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Honest tea

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The Honest Tea case is about an entrepreneur, Seth Goldman, who built a successful social venture in the alternative beverage industry. After building Honest Tea to become an industry leader, Seth faced with the decision of whether to merge with Coca-Cola and how to successfully manage the post-merger transition. Information about the alternative beverage industry and Seth’s use of social media is presented to help determine how Honest Tea can continue to grow after merging with Coke yet maintain the core principles that their stakeholders value.

Seth Goldman believed that building a successful brand meant that the company would need to demonstrate that a strong alignment with the core values of their customers. It was through this guiding principle that Goldman built a loyal following to the Honest Tea brand by providing healthy drinks and by satisfying the growing demand among consumers for organic products. However, the Honest Tea case illustrates how the company has grown to a point where Goldman believes the company should look externally for distribution support. While Honest Tea’s merger with Coca-Cola will likely enable Honest Tea to expand its distribution capabilities, the partnership could come with a set of costs that Goldman may not have completely accounted for.

The case makes three important contributions to practice. First, the Honest Tea case presents an overview of the way social entrepreneurs can capitalize on opportunities. Second, the case illustrates how entrepreneurs of social ventures can face unique challenges. Indeed, stakeholders often share deeply held ties to social ventures that can become quite weak when stakeholders perceive that the firm is sacrificing its core values. Third, the case highlights how social ventures can leverage social media in two important ways: to create brand awareness of their products and to maintain transparency with both internal and external stakeholders while the firm undergoes a merger or similar institutional change. Collectively, the findings suggest a number of practical insights into how entrepreneurs can maintain strong ties with stakeholders during the growth phase of a social venture’s development with social media.

In his blog post in August 2008, Seth Goldman reflected on how bittersweet growth can be. The announcement that Coca Cola would be making a 40% investment into the company, for $43 million, came in February 2008, just 5 months before Honest Tea’s 10 year anniversary. Now having the access to the distribution channels of the largest beverage distributor in the world, Honest Tea finally has access to reach store shelves nationwide. Seth remembers all the years Honest Tea had to beg independent distributers to carry the organic beverage. He also thinks of his conversations with the independent distributors, who served as a real catalyst for Honest Tea’s initial growth, that their contracts would be terminated. His firm’s new found growth with Coke is indeed bittersweet (Chaudhuri, 2008). For Honest Tea, the merger with Coke means they could have a more far reaching impact of bringing healthy, organic products into the mainstream. However, they could be opening themselves up to scrutiny by their stakeholders who challenge whether Honest Tea can truly stay honest to their mission after merging with an organization such as Coke.

Going into the 10th year, Coke executives approached Goldman about aligning interests with Honest Tea. Seth saw this as an opportunity to expand their distribution network while also helping fulfill Honest Tea’s social mission to help developing countries, society and the environment. Goldman states “Despite our 66% annual compound growth rate (70% in 2007), we still aren’t reaching all the people we want to reach. Our business has inspired many, but we also want to see Honest be a change agent through our own actions. When we buy 2.5 million pounds of organic ingredients, as we did in 2007, we help create demand for a more sustainable system of agriculture, one that doesn’t rely on chemical pesticides and fertilizers. But when we buy ten times that amount, we help create a market that multiplies far beyond our own purchases. When we sell 32 million bottles and drink pouches with less than half the calories of mainstream alternatives, as we did in 2007, we help displace 2,400,000,000 empty calories. That’s important, but when we sell ten times that number, we help lead a national shift toward healthier diets.”

Despite its benefits, a merger with Coke may have its share of costs, some unique to social ventures. Once Honest Tea merges with Coca-Cola, will Honest Tea be able to continue fulfilling its social mission? Most importantly, how can Seth persuade stakeholders, both internal and external, to support Honest Tea’s merger with Coke? Most of Honest Tea’s stakeholders including employees, consumers and independent distributors are socially focused and steadfast in their support of socially responsible companies. How might they react to the news that Honest Tea has merged with a national distributor and especially one with so much negative connotation associated with it? Will they be as committed to the Honest Tea brand? Goldman has built a solid following to his personal blog site. However, even if Seth is transparent with customers through social media about the challenges Honest Tea faces will it be enough to persuade loyal customers, and even employees, that Honest Tea will maintain its core principles?

From Home Brewed to Mass Market
After graduating from Harvard in 1987, Seth went on to the Yale School of Management where he would graduate in 1995. Seth speaks of his experience at Yale asthe point at which he recognized corporate responsibility as a competitive advantage. “The first case study at Yale awakened me to the potential that business has to shape our society in a positive way — extend


economic opportunity to disadvantaged communities and protect the environment” (Zmuda, 2008).
In 1997, Seth realized that between the soda and other sugar filled alternatives there was nothing to meet the needs of the healthier consumer, other than water. It was then that Seth realized where his passion and destiny was, in the healthy alternative beverage industry. He remembered the common taste preference he had with his Yale professor Barry Nalebuff and immediately emailed him about his idea. It seemed the timing was perfect for this pair to come together. Seth had a passion for finding the perfect alternative drink combination and Nalebuff was just returning from India where he had gone for a case study to analyze the tea industry. In India, Nalebuff discovered that most American iced-tea makers used cheap tea leaves. So with Seth’s passion and Nalebuff’s knowledge, they decided that there was a potential market for an an all-natural brew that used only high-quality tea leaves in the newly developing ready to drink tea industry.

After five weeks of brewing up different batches of tea in Seth’s kitchen to come up with the right flavors, they finally settled on a variety of five flavors and officially launched Honest Tea in February of 1998. Shortly thereafter, Seth and Barry approached the regional office of Fresh Fields, now Whole Foods Market, with their concoctions in thermos jugs with a mocked up label. To their surprise, their initial order was for 15,000 bottles. To fill this order they raised $500,000 from their parents, relatives, and friends. By June of that year, just 4 months after landing the contract with Fresh Fields, production was moved to Buffalo N.Y. and Honest Tea made its first appearance on store shelves, with 5 different flavors including: Gold Rush Cinnamon, Kashmir Chai, Black Forest Berry, Moroccan Mint Green and Assam Black. By the end of the first year of production Honest Tea had already surpassed sales of $250,000. Identifying an Opportunity: Pioneer in the Organic Movement

In 2001, Honest Tea saw an opportunity in the organic food and beverage industry. In 1999 organic were only about $1 billion (Food & Drink Weekly, 2005). However, by 2001 sales organic sales had grown to about 10 billion. This gave rise to supermarket chains having to compete on a significant scale with Whole Foods, which was the leading natural food supermarket chain. According to a survey done by MarketResearch.com, about a third of the U.S. consumers had bought organic products and 85% of these planned to increase or maintain their level of organic purchasing. In 2001, only about 800-900 companies were producing organic products, with fewer than 10% of those reporting sales of more than $10 million, but of these they accounted for more than half of all natural and organic sales (Organic Trade Association, 2008). Goldman believed that once the USDA introduced its “USDA Organic” seal in October of 2002, consumers would have a deeper understanding and interest in organic products.

In 2004, Honest Tea became the first tea company to offer an entire line of all USDA certified organic ready to drink bottled teas, when all twelve of their varieties were certified. This meant that all Honest Tea beverages are made without antibiotics, pesticides, irradiation or bioengineering, as well as that their farmers are required to adhere to certain soil and water conservation methods and is monitored by a third-party certification agency. Honest Tea quickly became one of the fastest growing producers in the ready to drink bottled tea


industry and were positioning themselves to be the leaders in the organic beverage industry. Already on a steady growth path with increased sales by 75% from 1999 to 2000, then by another 75% the following year with end of year sales of $3.2 million by 2001 end of year. According to data from SPINS, Honest Tea was said to be holding 26.7% of the bottled tea market in natural foods, holding higher market share than more main stream brands such as Snapple and Arizona within this natural segment.

The primary challenge for Honest Tea was gaining access to distribution channels to get the product shelf space. Whole Foods, which was their first contract, has remained a source for strong shelf placement. Whole Foods is very much aligned with the corporate values of Honest Tea, in the fact that they sell healthy, organic products that are produced in ways that are considered ethical. Honest Tea also worked to align their product with other national natural/specialty food chains where they would be able to reach their target consumers. Getting in front of these stores has not been an easy task throughout the years, it has been through a passionate sales team that attended trade shows, did cold calls and many nights out on the road that Honest Tea was able to reach the growth level they did. Seth personally faced these same hardships on the road as he describes one of the low points in building the company was when he rolled his car off an icy highway at 2 a.m. driving through a blizzard from Buffalo. In his blog, Seth speaks of his salespeople who, “had to deal with setbacks and disappointments from distributor and buyers who didn’t see the value in a low-sugar, organic beverage.

During the first five years, distributors rejected us at least eight times more than we were accepted”. Distribution is a struggle for any independent beverage company and it is the key to success in the industry. Seth talks about the challenges specific to the beverage industry, “you can build a great brand, but you can’t sell it on the internet or ship it through the mail. Beverages have a high turnover, and you’re out of the game unless your product is being restocked and on the shelf.” Gaining the shelf space and distribution necessary to survive in the beverage industry was a huge challenge and takes a great deal of persistence. This passion and persistence was never lacking in the Honest Tea brand, but at some point they recognized the need to have greater access.

Despite the challenges, Honest Tea had been successful in getting in front of consumers. Goldman announced “Honest Tea is excited to be the first to offer fully organic bottled teas in mainstream venues. Our national presence with Barnes and Noble and other prominent chains enables us to sell organic beverages to the fast-growing group of consumers looking for healthier and more environmentally friendly alternatives.” Organic products represent the fastest-growing portion of the natural foods segment with a consistent annual growth of more than 20 percent. A recent study published by LOHAS (Lifestyles of Health and Sustainability) estimated the market for organic products to be 50 million consumers.

In addition to recognizing the opportunity to stand out in the organic market, much of Honest Tea’s more wide spread success can be attributed to the changing tastes of consumers. The American Beverage Association reports that between 2002 and 2004 soft drink sells declined by 24%, while at the same time sports drinks increased by 70% and bottled water, diet soda and fruit juice increased on average by 20%. In 2009, the American Beverage Association.

Coca-Cola also recognized the changing in consumer preferences for healthier alternatives. They decided their best course of action to not lose market share was to diversify their portfolio. In 2007, Coca-Cola quietly developed a new division, Venturing & Emerging Brands (VEB), which would seek out small (but high-potential growth), entrepreneurial brands that could expand their product offerings. Such healthier alternatives to merge with Coca-Cola included Minute Maid (bought 40 years ago), Powerade, Nestea, Dasani and in May 2007, Coke paid $4.2 billion for Glaceau (Vitaminwater). Thirteen of these new brands, including Vitaminwater, Powerade, Minute Maid, and Georgia Coffee generated more than a billion dollars in annual sales in 2008. Deryck Van Rensburg, President of the VEB division stated, “We’d like to get in a little earlier this time”, referring to the 2007 acquisition of Vitaminwater.

This strategy to identify a high-growth opportunity still in the early stages led to Coca-Cola North America’s VEB seeking out Honest Tea. This new division was a contrast to Coke’s past desire to acquire brands rather than invest in the brand equity and people. The VEB division was open to minority investment to allow for the company culture to remain intact, which is exactly what Honest Tea was looking for, someone to buy into their mission. Opposites Attract: Honest Tea chooses an unlikely Partner

On February 5th, 2008 Seth publicly made the announcement through his Honest Tea blog that Coca-Cola would be buying 40% stake in the company. Under the agreement with Coke, Honest Tea would continue to operate independently, with Goldman and a separate board in control for three years, at which time in 2011 Coke would have the option to buy majority stake in the company.

Seth reflects on the past, “We started Honest Tea ten years ago with five thermoses and an ambitious vision for offering a new type of beverage – a delicious healthier drink produced with a consciousness about the way the ingredients are grown. As more consumers become aware of how their decisions impact the health of the planet and themselves, we are thrilled to receive this investment from the world’s largest beverage company to help take our brand and our mission to a larger scale and wider audience”.

Seth Goldman reaffirms this in his statement about the partnership, “This investment will allow us to get to the next level of impact, to see Honest Tea sold wherever beverages are sold while still honoring our mission and style of business. As our delicious new varieties indicate, Coke’s investment is intended to support Honest Tea’s innovative approach to organics and sustainability.” While the partnership will allow for unbelievable growth and expansion for Honest Tea, it still remains important to the corporate culture of Honest Tea and their brand that they stay true to their commitment to sustainability in regards to community, economic and social development.

Coca Cola President of Venturing and Emerging Brands, Deryck van Rensburg, said of the investment, “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. This transaction is a superb example of our mission in VEB to seek out and invest in the best beverage entrepreneurs and the highest growthpotential beverages. Honest Tea embodies socially-responsible business practices that fit very well within our increasing focus on Corporate Responsibility and Sustainability.”

Leveraging Social Media during Strategic Change
An important part of Honest Tea’s strategy throughout the merger talks with Coke would be leveraging social media as a means to stay connected to their consumers and gain insight and feedback on their products directly from the end user. Seth often used his personal blog, “The Mission Driven Business”, to write about Honest Tea’s corporate culture and brand. It was important to Seth throughout the process to remain transparent and openly address consumer concerns over how Coke’s corporate culture would impact that of Honest Tea. The consumer engagement became particularly important in gaining stakeholder acceptance of the investment by Coke.

During “An Honest Dialogue with a Disappointed Consumer”, Seth demonstrated how social media engagement can be an important factor in gaining stakeholder buy in to your mission and vision. He publicly addresses a concerned consumer named Julie who did not support the decision of Honest Tea choosing to merge with the Coca-Cola brand. Julie, concerned customer:

Optimists within your company have asserted that Honest Tea is not selling out. Rather, they say, Coca-Cola is “buying in.” Only time will reveal whether this is the case, or if this “buy in” is simply the corporation’s latest foray in corporate green-washing and beverage market monopolization. Seth:

I agree with you here, and I encourage you to keep a close eye on what we sell and how we sell it – if we change our fidelity to the “Honest” brand, please let me know and I’ll respect your right to take your business elsewhere. If we stay “Honest”, I believe we deserve your business.

Seth took the time to respond to a lengthy letter by this customer to address all concerns. While he may not have won over every concern she had, it shows Seth’s commitment to his consumers through transparency and honesty of dialogue. He openly encourages consumer feedback and takes the time to address their concerns, this engagement with the key stakeholders is an area Seth considers highly valuable and essential within his mission driven business. Can Honest Tea stay true to their mission and values?

Honest Tea felt that a merger with Coke was the only way in which they could achieve broader distribution. Some may argue that Seth is being naïve in his thinking that he will be able to maintain the same soul and essence behind the Honest brand name. However, in breaking with their past practices, Coke stresses that they are investing in a brand and providing additional resources to distribution. More importantly, Coke is allowing Seth to stay at the helm and leaving the Honest Tea organic brand untouched in terms of corporate values, organizational/management structure and goals towards economic development.

This may stem in part from mission, which they label their “2020 Vision,” to be the world’s best known brand will become a leader in every drink market and category, reduce water, packaging and energy use and more than double its system revenue (Business Week, 2008). Indeed, it appears that Honest Tea needs Coke for their distribution, yet it seems that Coke’s vision for the future is based in part on Honest Tea’s social responsibility and brand. Not surprising to some, the marriage between Coke and Honest Tea has already seen its share of conflict. Coke’s interest in Honest Tea was to meet consumer demand for lower-calorie drinks. However, Coke is expressing concerns that the strength of the Honest Tea brand may in fact be contradicting Coke’s core business. For example, Honest Tea’s “Honest Kids” brand heavily promotes on the front of their packaging “no high-fructose corn syrup”. Seth believes this is a major point that appeals to parents seeking healthy alternatives for their children. Coke, the other hand, feels that the wording is a direct marketing tactic against many of Coke’s staple brands that are high in factory-produced syrup. In fact, the tension has already publicly surfaced. Under strong pressure from Coca-Cola to either change the wording or remove it all together, Seth has held firm to his conviction that the phrase had to remain. Honest Tea’s “decisions were made on their understanding of their customers” and it is important for their customers to recognize the health value in the product. While the Honest Tea/Coke relationship has seemed a success thus far, time will tell if Honest Tea will remain honest without the control and watchful eye of its passionate leader, Seth Goldman.

This case tells the story of an entrepreneur, Seth Goldman, who founded the Honest Tea social venture. Timing, innovative thinking and commitment toward his vision help to make Honest Tea a stand out even in the overwhelmingly large beverage industry. Ten years after Honest Tea’s initial launch, Honest Tea is growing at an exponential rate and the competition is still trying to catch up with what Honest Tea has developed in brand equity alone. However, despite its phenomenal growth, Honest Tea has reached a point at which it believes that they need outside support to continue to growth. The case centers on Seth’s decision to sell a 40% share in the firm to Coca-Cola.

By merging with Coke, Seth’s hope is for Honest Tea to become a household name. However, critics argue that they are not going to be able to hold on to their same vision and moral fiber that is at the very core of the Honest brand (Fromartz, 2008). In the months leading up to the merger announcement Seth has devoted considerable time on his personal blog discussing the merger with customers. In all of Seth’s statements he is optimistic and sure that this strategic move will be in the best interest of the company to obtain higher levels of distribution and have a much greater environmental, health and economic impact than they ever could as a small company. However, despite being transparent with customers through social media outlets, the merger has not sat well with long-time customers. Critics contend that when socially responsible companies ‘sell out’ and follow their aspirations of being a nationally known brand they all too often lose the soul of their company (Howard, 2009).

So What?
This case is intended for use in either undergraduate or graduate entrepreneurship courses, or perhaps Business & Society courses that devote a portion of class investigating social enterprises. The class offers students a chance to seek the key factors that lead to the initial success of social venture. Much of the case centers upon whether Seth can persuade stakeholders, both internal and external, to support Honest Tea’s merger with Coke? Students have the opportunity to understand that many of Honest Tea’s stakeholders including employees, consumers and independent distributors are socially focused and steadfast in their support of socially responsible companies. How might they react to the news that Honest Tea has merged with a national distributor and especially one with so much negative connotation associated with it? Will they be as committed to the Honest Tea brand? Finally, students are presented with the power and advantages of social media to social ventures in during their growth stage, and while they undergo significant organizational changes. Students are challenged with evaluating whether Seth’s transparency with customers about the challenges Honest Tea faces through his personal blog will it be enough to persuade loyal customers, and even employees, that Honest Tea will maintain its core principles?

1. What are some of the keys factors that have lead to the success of Honest Tea?

The success of Honest Tea has always been about being innovative and ahead of the competition in terms of what consumers demand and preferences would lead toward. Honest Tea saw a missing niche in the less sweetened beverage industry and sought to fulfill this need. Seth Goldman, co-founder and TeaEO of Honest Teas, realized that he was taking a risk by leaping out ahead of this trend when he started the company in 1998 (Goldman, 1998), before there was a solid demand for a healthier alternative, but he recognized that the trend would be coming and he knew as a person with an active healthy lifestyle that he had a preference for a less sweet beverage, then others probably did too. “Ten years ago we were way ahead of our time,” he says. “At 17 calories, we got a lot of blank looks. We decided, instead of sweetening our products, let’s hope that people catch up to us with their preferences.” (Zmuda, 2008). In addition to his innovative development of the Honest Tea less sweetened flavors, he recognized the growing trend toward organic and was at the forefront of having the 1st full USDA organic seal of approval for all of the product line as well as having many brands that are Fair Trade certified. He as well saw the importance of corporate social responsibility and that consumers were going to begin to demand more than just a product from the companies they buy from but would demand companies to align with their values. This was the key that he carried through his company was developing a loyal following because their consumers believe not just in the Honest tea product, but in all that the Honest brand name stands for. 2. Did Seth make the right move by partnering with Coke? What other alternatives could he pursue?

Considerable research attention has been devoted to understanding the benefits of strategic partnerships among organizations. However, companies often face criticism when sell out to corporate giants. Burt’s Bee faced serious criticism when they sold to AEA Investors and then were flipped to Clorox just a year later. Celestial Seasonings sold to Kraft in 1984, but the two companies clashed due to the conflicting views of how to run the company, leading to an eventual buy out by a private management group. Dean Foods and Silk soy milk ended up in a lawsuit after their merger.

Most recently, Coca-Cola is dealing with criticism due to recent lawsuits by food activist group CSPI over Vitaminwater. Their claims are that while it may have less sugar than the standard soda, the 33 grams of sugar per bottle still do not make this beverage a healthy choice. A judge is validating these claims under the FDA’s “jellybean rule” in which a product cannot be falsely promoted as healthy.

Seth addressed the obvious concerns of a future merger in an interview in November 2007, “So how do we move from the ideal to the real without screwing up what we’ve created? The world of mission-driven business is littered with entrepreneurs whose companies lost their soul or at least lost their leadership. Whether 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. Our challenge is to find a partner who wants to “buy in” to our mission, rather than one who wants us to “sell out”. Any partner that we consider must understand that the “Honest” brand stands for greattasting, healthier beverages that are produced in a more sustainable manner. As long as that partner buys into our approach, we welcome the opportunity to expand the scale and reach of Honest Tea.”

Seth probably felt optimism towards his goal to keep the soul of the company intact by the example of Stonyfield Farm founder Gary Hirshberg who sits on the Honest Tea board of directors. Gary initially negotiated for two years on the deal with Group Danone in 2001 to buy 40% interest. Today Danone owns 80%, but still with Hirshberg as the leadership of the company guiding the social direction.

According to Gary Hemphill, Managing Director of Beverage Marketing Corporation, a number of failed ventures by bigger corporations to change the values that made smaller companies a success have learned from the past. “They’ve realized that if they’re going to acquire a smaller company whose big reason for success is its uniqueness and mission, it’s really crucial to try to retain as much of that as possible in order for the company or brand to survive and thrive.”

In a personal interview the authors queried Seth Goldman on whether Honest Tea had pursued other funding alternatives. Goldman did indicate that private equity was an option, however he stated that he believed that the merger with Coke was in the best interest of Honest Tea primarily because of Coke’s established distribution network. Other options that students could explore include going public with an IPO.

3. How can entrepreneurs leverage social media to communicate with social venture stakeholders?
For social entrepreneurs tools like Facebook and Twitter have blurred the lines between what is considered in the domain of the personal and the organizational, or between what is considered life and work. Certainly, the case can be made that this is already the case for social entrepreneurs. Networking is key to social entrepreneurs success, and this may be particularly true when they can feel isolated. It is clear why social media tools can be useful individually (to make contacts, build relationships, find support, bookmark sites of interest etc). Social media can especially effective organizationally (for communications, community-building etc). This latter point is perhaps especially salient for social ventures. However ultimately, social media tools provide amazing opportunities and resources to facilitate change, to network effectively, to communicate directly, to fundraise innovatively, and to build communities swiftly. In all but a very small minority of cases for social entrepreneurs, they are means to an end, not the end in themselves. However, Seth demonstrated how social media engagement can be an important factor in gaining stakeholder buy in to your mission and vision. He also demonstrates how social media can serve as a bridge to customers who are unsure about the strategic direction of a social venture.

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