove us to partner with Coca-Cola. We had to get this product available to people — not just in natural food stores, but wherever they shopped.

The folks we would go to for distribution, outside of the natural-foods channel, were the people distributing Snapple and all these sweet drinks. And these guys — I’ll say guys because it was universally men — would say, “It’s not sweet enough. It’s too expensive. It tastes like grass.” It was a taste they weren’t familiar with. So that was a huge struggle, and it was absolutely a constraint on our growth. Once we started working with Coca-Cola, all of a sudden we had distribution to wherever we wanted. When Coca-Cola invested we were in about 15,000 stores, which wasn’t bad, but now we’re in 120,000 stores.

All of a sudden, we’re seeing growth everywhere in the past 18 months. We expected it on the coasts and in the natural-food stores, but now we’re in chains like Sheetz and Wawa — places that never got traction before. We just launched nationally with Wendy’s, which now sells our brewed tea in all their locations. Wendy’s is also selling our Honest Kids line in their kids’ meals.

The overlap between the Wendy’s consumer and the Honest Tea consumer prior to this happening was probably very little, maybe five percent. But all of a sudden, all these people are getting exposed to organic, fair-trade, low-sugar products. It’s a neat moment. Despite the fact we’ve been at it 18 years, it’s like there’s a new growth ahead.

Do you feel like a cultural shift brought on this rapid growth phase, or was it your partnership with Coca-Cola? Or perhaps a little of both?

SG: I think it’s a little of everything. There’s no question that the population has shifted. People’s diets have absolutely evolved. One of the most exciting areas is the kids’ market. Honest Kids is a product we brought out in 2007. When that came out, the dominant brand, by a significant amount, was Capri Sun. Every Capri Sun was 100 calories, and filled with high-fructose corn syrup. We have been taking market share in that category aggressively, and while the whole category has been going down, we’ve been growing.

Now Capri Sun is more like 60 or 70 calories. Their products have a big label that says “no high-fructose corn syrup.” Not only our presence, but our success in that market has helped create a climate where these brands feel they need to change. There was a great quote by Rose Marcario from Patagonia. She said something like, “We have to make it uncomfortable for the competition not to follow us.” I think we’ve definitely done that in the kids’ category.

We didn’t start doing our Mission Report until Coca-Cola invested with us — every year before that we were just trying to stay in business. After they invested, it didn’t change our mission, and we’ve been transparent and accountable about that.

What was the key component in maintaining your culture and mission?

SG: I think part of it was the deal structure. This was the first deal Coca-Cola had ever done where they didn’t buy the company 100-percent outright. Their culture had always been to buy the entire brand.

I’m friends with the president of Vitá Water. They did their deal before we did, and he told me, “You’re not going to be around in a year. The first three months they’re going to want to know your opinion. The next three months they’re going to want to know your phone number. After that, they’re not going to want to know you. You’re irrelevant.”

Our deal was structured very differently. When they called, in the start, I said, “I’m not negotiating. We can’t sell. This brand is too new, there’s too much growth ahead. The mission is on its way to realizing itself, but it’s not there yet. There’s a lot more work to do.” And they got it.

Was there any internal resistance to the sale within Honest Tea?

SG: The only person who was against it was my father, who said at the time, “I see you doing something, living what you believe. You’re thriving and enjoying it. I just don’t want you to lose that.” It was good to hear, and I had to reassure him that I thought, as I did and still do, that it was the right thing. He has since come around.

What advice do you have for small or medium-sized companies that are thinking about being acquired by a larger brand? What challenges should they keep an eye out for?

SG: Don’t do the whole deal at once. Let each side understand how the other works and demonstrate and develop trust with each other. Coca-Cola initially invested with us in 2008. For the first three years, we were really independent. As a result of that structure, when they had the chance to invest and buy the rest of the company in 2011, it was already working. When they first invested, we were at $23 million . By the time they bought the company, we were at $72 million. So we’d grown threefold in three years.

They said, “Why should we change anything if it’s working?” I think the other thing they came to appreciate was how much we understood our customer and our consumer, and that we had relationships they didn’t have with Whole Foods and the natural channel. So why should they buy it and take it over? They didn’t want to lose our team. They didn’t want to lose my authentic voice around the brand and the messaging.

For me to stay, I needed to feel a sense of ownership. And they got that. The chairman of Coca-Cola had been an entrepreneur himself, so he understood why that was relevant. I guess there really isn’t any other brand they’ve bought where the CEO is still around, though.

Also, make sure your mission is embedded in your brand. For us, our mission was always about the product we were selling. It was low-calorie; it still is. It was organic; it still is. It was fair trade; it still is. If you build a brand with the mission being the equity of the brand, then the only way to compromise that is to take those away. And those criteria are all third-party verified. It’s not that we just say, “We’re environmentally friendly.” That’s a mushy term that can mean different things. Outside verifications are important because otherwise the claims can get watered down.

How would you respond to someone who says you “sold out” to Coca-Cola?

SG: We are holding ourselves accountable — we’re documenting everything we’re doing. Everything we sell is organic, but the range of organic offerings has grown. When Coca-Cola invested in 2008, we were at about 30 percent Fair Trade Certified; now all of our teas are Fair Trade Certified. We’ve just converted all our sugars to Fair Trade Certified as well. Those initiatives cost more. When you shift to organic and then to fair trade, you can’t make it up in scale; you’re raising your cost of goods. With Coca-Cola’s support, we have made those moves. The dollars we are investing in communities has grown, and it grows every year.

We’ve been very transparent about it. We didn’t start doing our Mission Report until Coca-Cola invested with us — every year before that we were just trying to stay in business. After they invested, it didn’t change our mission, and we’ve been transparent and accountable about that.

What is the challenge that has kept you awake at night?

SG: I don’t lose as much sleep as I used to, but the challenge now is truly scaling and getting a broader part of the population to buy this product. Most people don’t know what “organic” means. They don’t understand the difference between organic and natural. It’s still a challenge, but that’s why I’m so excited to be in places like convenience stores and Wendy’s. No one goes to Wendy’s saying, “I’m going to buy an organic product,” but all of a sudden they’re being presented with an organic option. What an amazing opportunity: millions of servings a week to people who could be our customers if they only knew about it.

Coca-Cola has invested in us to make us a billion-dollar brand. This year we’ll be at about $350 million, which is neat. Our total sales have been about $170 million, but the way it works in retail means $350 million. It’s great, but it means we still have more growing to do. We’ve come up with our new mantra from the Beastie Boys song called “No Sleep Till Brooklyn” — ours is “No Sleep Till Billion.”

Do you believe that in order to truly scale a company you need to sell your brand to a larger organization at some point?

SG: No. I think it depends on the business. For us, as a beverage business, there was just no way we would get to the customers we are getting to now unless we were on beverage trucks. There aren’t independent drink companies of scale. The only one of any scale that’s not part of Coca-Cola, Pepsi, Dr. Pepper, or 7UP is Red Bull. They have their own trucks. So, for our industry, it was the right thing to do. It really depends on the industry, what you are bringing to market, and how you distribute it to market.

Here’s an example of why it works for us: before Coca-Cola invested with us, we were spending about 18 cents on each bottle. When we started working with Coca-Cola, they were able to get each bottle for 13 cents because they can buy so many more. We save 60 cents per case this way. I knew the first thing we were going to do with the money we saved was to convert to fair trade. You could say that we need to make a good margin, but if it costs us a penny more per bottle to go to fair trade, we can put half the money toward our margin and half the money toward making this tea fair trade, or even toward adding fair-trade sugar. Coca-Cola’s scale helps us do things that we wouldn’t be able to do as an independent company.

“There is a rising generation that’s serious about making an impact and not compromising what they do. It bubbles up to the older generations.”

Do you feel positive about the future of the food industry? Where is it heading?

SG: I’m a notorious optimist. You’re not an entrepreneur if you’re not an optimist. I feel optimistic about the whole future of our economy. One of the reasons I feel that way is the impact movement: there is a rising generation that’s serious about making an impact and not compromising what they do. It bubbles up to the older generations.

Consumers are also finally getting it. To me, the biggest driver has to be the consumers — they’re getting empowered in a way they weren’t before. It’s ironic in a sense, because I think people feel more powerless about elections. There’s a frustration that the establishment isn’t really doing what we want it to do. I say there’s an election going on every day in the store: with the products they buy, people can vote for change or for the status quo.

HONEST TEA’S SALES GROWTH

THE IMPACT OF COCA-COLA

HONEST TEA’S CURRENT NUMBERS COMPARED TO JUST BEFORE COCA-COLA INVESTED IN 2008

ANNUAL SERVINGS SOLD

ANNUAL POUNDS OF FAIR TRADE INGREDIENTS PURCHASED

ANNUAL POUNDS OF ORGANIC INGREDIENTS PURCHASED

ANNUAL FAIR TRADE PREMIUM GENERATED

SETH’S 3 TIPS FOR ENTREPRENEURS

THE SCALE OF Coca-Cola