Taking an Honest Look at the Future:
Partnering with Coke to Build a Billion Dollar Beverage Company with a Conscience
An Interview with Seth Goldman, President and TeaEO of Honest Tea
Over the past decade, Seth Goldman has made the Honest Tea brand live up to its name time and time again. As the first certified organic bottled tea, he ensured products were sustainable and healthy, but then went the extra mile, taking steps to launch the first certified fair trade tea as well as purchasing ingredients that supported non-profit organizations and community projects around the world. Honest Tea, with a low-sugar, “tad sweet” taste, along with its brand authenticity, was a refreshing option for many consumers, and today it’s the top selling natural tea in the United States, bringing in over $23 million in sales in 2007. But even after topping the charts at natural food stores, the mainstream beverage world is a hard one to break into. After years of grass-roots efforts and partnering with all sorts of distributors to help get him in the door, from charcoal and cheese to corned beef, the company was still only breaking even. So as Honest Tea approached its 10-year anniversary, Goldman had to be honest with himself and the investors in the Honest brand and he came to the realization that the company needed a distribution partner to help take their product to the masses.
Then Coke came calling.
When Honest Tea announced last February that it was selling 40 percent of the company to Coca-Cola, many in the organic community were shocked. Headlines asked “Did Seth Cross Over To The Dark Side,” and some worried about Honest Tea being turned into “Dis-Honest Tea” under the influence of their new partner. But, despite the worries from some, Goldman assures all those concerned that good that can be achieved through this partnership in ways that he never could have done on his own. And, for many, we will welcome an organic option on the shelves and cross our fingers that through Honest Tea forging the way, more consumers will be exposed to the message of organic. Goldman took a few minutes to talk to Organic Processing Magazine about his new partnership with Coke and how he plans to turn Honest Tea into a billion dollar beverage company with heart, soul and widescale distribution.
OP: In the time since you’ve announced your partnership with Coke what has been the response from most customers?
Goldman: Most consumers have been excited that it’s going to be easier to find our product; that’s really been the primary response. But, I think with any announcement like this there are going to be questions. There’s some who have worried about Coke trying to strip costs out of the system. I think our latest release is proof that this is not the case—we are announcing two new fair trade certified teas at the same time that we are announcing an expanded distribution with Coke on the West Coast. Overall, a consumer should be less worried about what we say than what we actually are out there doing.
OP: Speaking of which, in an article from Fast Company, you said that you want to see Honest Tea be an agent of change not just through the example it sets, but through actions as well. How do you see this partnership with Coke helping you become more of an agent of change?
Goldman: Well, with this partnership we can start to reach the scale where we have an impact, not just on what people think but on what people do. Last year we bought 2.5 million pounds of organic ingredients and within the next three years we expect to buy over 25 million pounds a year. That’s more than just setting a nice example—this will make an impact on what happens in agriculture, certainly around tea, and what happens in the sugar industry as well. When the demand grows, the supply inevitably follows.
Fair trade is a good example. In the past few years, we’ve directed thousands of dollars to help the farmers and communities that we work with, and that’s a positive thing. But now we’re talking about directing tens of thousands, probably hundreds of thousands over the next few years, and all the gardens that want to be our suppliers will have to meet fair trade certification standards in order for us to even look at them. We’ve already seen it with organics. We have many gardens sending us samples, but we have a policy: if it’s not organic, don’t send it to us because there’s just no way we can consider it. Now, for some of our teas, if it’s not organic and fair trade, don’t send it. That starts to change behavior in these gardens for both those who operate them and those who work there too.
So far, with our fair trade funding we have helped these communities develop a computer learning center as well as purchase bio-gas units so they can convert manure generated by the cows in the garden into methane they can use for fuel. We’ve also supported micro-enterprise. One of the gardens has a place where tourists can stay. That’s a great way for them to create additional source of income in the community, plus we get to educate visitors about organic tea cultivation, which is good for everyone.
OP: The Fast Company article also said that this merger could be the best thing for your company or “a slow controlled brand implosion,” how do you think you can prevent that?
Goldman: Just keep doing what we’re doing. As soon as we start ignoring what we built the company on or how we got here, that’s when something like that happens. When Quaker took over Snapple, for example, they ignored the fundamental components of the brand. It was a brand that had been built through distributors who felt real loyalty to the brand. It was known for quirky marketing like the old Snapple Lady and finding ways to get it into the hands of influencers like Howard Stern and Rush Limbaugh. Then Quaker fired the Snapple Lady, pulled the product out of independent distributors, put it through a warehouse system, and cut off all relationships with Stern and other key brand allies. They disconnected the brand from its roots, and anything disconnected from its roots can’t really live.
OP: So, what are you doing to stay connected to your roots?
Goldman: Unlike Snapple, we are not cutting ties with smaller natural foods distributors, and we will work to expand those partnerships. We are also continuing the same type of guerilla marketing— getting street teams out to the Green Festivals and events like the Boston Celtic’s victory parade and the Gay Pride Parade.
It’s important for us to stay authentic and be on the grass-roots level where the core consumers are and where we can expose new consumers to the whole Honest experience. There are a few things that make our product different. One is the taste, which you can’t really communicate through a radio ad or a TV ad. The other thing is authenticity. So much of commercial language, and the overall approach, is well, commercial. It’s very heavy with overstatement, hype or bluster and it often repels consumers—particularly those consumers like ours who value authenticity.
“Authentic marketing” to most people probably sounds like an oxymoron. For us, it is about being consistent with our brand and what it stands for. Another way we are doing this is through our partnership with Saturn; we are using their VUE hybrids to transport product to our sampling events. It would be one thing if we’re talking about sustainability and then we drive out to events in a Hummer. We recognize that as part of our marketing presence, it’s important how we get there. At the Organic Summit, someone said, “why don’t you bike to sampling events?” That’s a nice idea but it’s just not realistic when you are carrying around dozens of cases of tea. But on the other hand, a hybrid does work because it’s big enough to carry around what we need, but it’s also incorporating the message of sustainable transportation. It’s a great way to educate our consumers about the environment at the same time that we’re educating them about tea.
OP: What other sustainability efforts are you involved in? Do you think that Coke will support these types of sustainability efforts as you move forward?
Goldman: They already are. As an example, we’ve created this local initiative called “Bethesda Green” where we got restaurants to convert to bio-diesel and put in recycling bins. Coca-Cola was really one of the first investors in this effort and they helped purchase 20 recycling bins in the downtown area.
On a wider scale, we’ve always had the desire to do more to improve the sustainability of our bottles, whether it’s light-weighting or increasing recycled content, but we haven’t had the scale or the purchasing power to do so. Now with Coke behind us, vendors take us much more seriously.
We are also working with Terracycle on a project where kids save their Honest Kids drink pouches and can send them to us to be recycled into pencil cases or other bags. It’s something we’re excited about and now other companies like Kraft are hearing about it and want to get involved. So I said sure—right now Honest Kids is only selling a few million pouches and Kraft is selling billions, so, if we get them on board, we can really change the waste stream. However, as satisfying as it was to create a model that inspired someone else, there was a little bit of me that said, “Man, I want to be the one that helps change the waste stream, not just modeling it so others can do it.” And now that Honest Kids is going to be tapping into Coke’s Minute Maid distribution system, we believe we will be able to make even more of an impact ourselves.
OP: You have been reported as saying that “Coke is not acquiring the company, it’s merely investing in it,” and that your team will remain in control from a board governance perspective. What measures are you taking to ensure this?
Goldman: On our board we have myself, my co-founder Barry Nalebuff, Gary Hirshberg of Stonyfield Farm, and then two members from Coca-Cola. So with the assumption that Gary is going to lean toward the organic-mission-oriented side of the brand, if there were to be a vote where the mission is the question, we’re confident we would have a majority. But, we haven’t had any situations like that, and I certainly don’t anticipate that kind of thing arising.
What really is important is that all of our employees continue to have an ownership interest in the company. We made it part of the deal that when Coke invested our employees would be able to invest alongside them, on the same terms, at the same valuation. That certainly made everyone feel empowered. We made sure to expand the employee ownership so that they actually increased their share in the company as a result.
OP: So you are pretty sure that Coke isn’t going to one day just decide to insist on using high fructose corn syrup or swap out organic or fair trade ingredients for something cheaper?
Goldman: The best way to protect the integrity of the product is to build value around the core elements of the brand. Our brand is committed to organic, healthier and authentic products and if we build value around that now, Coke of all companies will appreciate that value. They’re the ones who learned the painful lesson of what happens when you toy with success. The whole New Coke fiasco is like a scar.
Our values are built into the brand, into the actual ingredients of the product. Organic, fair trade and healthy are pillars of the product and it would not be Honest Tea without these elements. We’re not a company where our values are shown by what we give away in profits. It’s really about the product we’re selling; how we make it and how we communicate that value to the consumer.
Regarding organic, in addition to the message we have on our bottles, we will be having a sampling team at all of our market launches to educate people about the value of organic. One of the most compelling rationales for organic tea is really quite simple: tea is one of the few agricultural products that isn’t rinsed. If you buy a conventional tomato or apple, you take it home, you rinse it, wash it and at least you’ll get the surface chemicals off. With tea, the tea leaves are never rinsed. They’re picked, dried and the only time the chemicals are washed off is when hot water is poured on leaves to brew the tea. So clearly organic tea, never having chemicals on it, is going to be the choice for a health-conscious consumer.
Recently another pesticide, carbofuran, used mainly on imported coffee, bananas and rice, was banned for health reasons and who knows what other chemicals will be next? The more that kind of stuff comes to light, the more the value of this brand, and the organic pillar of Honest Tea, will be important.
Overall, our job in the next three years will be to show Coke the value of Honest Tea by being successful with our current brand structure. As they say, the best defense is a good offense. The single best thing we can do to help protect our brand is to do exactly what we’ve been doing but do it in a bigger, more powerful way.
OP: It’s been reported that presidential candidate Barack Obama is a
big fan of Honest Tea. What is the story with that and has it help spread awareness?
Goldman: Yes, he is a big fan of Honest Tea and when he would go to a city where we didn’t have distribution his campaign had to go through all kinds of gyrations; calling our office to track down the nearest location and traveling hours out of the way to get the product. With our expanded distribution, it will be easier for them as well as millions of other people to find our product.
As for awareness, I’m sure it doesn’t hurt. At samplings, people will come up and say, “Oh, I want to try the tea that Barack Obama likes,” which is the Black Forest Berry. But, we’re not a political tea—we have a great deal of consumers who are Republicans. There was a great article in the Weekly Standard where one of their columnists wrote, “Finally, Barack Obama and I agree on something.”
OP: So, what is the plan for expanded distribution?
Goldman: Well, first of all, we will continue our natural food distribution so that all of our existing business efforts will stay intact or grow. SPINS data shows that our brand has a market penetration of 90 percent or higher in the natural foods area—which is great.
We’ve made success there, but we haven’t really gone beyond the natural foods channel. So if there’s not a co-op around, where would you buy your drinks? At a convenience store? A drug store? Supermarket? We have made some progress in these types of stores in California, DC and Denver, but I didn’t see a path where we would be able to gain a national presence with these retailers on our own. Some of the markets weren’t really interested, or didn’t understand organic. We knew we had to find another way into these stores, and Coca-Cola obviously has a tremendous reach.
Where we expect to see enhanced distribution is with our plastic bottles, which will go on the Coke trucks. We’re starting in California, the Pacific Northwest and Arizona; in places where there’s already a strong inclination toward our product and a good natural foods presence.
OP: You have just embarked on a new chapter in Honest Tea and we are all waiting to see if the noble and courageous Honest Tea will be able to hold its own in the giant’s domain and whether or not these two distinctly different companies can work as partners. How do you envision the story turning out?
Goldman: The ideal scenario for me is that the Honest brand becomes a very powerful platform for organics and healthier products. When Coke invested, they said they wanted to see Honest brand become the next billion dollar brand, and that sounds like the right kind of scale for us. We want to be powerful and be everywhere beverages are sold.
Ten years ago, we were ahead of our time. Now we’re right where everyone is headed. Soda is no longer growing as a category; people are moving toward healthier drinks. Coke certainly recognizes that in 5 to 10 years from now there’s not going to be as much soda sold, and I think their intent is to still capture the same proportion of beverages sold to consumers.
There is no question that there’s a tremendous potential for tea. Hot tea is the world’s second most popular beverage so clearly there’s an opportunity for bottled tea to grow significantly beyond where it is. Currently, organic foods are roughly 3 percent of American food purchases, however, categories like yogurt are much closer to 10 percent. Right now, organic bottled tea is less than 1 percent of the bottled tea market, but, with this partnership, there’s the opportunity to get to 10 percent in the near future.
When we reach that scale, we start to really make an impact on everything from peoples’ diets and agriculture to the way people think about companies they deal with and their role as consumers. It’s really exciting to think about all the directions we can go with this.
