Honest Tea Founder Talks on Coke Deal

By Samuel Fromartz

Though I took a critical look at Honest Tea's deal with Coke last week, company co-founder and CEO, Seth Goldman, agreed to chew it over with me in an interview.

I've admired Honest Tea for awhile and profiled the company here. It sources from organic and fair trade tea estates, has  looked hard at packaging and shipping, and has been open and transparent in its practices - as this interview attests. These are all key practices in sustainability.

Their "less-sweet" drinks offer a tasty alternative to sugar-laden calorie-busting sodas - yes, just the kind Coke sells. The formula drove Honest Tea sales up 70 percent to $23 million last year.

But I worried Coke's deal to buy a 40 percent stake would throw Seth and his team off track, or worse. There's more than a few examples of companies that stagnated or died a slow death after a giant took them over.

Seth countered that Coke will actually give him a major push in the market -- starting with two new products he's launching this year. Here's the edited interview:

(Photo: Seth Goldman via Honest Tea)

Fromartz: I hope you don't feel like I shot first and asked questions later.

Goldman: Well, a little bit. I think what you wrote was obviously your gut reaction so I appreciate the chance to talk here and share some of the thinking on it.

Fromartz: So explain why you did the deal.

Goldman: I believe in what we're doing and what we're selling. When we sell a bottle of tea that's grown organically and often with fair trade we're doing a good thing for the ecosystem, for the people who picked the tea leaves and for the people who drink the tea who are getting a healthier product.

If you believe that, then you have a responsibility to sell as much of it as you can. Buying 2.5 million pounds of organic ingredients, as we do, is a notable thing, but it doesn't change markets, it doesn't change the landscape of agriculture in tea fields. When we go to 25 million pounds, then you'll start seeing some of the larger suppliers say, 'Wait a minute, we're going to have to change things. We can't use chemical pesticides and herbicides – we have to find a way to grow the leaves and our business in harmony with our environment.'

And when we look at consumers, selling 30 million bottles is good. But if you think about what happens when we get to 300 million or 3 billion bottles, then you start changing the diet of people in this country and have a huge impact. I firmly believe a partner like Coca Cola can help us achieve that.

Fromartz: Well let's talk about that – I mean you were growing at 70 percent, presumably a lot of companies were knocking at your door. What was compelling about Coke?

Goldman: A few things. First of all, both parties went into the conversation knowing that for this to work we had to have Honest Tea – and me in particular -- remain independent and in control of the company. They recognized the value there, they had no interest in seeing that go away, and I had no interest in that either.

Fromartz: You're young, in your early 40s, you plan to be doing this for awhile?

Goldman: This is obviously something I believe in and we're just starting to realize our potential so I'm not going to pick up my toys and go home.

Fromartz: So how do you keep control. What's in the agreement that ensures that?

Goldman: Our board – we own 3 of the 5 board seats - and on a day-to-day basis I'm running the company. If push comes to shove and we disagree about something, it goes to the board, where we have majority.

Fromartz: And does that continue even as they increase their ownership stake above 40 percent?

Goldman: It definitely continues through the next three years. After that, they'll own the company.

Fromartz: So you have a three-year window of board control and after that you're fully part of Coke.

Goldman: Yes, but they have expressed a strong desire for me to stay on as long as I want.

My view is it's our job to build the brand to the scale we think it can achieve and build a strong brand identity. And if it's a strong organization, I'm confident they'll honor the brand. If we aren't successful at that then I recognize they might want to fold us in. So there's a risk there. But as with anything I've done, from the time I launched Honest Tea, there's risk and this is a risk I'm willing to take.

Fromartz: Can you talk about the rationale for the deal, since in your blog you said you were tired of raising money and doing distribution deals.

Goldman: I don't want to make it sound like this is me throwing up my hands and giving up. It's more about where can we be most effective. What we do best is building a brand with integrity, authenticity, and with a commitment to sustainability and organics – that's what our organizational strength is. So to have a partner who can help us leapfrog to a new level of production capability and distribution, that makes what we do much more powerful.

Parts of the country don't even have our product. And for that matter, even if we would have put 10 more years of effort in, we still would not have gotten access to the accounts we now get access to.

Fromartz: You mean if you spent the next 10 years on your own, building this independently?

Goldman: Yes. And one of the things I think I see – whether it was in comments on your blog or in emails – I think there is a desire to see good things stay small.

One of the unintended consequences of staying small is economic and geographic exclusivity, meaning people who don't have access to our products, who don't live near a Whole Foods or a natural food store, can't enjoy our products. Someone in Tulsa emailed me and said, 'Now I won't have to drive 2 hours now to get your product.' There's a real issue there. Why should healthy and more sustainable products only be available to certain parts of our population? So that's a real benefit of this partnership.

Fromartz: But you were in Target?

Goldman: Yes, Target's been a wonderful account, but it's not where people buy most of their food.

Fromartz: Is this the nature of the drink business? Is it basically impossible to remain independent and reach critical mass?

Goldman: I don't know about impossible but it's awfully tough. Money on its own does not create distribution.

Fromartz: So where are you headed? One thing an article in the Washington Post mentioned was Honest Tea in McDonald's?

Goldman: That's just an example of the kind of account that we will now have access to.

Fromartz: You can get in the door and talk with them.

Goldman: Yes, and before we couldn't.

And think of the kind of people who go to those places and the menu offerings they have. If we can start seeing organic, lower calorie products there -– I mean some people will say, 'We don't want to support those kind of stores.' And I say, 'Whether we want to or not, that's where billions of meals are served and if you want to change the diet and see products that are more sustainable you've got to be in those kind of places.'

We're not in Wal-Mart but we should be. Wal-Mart sells more organic products than Whole Foods and I love Whole Foods. They were our first and largest customer but we can't be serious about changing the way agriculture works and changing diets without being in places where most people get most of their products.

Fromartz: But can you understand…

Goldman: Look I come from an activist background so I totally understand…

Fromartz: I mean, I got email from people asking 'Will Honest Tea Remain Honest?'

Goldman: And that's a fair question. We've gotten a lot of emails, mostly positive but some negative. One of the most important points is I'm not trying to excuse or rationalize what Coke sells. They've obviously been successful at it. But if people think their product is unhealthy, then their desire should be to see more Honest Tea available wherever Coke is sold.

Fromartz: So people have a choice.

Goldman: Yes. I mean what's the alternative? We don't do this deal and the only products people can buy are the ones they think are unhealthy?

We want to continue what we're doing, only more so. I'll give you an example. We're launching two teas this year, Jasmine Green Energy Tea and Citrus Green Energy Tea. The green energy name comes from the fact that we're going to be tracking every step of the production chain, from the way the tea leaves are grown and processed and shipped, to the way they're processed in the bottling plant, and we're going to be offsetting the carbon footprint by buying credits from a wind farm in Iowa.

Fromartz: So you're going to be tracking all the energy in the tea from China to my house?

Goldman: Well, not to your house. At least to the point where we no longer own it at the distributor. Now we've obviously shared these plans with Coke and they've said, 'This is exactly what we want you to do.'

Fromartz: You had no concern about Coke's commitment to sustainability?

Goldman: No, I met with them. They have a team looking at recycling and water usage, so we've talked about what we can do.

I'll give an example: we buy about 30 million bottles, it seems like a lot but it's not compared to what other companies buy.

So when we go to our supplier and say, 'Hey, we want to try and increase the recycled content of the bottle,' They say, 'Come talk to us when you're buying 10 times that amount.'

When we go to that same bottle supplier with Coca Cola and say, 'We need to have recycled content in our bottle and here's Coke's technical science on how it's done,' then all of a sudden it can get done. And we've discussed plans with Coke to get to a very significant recycled content in that bottle, far more than any other company is doing right now.

Fromartz: In the Honest Tea bottle?

Goldman: Yes, but with technology and science coming from Coke. That's the kind of opportunity we'll have. We want to be an eco-incubator – as we've been – we want to continue to push the envelope and we have a very strong endorsement for doing that.

Fromartz: And what you have to show to them is that you'll deliver what they want, growth and profits.

Goldman: I have to show them I'm delivering what they invested in. They didn't invest to bring high fructose corn syrup into Honest Tea and get rid of the organics – that's not why they invested.

Fromartz: Well, Seth, thanks for talking with us. We'll be keeping an eye out!

Goldman: I will too, believe me!

Comments

[Simon Huntley]

The 'early adopters' will hate you for taking the stand you are taking. You are taking the exclusivity out of it for them, but the rest of the population will love you for what you are doing.

The early adopters will be loud, though!

I wish you luck, Seth, there is a constant push and pull between staying small and going big. I see the arguments on both sides. I hope this works out for Honest Tea.

[Farmer Troy]

O.K. O.K.,
If Coke does what Seth says they are going to do, then I guess I will wait and see and support the transition. If billions of people can get Honest Tea along with their Happy Meals, then I guess that's a good thing.

Yes, as an early adopter, I guess I was a little bitter now that Honest Tea is not so exclusive, but who am I to keep such a good thing to myself . . . share the wealth is a good motto.

BTW, my favorite quote from underneath an honest tea lid is "He that throws mud, only loses ground." by Fat Albert.

I didn't mean to throw any mud, just venting my initial thoughts.

Best Wishes to Seth and Honest Tea, I'll be pulling for you (and still drinking your tea).

[jeff bean]

Seth,

You've worked hard to build a company, and deserve the success. Bravo.

Having worked in farmers markets and the major grocery chain business during my college years, I remember how small brands never had a chance to reach a larger audience. It's all about distribution.

If Honest Tea now has a chance to reach more people (possibly changing their consumption habits in a positive way), well, that's a no-brainer. It's a great thing.

Tom's of Maine is one such example.

[Alistair Williamson]

Another interesting article. The scale argument has some real truth.

The challenge they have, I think, is that Coke has a commitment to it's shareholders to grow share price and earnings.

Currently that is not in conflict with Honest Tea's mission. Sometime in the future it probably will be. What happens then?

Aligning the interest of shareholders, employees, suppliers and customers is one of
the hardest things to and do. When the scale of the shareholder is around 1,000 times the Honsest Tea (coke market cap $135 billion), it's very hard to make it work.

I wish Seth best of luck, and hope he has the time to converting some key shareholders to the mission. He'll need their backing when times are harder.

Cheers, Alistair

[Samuel Fromartz]

Alistair, what Seth has to do is prove the VALUE of his proposition, so that Coke can see it in the marketplace and on the bottom line. That way the pure profit-mongers, whether in the executive suite or on Wall Street, will be defused. Thanks for your comments.