Coca-Cola Decides to Gulp Down the Rest of Honest Tea
[Editor's Note: Article amended February 17, 2011.]
Honest Tea, the fast-growing 13-year-old vendor of organic teas, first attracted the attention of Coca-Cola back in 2008, when the fizzy drinks giant took a 40 percent stake in the green-minded startup. Today, CEO Seth Goldman announced that Honest Tea had notified its shareholders of Coke's decision to exercise its option to buy the balance of those shares, almost three years to the day after their original agreement. The deal is on track to close within the next few weeks.
The deal would cap a period of accelerating growth for the Bethesda, Md.-based tea brand. Sales peaked at some 100 million units of bottles and bags last year, bringing sales close to $100 million, Goldman explained, thanks in part to a boost in distribution that came from the original deal with Coke.
"We've seen growth three-fold," said Goldman, thanks in part to current or pending distribution deals with major national chains including CVS, Walgreens and Rite Aid. The high point of Honest Tea's arrival to the mainstream, Goldman joked, may have been marked when the company appeared as a clue in a New York Times Friday crossword puzzle. The clue, "Honest ______ (drink brand)." The answer: Honest Ade, not Tea -- one for the experts.
In a nod to Goldman’s central role as founder and CEO -- or TeaEO -- Coke has ensured that he maintains an equity stake in the operation and will continue to run the brand. The move is unprecedented, Goldman told attendees at the State of Green Business Forum today at the National Press Club in Washington, D.C.
Coke has a well-evolved business process for buying up small-brands, transitioning out the founder and folding the products into the parent's larger manufacturing, distribution and marketing operations. "A veteran of the beverage business told me that after a takeover, for the first few weeks, they want to know your opinion, for the next few weeks, they want to know your telephone number, and after that they don't want to know you," said Goldman. "This was unusual for Coke, but came from the chairman."
Speaking with GreenBiz.com's senior writer, Marc Gunther, Goldman acknowledged the decision stirs charges that the organic tea brand is compromising its green integrity. Honest Tea has cultivated sustainable practices among its tea suppliers to achieve USDA certified organic status. It has also ruled out using high fructose corn syrup, and has certified its products as Fair Trade.
Goldman dismisses the charge, arguing that scaling up his business is the path to delivering the greatest benefits most broadly. "It's easy to fall into a 'big is bad, small is good' trap," said Goldman. "To those critics, I ask, 'What's your strategy to change corporate America?'"
Coke has proven loath to tinker with Honest Tea's green appeal -- even in the face of tension with the newcomer. The companies attracted national attention in 2010 when The New York Times detailed a conflict over Honest Tea's decision to brand its kids' beverage line as free of high fructose corn syrup (HFCS), despite pressure from Coke. The big drink brand was facing charges over the synthetic nature of the corn-derived sweetener along with the high calorie count of its fizzy drinks.
"We decided not to change it," at the time, said Goldman. "And to Coke's credit, they didn't ask to change it. We have an understanding they won't change it post-takeover."
Longer term, the question may be whether or not Honest Tea is likely to change Coke. "The single best way I can do that is to make Honest Tea powerful, to make it a billion-dollar brand," said Goldman. If so, "our impact will be felt throughout Coca-Cola and the industry."
Coke is transferring greener practices into Honest Tea's manufacturing and supply chain practices. Honest Tea plans to adapt a Coke-developed plastic resin, made from plant material, that can be mixed into regular plastic recycling flows. Before now, plant-based plastics have largely been a headache for recyclers.
"It's made from molasses," said Goldman, "and the first plastic bottle that can be hot-filled -- we put 180 degree tea into the bottles -- that is recyclable. It's a PET bottle with a different source material. Corn-based polymers can't handle that."
Here is a clip from Goldman's interview at the State of Green Business Forum 2011: