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Honest Tea Aspires To New Heights, Thanks To Coke
The Tea & Coffee Trade Journal / March 2008

By Larry Luxner

Now that Coca-Cola Co. owns 40% of Honest Tea, will the little Maryland-based tea brewer be so honest?

Absolutely, promises "TeaEO" Seth Goldman, who along with co-founder Barry Nalebuff launched the nation's top-selling brand of organic bottle tea in Goldman's kitchen 10 years ago — armed with nothing more than five borrowed thermoses, an empty Snapple bottle with a label pasted on it, some tea leaves and the name Honest Tea.

"This gives us a great platform for us to expand the distribution of our products and the number of customers we can reach," said Goldman, who had been in negotiations with Coke since last fall. "And it gives them the opportunity to share in the growth of our brand."

Coca-Cola, whose carbonated beverages are not exactly known for their healthful attributes, paid $43 million for its stake in Honest Tea — a company that prides itself on 100% natural ingredients, organic sustainability and fair trade practices.

In announcing the deal Feb. 5, Coca-Cola North America's Venturing and Emerging Brands (VEB) Business Unit issued a typically canned, corporate-sounding press release devoid of the flavor and originality that's become a trademark of Goldman's little enterprise.

"Honest Tea is on the forefront of the rapidly growing organic beverage business and Seth Goldman and his management team have successfully anticipated and met consumer needs in this expanding category," said Deryck van Rensburg, VEB's president and general manager. "This transaction is a superb example of our mission in VEB to seek out and invest in the best beverage entrepreneurs and the highest growth-potential beverages."

That's putting it lightly. Honest Tea's revenues this year are expected to exceed $40 million, up from $23 million in 2007, $13 million the year before that — and only $250,000 in 1998, its first year of existence. That compares to Atlanta-based Coca-Cola, which reported revenues last year approaching $21 billion.

Even though Goldman, 42, is originally from Boston, Honest Tea has always been based in Bethesda, a suburb of Washington, D.C. Since its founding, the company has moved four times; it newest headquarters is an upscale two-story building sandwiched between an Apple Computer store and a kung fu school in downtown Bethesda.

In a recent blog posting, Goldman wrote that he's confident Coke will prove to be a strategic partner that wants to "buy in" to Honest Tea's mission, rather than one wanting him to sell out.

"The world of mission-driven business is littered with entrepreneurs whose companies lost their soul or at least lost their leadership," he said, pointing to Vermont ice-cream manufacturer Ben & Jerry's, which was acquired by Unilever in 2000 for $326 million. "If you talk to Ben Cohen from Ben & Jerry's or Steve Demos from Silk, they will tell you that if they could do it over again, they would have done it differently. I am determined to make sure that never happens with Honest Tea."

Goldman said his company will now have five board members (down from seven); himself, Nalebuff, Hirshberg and two representatives from Coca-Cola, but that he's keeping his management intact, and exactly as it was before.

"The risks of this kind of transaction are obvious, but I've seen it work firsthand with my board member, Gary Hirshberg at Stonyfield Farm, who continues to lead the enterprise and the organic food movement with all the fire and wisdom that he had when Groupe Danone purchased 40% of Stonyfield in 2001," said Goldman.

Given Coca-Cola's latest acquisition, perhaps it's ironic that Honest Tea was born out of a classroom analysis of the competition between Coke and Pepsi.

"Barry made up the name," Goldman told The Tea & Coffee Trade Journal in an interview last month. "I liked starting things and always had an entrepreneurial appetite, but there was certainly no inclination toward the beverage business. Back then, I was his student at the Yale School of Management. I do a lot of running, so I was always thirsty. Barry asked if anything was missing [in the beverage market] and my hand shot up. There were all these huge companies and thousands of options out there, but everything was too sweet."

Goldman, a Harvard graduate who had worked on Capitol Hill, quit his job at the Calvert Group, a mutual-fund company, and started brewing batches of tea in his kitchen. Five weeks later, he brought thermoses of tea and a bottle with a mock-up label to Fresh Fields (now Whole Foods Markets) — and walked away with an order for 15,000 bottles.

"Our main idea was to make a product that wasn't loaded up with sugar and junk," he said. "At that time, the leading beverages in the natural-foods world were Arizona and Snapple. These were perceived as healthy beverages."

At an average $1.39 to $1.49 per bottle, Honest Tea is far more expensive than either of those two. But Goldman says it's also much healthier than either of those two, because it has less sugar and it's all organic.

"When I started the company, organics were just on the horizon," Goldman said. "We used organic cane sugar, but as we grew, there weren't sufficient supplies of organic tea. We were the first to make an organic tea in 1999. There's no question that since then, other companies have moved toward us. Snapple has made its products less sweet."

Goldman said he decided, without prodding from the Food & Drug Administration, to put on the label how much sugar is in the entire bottle, not just in each 8-oz. serving. Caloric content ranges from zero calories for Just Green and Just Black to 100 calories for the Honest Ade line, though the average Honest Tea beverage contains just 34 calories.

"We decided to make something that has half or even a third of the calories of Snapple, but enough flavor to taste good, but not so much that you can't taste the tea. Too much sugar, and it tastes like soda without carbonation."

Sitting in his informal company headquarters, which features flooring made out of recycled tires and walls constructed from bricks recovered from a Baltimore landfill, Goldman ticked off his latest flavors — pomegranate white tea with açai, mango white tea, pearfect white tea, vanilla mint white tea and heavenly honey green.

"Snapple is empty calories. It's made with high-fructose corn syrup," he said with a note of contempt. "When you drink our products, the calories are coming from honey.

He added: "It's easy to assume that most bottled tea out there is made with real tea leaves. But it turns out that most bottled tea is made with powders and concentrates."

Goldman says he sources his organic assam and darjeeling tea from China's Hunan province, as well as India, South Africa and Sri Lanka. He occasionally travels to the source of his tea to make sure the gardens are certified organic — a sure way of avoiding herbicides like atrazine, which have been linked to genetic mutations in frogs.

"Tea, unlike most agricultural products, is never rinsed," he said. "Once the tea leaves are picked, no rinsing process happens. So if any chemicals are sprayed on tea leaves, those chemicals will stay on the leaves until hot water is poured over them to brew the tea. Going organic is a way to have inspection at the garden level."

Only three years after its modest beginnings in Goldman's kitchen, Honest Tea was already offering its products in the form of tea bags, and by 2003, the company was ranked No. 117 on the Inc. 500 list of the nation's fastest-growing private companies.

In 2004, Honest Tea gained full USDA organic certification of all 12 of its bottled teas as well as all eight tea bags. The following year, Goldman's growing enterprise made its first foray into a non-tea product with the introduction of Honest Ade Limeade and Cranberry Lemonade organic citrus quenchers.

And last year, the company launched its new line for children, Honest Kids, with three flavors of low-sugar organic beverages — Berry Berry Good Lemonade, Goodness Grapeness and Tropical Tango Punch — in plastic drink pouches.

All told, Honest Tea offers 15 varieties in glass and four in plastic. There are also four varieties of Honest Ade and three of Honest Kids, for a total of 26 branded products. The most popular is Moroccan Mint, which the company calls its "million-dollar baby" because it was the first flavor to hit $1 million in sales within a 12-month period.

"We're not just a tea company anymore, we're more an organic beverage company," he said, estimating that tea still constitutes 70% of annual sales.

In an effort to help those at the other end of the bottled tea chain — poor farmers — Honest Tea has entered into a number of partnerships around the world. For example, Pomegranate Red with Goji Berry is sourced from indigenous organic honey bush and rooibus teas grown by community-based suppliers in South Africa. The rooibos is fair-trade certified, and a portion of the sales from this tea go directly to community development projects.

Similarly, the Sublime Mate brand is made with yerba mate from a fourth-generation family farm in Argentina's Misiones province. The grower offers his workers fair wages and working conditions, and has committed to replant 8,000 native trees this year in the rainforests of northern Argentina.

A third flavor, First Nation Peppermint, was designed in partnership with I-tchik Herb, a woman-owned company based on the Crow Reservation in Montana. A portion of the sales is given to the Pretty Shield Foundation, a non-profit group that assists at-risk Native American youth.

Goldman says that the organic food market, valued at $15-30 billion, is still less than 3% of the overall food business, so there's plenty of room to grow. The market for bottled tea is around $3 billion, with the organic share of that market at under 1%.

"We're confident that over the next five years, that percentage will grow to 10%. That's where our opportunities lie," said Goldman, himself an avid consumer of his own products (he usually drinks at least three bottles of Honest Tea every day). "People are turning to tea not just because it's got healthy properties, but because it's a healthy alternative."

For the first time, Honest Tea says it's the top-selling organic bottled tea in all seven regions of the United States. Goldman's biggest single customer is Whole Foods Markets; other distributors of Honest Tea include chain retailers Costco, Target, 7-Eleven, Sheetz and Wawa.

Yet Goldman says making a profit isn't his main objective.

"We hit our break-even point in 2005 as a business, but we weren't profitable this year," he explained. "The focus for us as a brand is growth. We want to continue to build."

In addition to Coca-Cola, Goldman and Nalebuff, some 100 other investors have stakes in Honest Tea including Stonyfield's Hirshberg and finance writer Andrew Tobias.

Interestingly, Honest Tea has done very little advertising, if at all.

"It's been all word-of-mouth since we've never had a lot of money," he said, adding that the company has done some small trial radio spots this year with the Washington Nationals baseball team. That low profile is unlikely to change with Coke's acquisition.

"What's nice is that we're growing quickly, and that larger companies recognize the opportunity in what we're doing. That speaks to the hard work we've done," said Goldman, who still rides his bicycle to work. "Ten years ago, we were a little ahead of our time. I'd say our time has finally come."

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