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Honest Tea: Coca-Cola Deal Won’t Change Ethos
by Kevin J. Shay
Gazette.net
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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