Honest Tea stays true to its roots as it grows

Seth Goldman is trying to take honesty mainstream.

A year after selling a 40% stake to Coca-Cola ko, his Honest Tea is going national with Coke distribution support. The bottled organic brewed teas with natural fruit sweetening, such as mango and pomegranate, is getting a mass-market presence, beyond natural and organic products stores.

"We're not just about creating a high-end frou-frou brand," says Goldman, 43, who co-founded Honest Tea in 1998, at the loftlike headquarters here. His "office" is a desk in a corner of the open room. "We want to provide our product wherever beverages are sold. Once you get beyond the natural store shelf, it's much harder for consumers to get it. We weren't getting distribution."

That began to change a year ago, with Coke's $43 million investment and option to buy it all by 2011. The deal brought more than cash to expand — it brought support and access to new markets.

"When you have a pure financial investment ... that's very distracting for management and often very bad for the brand," says Gary Hirshberg, 54, an Honest Tea board member and CEO of organic yogurt company Stonyfield Farm. "This makes happier employees, which makes a better-quality product, which makes a difference in tough times."

Yogurt giant Danone bought 85% of Hirshberg's Stonyfield in 2001. He knows that distribution is key to success.

"You can have the healthiest and best drink, but if you can't get it to store shelves, you're just another has-been," he says.

While bottled tea sales were $1.1 billion, down 1.7%, for the 52 weeks ended Jan. 25 vs. a year earlier, according to Information Resources, Honest products, including its Honest Kids juices, were up 66%, to $38.1 million — despite prices about 20% higher than rivals such as Snapple and Arizona.

The growth potential for organic tea drew the interest of Coca-Cola's Venturing and Emerging Brands (VEB) group.

"We are less than one-half of one percent of tea that's sold," says Goldman, who co-founded Honest Tea with Barry Nalebuff, a Yale University School of Management professor. "We're confident that within the next three years, organic tea will be 5% to 10% of beverage sales."

Honest Tea, whose flavors include Mango Green Tea and Pomegranate White Tea with Acai, has built a solid image through organic ingredients, being less sweet and promoting social responsibility through buying tea leaves that are certified Fair Trade, a program for Third World farmers.

Honest "represents the intersection of three megatrends," says Deryck van Rensburg, president of the Coke's VEB group. "It's not just about offering a product, but it's the way (Goldman) does business. Consumers are increasingly concerned not only about products but also the kind of company the products come from and what it stands for."

What Honest Tea stands for includes buying bicycles for employees to commute to work, putting recycling bins in schools to collect used foil packs from its kids' drinks and organizing tea garden farm cooperatives in supplier nations.

Some organic enthusiasts have criticized Goldman for selling a stake to Coca-Cola. Goldman also has had to buy out dozens of contracts with independent distributors, who helped grow Honest Tea, only to lose the business to Coke's network.

"You feel like an incubator," says Jeff Jordano, general manager, Pacific Beverage, which has about 40 trucks. "You take these brands, grow them, and if they do well, they sell out to Coke or Pepsi." In 2007, he lost Glacéau, also bought by Coke.

Swire Coca-Cola, with 500 trucks, recently got Honest Tea in its 11-state distribution area, including Oregon and Arizona.

"This is the first beverage we've had of this type," President Jack Pelo says. "It's a nice addition."

A 1995 graduate of Yale, Goldman had created a business plan for a microbiology company.

"I was excited about building an idea into a business, but that idea wasn't something that I believed in or wanted for myself," he says. After two years of marketing at the Calvert Group, mutual funds for socially responsible investments, Goldman contacted Nalebuff about the Honest Tea idea.

"Tea is a great vehicle to create community wealth," Goldman says. "It is consumed by some of the wealthiest cultures but created by the poorest. We felt that we had a healthier and a more sustainable product that made sense for the consumer."

He got a big break when he landed a meeting with a buyer for Whole Foods. Goldman and Nalebuff concocted five flavors and showed up with the drinks in Thermos jugs and a mock-up label on a Snapple bottle. The buyer said they'd take, not buy, a case of each flavor and if it sold, place an order.

Goldman insisted that the cases be bought and promised the product by Memorial Day. In the meantime, Goldman learned that his youngest of three sons would need heart surgery. Meetings and tastings with Nalebuff often were in the hospital waiting room. The first cases sold; by 2000, Honest Tea had distribution in Whole Foods.

Before Coke came along, Honest Tea began trying to go more mainstream. Glass bottles with stronger flavors such as Moroccan Mint Green Tea sold in health food stores. In 2004, it introduced slightly sweeter varieties in 16.9-ounce plastic bottles.

"He had this vision that mainstream can be organic," says Dan Cavanaugh, 53, who oversees traditional grocery outlets. "With Seth's vision, we separated the line, and we kept the core consumer, but we grew new consumers."

Melanie Knitzer, 51, who oversees sales to natural food stores, was Goldman's first employee.

"My job is to make sure we stay true to our roots," Knitzer says. She left a large distribution company to join Honest Tea, with annual sales of $140,000 at the time, because of Seth. "He has such passion and he's genuine, and you believe him."

Honest Tea spends little on marketing, but has benefited from celebrity interest that includes President Obama, Oprah Winfrey and Steve Martin.

It started when Winfrey discovered it in a health food store, and her Harpo Studios called to find out where they could find more of the "tea that Oprah loves," Goldman says. "It's really funny. It's a true discovery brand. ... The consumer finds it and tells their friends about it."

As for the Obama connection — he favors Black Forest Berry — it started when he was elected to the Senate.

"We got a call about where they could buy it and have it delivered to the office," Goldman says. During the campaign, "They called into the office to find out where it was available."

Despite such connections and the Coke money and the growth — with 125 employees now, Goldman had to host the holiday party outside his home for the first time — Goldman says nothing essential has changed. "This is still the company and vision that we founded."