The Honest truth: How a tiny tea company is poised to become one of Coca-Cola's next $1B brands
As more stores carried its products and sports drinks, lemonades and kids beverages were added to the lineup, revenue has soared from $38 million a decade ago to more than $500 million today.
When Seth Goldman co-founded Honest Tea in 1998, the scrappy upstart's label was loaded with buzzwords like organic, low sugar, fair trade and sustainability.
While these attributes are common parlance for products today, consumers back then were hesitant to try a less sweetened product, and sustainability and transparency weren't top of mind when it came to choosing what to place in their shopping carts. To Goldman, this represented an untapped market, and one that if Honest could successfully disrupt, would give them an early advantage in the rapidly growing premium tea category.
"People didn’t have an appetite for less sweet drinks. Organic wasn’t a thing really. Fair trade wasn't a thing, meaning it wasn’t something that consumers were really conscious about," Goldman told Food Dive from Honest's Maryland headquarters. "The good news is we had a monopoly in those offerings, but the bad news is there really wasn’t a market so we really had to help make that market.”
To do that, Honest blanketed natural food stores, festivals and other events with samples of its Gold Rush Cinnamon, Kashmiri Chai, Black Forest Berry, Moroccan Mint Green and Assam Black teas to show consumers that a beverage could contain less sugar and still taste good. Field marketing is still the company's biggest personnel investment, Goldman said.
"People didn’t have an appetite for less sweet drinks. Organic wasn’t a thing really. Fair trade wasn't a thing, meaning it wasn’t something that consumers were really conscious about. The good news is we had a monopoly in those offerings, but the bad news is there really wasn’t a market so we really had to help make that market.”
Co-founder, Honest Tea
As consumer interest in healthier, more natural beverages gained momentum, the brand expanded into stores like Whole Foods, which Honest first entered in 1998.
But as the company grew, Honest was increasingly up against premium brands in the space also riding the growing demand for tea and better-for-you beverages. Many of these had deep-pocketed owners such as Tazo, owned by Unilever; Starbucks' Teavana; PepsiCo and Unilever's Pure Leaf and Coca-Cola's Gold Peak.
Despite the competition, Honest remains a market leader in the space, commanding about 2.8% of the $1.8 billion premium tea category, according to the company.
Overall, the ready-to-drink tea market, which rang up sales of $200 million in 1990, posted revenue last year of $6 billion. Demand is expected to grow or remain steady in coming years as consumer interest in the beverage's healthfulness, variety, availability and sustainability lure drinkers, according to data from the Tea Association of the U.S.A. Much of the current consumption comes from brands like Snapple, Arizona, Nestea and Lipton, which are more well-known among the broader population.
Coca-Cola comes calling
Goldman's inspiration for what became Honest came on a hot September day in 1997 when the Yale School of Management graduate was running in New York's Central Park with a friend. After their workout, the pair stopped at a nearby shop to quench their thirst, but found nothing but sugar-laced teas and colas. Later that evening, Goldman emailed his former Yale professor Barry Nalebuff to remind him about a conversation they had three years earlier for a tea company using spring water and natural sweeteners with a fraction of the calories.
It didn't take long for the business to get going. Nalebuff and Goldman contributed much of the $500,000 to get the company off the ground, with the rest coming from their family and friends. Goldman left his job working as a vice president for a mutual fund company, and started the business in February 1998 in the home he shared with his wife Julie and their three children. His office occupied their guest bedroom and the kitchen served as a testing lab. Goldman hired a brewmaster who lived in the basement.
As the company grew during the next decade, Honest's success caught the attention of Coca-Cola. The beverage giant first added Honest to its portfolio by purchasing a 40% stake in 2008 for $43 million — a well-timed investment that came shortly before Great Recession, when financing became harder to come by — with an option that was exercised three years later to purchase the rest of the company for an undisclosed amount.
"We weren't losing a ton of cash, but we did need to raise more money and it would have been very hard to do that" during the recession, Goldman said. "I know a lot of companies that did go out of business during that time."
Since Coca-Cola first added Honest to its portfolio, the number of stores selling its products has soared from 15,000 locations in 2008 — a manageable level that allowed employees to personally visit many outlets to hand out samples— to an estimated 140,000 today. Honest products are now found in stores like Walmart, Kroger, Wegmans and Target; online retailers such as Jet.com, Amazon and Instacart; and scores of restaurants including Wendy's, McDonald's and Subway.
As more stores started selling its products and the items under the Honest brand expanded beyond tea to include sports drinks, lemonades and kids' beverages, revenue soared from $38 million a decade ago to more than $500 million today. With the brand posting annual growth in the double digits, Coca-Cola projects Honest to join the ranks of its billion-dollar brands in the U.S. by 2025 — and likely sooner if global revenue is factored in.
Erik Gordon, a business professor at the University of Michigan, told Food Dive that the purchase has worked for Coca-Cola in large part because of what it hasn't done with the Honest brand. Coca-Cola has been careful to maintain the values Honest cultivated when it was founded and keep its mainstream customers loyal to the brand, despite expanding the product lineup and availability of the drinks to more locations.
“Coke has handled (Honest) very deftly,” Gordon said. “They’ve taken it from being a niche brand into a mainstream brand that’s putting money on the board even by Coca-Cola’s standard.”
'The one that we used to daydream about'
When Coca-Cola first took its stake in 2008, the company brought with it a plethora of invaluable resources, ranging from employees, industry connections, consumer data, a global distribution system and an unrivaled knowledge of different beverage categories such as coffee, juice and sparking drinks, which have proven invaluable for Honest as it expands its reach around the world and introduces new products.
Goldman said Coca-Cola opened up new avenues to peddle its drinks and lead to the creation of new products that might not have been possible without the soda giant. Last December, Honest became the first organic product to be carried at McDonald's after the restaurant behemoth swapped out its 80-calorie juice option for Honest Kids, which contained 45 fewer calories. Coca-Cola was able to provide cash to help Honest make an upfront purchase of enough organic juice for its kids' drink — something Goldman said an independent company wouldn't be able to do — making a deal like McDonald's possible.
"It's the one that we used to daydream about when we started 20 years ago: Is there a way we can get our product to that kind of consumer?" Goldman said.
"The idea of not pushing a brand too far, too fast, too soon is something that they’ve done very well with Honest Tea, and they can take those learnings and leverage that as they bring some of these other smaller, faster growing brands into their portfolio."
Analyst, Edward Jones
While Honest started in tea, Coca-Cola has fostered its expansion into other drinks in the health and wellness category that fall under the organic, less sweet and fair trade umbrella that have become synonymous with the brand. So far, the efforts have proven largely successful, with the biggest success for Honest coming in children's drinks, where Honest Kids launched a decade ago. It has overtaken tea as the company's best-selling product.
"We're capturing customers with that less-sweet palate earlier and helping to introduce them to our brand, and that certainly speaks well to our prospects in the future," Goldman said. "If children today have that less-sweet palate as they get older, that's the reason they'll continue to be connected to our offering."
A future in food?
As the company has experimented, there have been a few notable failures like a kombucha line and a cacao-brewed drink. An Honest Sport line, which is in competition with the likes of PepsiCo's Gatorade and Coca-Cola's Powerade, launched in June 2016 before expanding nationally a year later. It has struggled to gain traction beyond its sweet spot in the natural channel.
Honest also hasn't ruled out another move into the food space, which would be a big shift for the beverage-focused Coca-Cola. Honest, which owns the trademark Honest Food, first attempted to enter the space in 2007 with a Green Tea and Salad Bar — a combination of organic fruits and vegetables like apples, carrots, beets, spinach, kale, tomato and broccoli, and green tea. Honest decided against a broader launch to focus on its beverages.
"We think there is still a lot of runway and opportunity within beverages, but we are exploring snacks, in particular, for youth," Clare Koller, general manager of Honest who joined the company in 2017 after a decade with Coca-Cola, told Food Dive.
At the same time, Honest has been rapidly growing its overseas business in nearly 40 European cities, as well as in Singapore and Mexico. In many of these areas, organic isn't common, which gives Honest first-mover advantage as it expands and the popularity of the segment starts to catch on with consumers. The global presence has given Coca-Cola and Honest the unique opportunity to try new products like sparkling lemonade in Switzerland, bagged coffee beans in Sweden and bottled coffee in the UK and Spain. If they perform well, Honest could decide to roll them out in the U.S. or apply lessons learned to other product innovations, Goldman said.
The purchase of Honest by Coca-Cola comes as the drinks maker has been snapping up beverage producers around the world recently in its bid to become "a total beverage company," including in North America where it purchased Mexico’s sparkling water brand Topo Chico last October and most recently acquired a minority stake in BodyArmor for an undisclosed amount with an opportunity to fully acquire the sports drink brand in the future.
Brittany Weissman, an analyst at Edward Jones, told Food Dive that Coca-Cola's decision to patiently and methodically nurture the Honest brand serves as a blueprint for how the company goes about integrating and growing other beverages it adds to its portfolio.
“The idea of not pushing a brand too far, too fast, too soon is something that they’ve done very well with Honest Tea, and they can take those learnings and leverage that as they bring some of these other smaller, faster growing brands into their portfolio," she said. "They have been good stewards of (Honest) and realizing 'OK, what really fits with this brand, and how can we use that to grow it rather than growing it at any cost?' "
Beyond the brand
For the 132-year old Coca-Cola, Honest's product line opened up new markets for the company and allowed it to increase deliveries to existing customers where the company previously had a smaller footprint, such as Whole Foods. The world's largest non-alcoholic beverage maker also was able to glean insight into how a company can expedite product development. Goldman said during a July trip to Europe, workers told him they were getting Honest products to market in nine months, rather than the customary year and a half.
"They all said, 'This isn't what we normally do. This isn't in our playbook,' " Goldman recalled. "They said, 'This is an entrepreneurial brand. If we want to be ahead of the market, we have to move quickly.' "
Koller said Coca-Cola has devoted additional resources, including staff and funding, to assist Honest in identifying future market opportunities and developing new products. An Honest coffee drink, which could hit the market as soon as the first quarter of 2019, is one example where Coca-Cola is lining up production capacity to quickly make the drink, while its sales team is talking with retailers ahead of the product's potential launch.
"We are a very difficult ship to move because we are so big," Koller said of Coca-Cola, which posted $35.4 billion in revenue during its most recent fiscal year. "To make those changes takes time. Honest is kind of serving as an example that is trying to do things faster."
During Coca-Cola's investor day last November, executives in Atlanta highlighted Honest as an example of a brand that prospered because it was brought along slowly rather than chasing volume growth.
"If (Goldman) would have gone for volume and put it in every channel, probably consumers would have lost [understanding of what the brand represented], but he built it slowly, just used digital and mouth-to-mouth," Francisco Crespo Benítez, Coca-Cola's chief growth officer, told the audience. "This is going to be a billion dollar brand in a few years. So it's not that we don't know how to [grow it], but it requires the right discipline."
For his part, Goldman insists he has no regrets about looking back to the decision to sell Honest to Coca-Cola.
"With seven years hindsight now, was it the right move to sell, but was this the right partner? In both cases, the answer is 'yes.' " he said.
Goldman is quick to point out that underneath it all is a small tea company that started with a mission to offer organic, low sugar, fair trade and sustainability to the masses. Growth has enabled Honest to pay more in a fair trade premium — extra money farmers and workers receive beyond the cost of the product or labor that can be used to invest in improving the quality of their lives. In 2007, Honest paid $30,000 in premiums. Last year, it was 17 times that at more than $500,000.
"When we were an independent company, we stood for the same things, it was just more at a model scale versus a full-impact scale. It was a nice model, we were doing nice things, but we're only in 15,000 stores. Are we really making that much of a difference?" Goldman asked.
Without Coca-Cola, his company's mission would have remained the same, but he admitted, "we might have been confined to our niche in the natural channel."
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