Honest Tea: Coca-Cola Deal Won’t Change Ethos
by Kevin J. Shay
February 8, 2008

Honest Tea of Bethesda, maker of organic, low-calorie beverages, will soon find out if things really do go better with Coke.

Coca-Cola Co. of Atlanta, the nation’s top-selling soft drink maker, is buying a 40 percent stake in Honest Tea, executives said this week. They declined to disclose what Coke is paying, but published reports put the price tag at some $43 million.

The deal gives Coca-Cola the option of buying the rest of Honest Tea after three years, Seth Goldman, co-founder and CEO, said in an interview Wednesday. Last year, Coke purchased Energy Brands, which manufactures vitamin-enhanced water, for $4.1 billion and energy drink maker Fuze Beverage LLC for some $200 million.

The partnership with the soft drink giant will help Honest Tea market its products to a much wider audience, Goldman said. Coca-Cola sells some 1.4 billion beverage servings daily in more than 200 nations.

‘‘They have the world’s largest beverage distribution system. It will be an exciting opportunity to get the reach they have,” Goldman said.

Honest Tea, which embraces an environmentally friendly philosophy, has come a long way since Goldman brewed the first batches of tea in his home kitchen. He started the company with board chairman Barry Nalebuff — his former professor at the Yale School of Management — in 1998.

Privately held Honest Tea had revenue of $23 million last year, Goldman said. That was up from $13.5 million in 2006 and $9.6 million in 2005. The number of employees has more than doubled in the past two years to about 60, with some 25 in Bethesda.

‘‘We’re looking to hire more employees to have about 75 by the year’s end,” Goldman said.

Honest Tea produces its beverages at plants in New Kensington, Pa., and Watsonville, Calif. The company markets the top-selling organic, ready-to-drink tea in the nation, according to natural products market research company Spins. Honest Tea also sells a line of organic thirst quenchers such as cranberry lemonade and low-sugar organic drink pouches for children.

For Coke, the investment in Honest Tea builds on its lineup of ready-to-drink teas. The company already markets Nestea and Gold Peak teas. The deal is a ‘‘superb example of our mission ... to seek out and invest in the best beverage entrepreneurs and the highest growth-potential beverages,” Deryck van Rensburg, president and general manager for venturing and emerging brands with Coca-Cola North America, said in a statement.

Coca-Cola saw its U.S. sales of carbonated soft drinks decline by 1.2 percent in 2006 from 2005, according to industry publication Beverage Digest of Bedford Hills, N.Y. Overall net revenues slowed in 2006 to a growth rate of 4 percent to $24.1 billion, following a 6 percent increase in 2005, according to the company’s most recent annual report.

Not the first investmentfor Honest Tea

The Coke deal is not the first investment in Honest Tea by a larger company. About a year ago, Honest Tea attracted $12 million, including $5 million apiece from Londonderry, N.H., natural yogurt maker Stonyfield Farm and Swiss private-equity firm Inventages Venture Capital Investment.

Those investments resulted in new board members and collaborations at Honest Tea. Gary Hirshberg, president and CEO of Stonyfield Farm, joined Honest Tea’s board when his company made an investment in 2002. In 2006, Stonyfield and Honest Tea partnered to mix Kashmiri Chai tea with organic vanilla ice cream to form Vanilla Chai ice cream.

Hirshberg, who is still on Honest Tea’s board, lauded the Coca-Cola deal and said he looked forward to ‘‘helping Seth and the team continue to build the business the right way in the years ahead.”

Two Coca-Cola representatives will be joining Honest Tea’s board, Goldman said.

Goldman: Company won’t be controlled by Coke

Although Coke is Honest Tea’s largest shareholder, the smaller company will not be controlled by the giant — at least for the next three years, Goldman said.

‘‘We will continue to operate as an independent business with the same leadership and mission,” Goldman wrote this week on his blog.

The company’s mission will continue to be to ‘‘create a delicious, healthier drink with a consciousness about the way the ingredients are grown,” Goldman said. ‘‘We always hoped that the ‘Honest’ brand would stand for a different way of doing business — a product that is what it says it is, a company that strives for authenticity in the way it treats its customers and stakeholders,” he said.

Coca-Cola has faced questions about its operations, particularly in developing nations such as India. Coca-Cola bottling plants in India ‘‘generally” meet government regulatory standards for water quality, according to a recent report by the Energy and Resource Institute, a New Delhi research organization. But the facilities still need to fully comply with wastewater requirements specified by Coca-Cola itself, the report says.

Coca-Cola’s water management practices in India ‘‘are consistently improving and among the best in the world,” company executives said in a statement. But they acknowledged there were ‘‘some areas where we can do better” and said Coca-Cola is strengthening monitoring capabilities for wastewater treatment and taking other measures in India.

Coca-Cola executives believe in Honest Tea’s mission, and the company is even doing more than Honest Tea in some areas, such as reducing packaging, Goldman said. The agreement with Coca-Cola can help Honest Tea become more of a ‘‘change agent” in the industry, he said.

‘‘When we buy 2.5 million pounds of organic ingredients, as we did in 2007, we help create demand for a more sustainable system of agriculture, one that doesn’t rely on chemical pesticides and fertilizers,” Goldman said on his blog. ‘‘But when we buy ten times that amount, we help create a market that multiplies far beyond our own purchases. ... We help lead a national shift toward healthier diets.”

While he has the same passion and drive for building Honest Tea of a decade ago, Goldman said he wants to focus more on building the brand and less on raising money and managing production and distribution channels. He said he wanted to be careful not to become like other ‘‘mission-driven” businesses that ‘‘lost their soul or at least lost their leadership.”

He also cited Hirshberg’s company as an example of one that made being invested in by a much larger company work.

Honest Tea moved to a new office last year in Bethesda. The office employs many environmentally friendly features, such as recycled rubber floors in the kitchen and hallways, a kitchen island made of recycled glass, and concrete and used bricks from a Baltimore construction site in support columns.

The company has also won awards for employee-friendly practices such as reimbursements for health-club memberships, paid leave for volunteer activities and tuition assistance. Honest Tea started a program last year to encourage green practices at other businesses in Bethesda.

U.S. beverage sales

Sales of ready-to-drink tea and coffee jumped by 66 percent from 2003 to 2005.

Carbonated soft drink market declined by 0.2 percent in 2005 and grew by only 1 percent in 2004.

SOURCES: National Association for the Specialty Food Trade, Beverage Digest

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