It all started with a run in Central Park. Seth Goldman, Honest Tea’s co-founder, president and “Tea”EO, was visiting New York City for an alternative investment conference. At the time, he was in charge of sales and marketing for a mutual fund that did socially responsible investing. After a run in the park following the conference, he and a college friend stopped at a refreshment stand. They scanned the shelves and realized not one of the drinks really met what they thirsted for at the moment. “There were all these sweet drinks,” he recalls, “all these watery drinks and nothing with enough flavor to taste good, but also be healthy. And I remember thinking, ‘Maybe this is the idea that I’ve been looking for.’”

Now, more than 10 years later, Coca-Cola has just decided to buy into that idea to the tune of US$43 million dollars, a 40-percent share of Goldman’s company, the Bethesda, Md., USA-based Honest Tea. The deal also leaves Coke with an option to buy the rest in three years. “The thought was by then we will have the chance to take the brand to the next level within the Coke system,” says Goldman. “Also, the investment is intentionally structured so that we retain management control of our brand and of our organization.”

Coke’s investment didn’t come as a surprise to close followers of the beverage business. Since Goldman’s jog in the park, Honest Tea has grown into a progressively minded US$23 million company marketing ready-to-drink organic teas and ades, with a newly-launched separate line of kids drinks in pouches, called Honest Kids. Honest Kids was expected to do US$600,000 worth of business in its debut, says Goldman. It ended up doing nearly triple that amount.

The deal comes as sales of Coke’s core products, carbonated soft drinks, have been stagnant or declining in the United States while New Age beverages, like Honest Tea’s RTD teas, have shown strong growth. “The tea category has taken on a little aura with green tea,” explains Manny Goldman (no relation to Seth), president of Goldman Consulting Services (Hillsboro, Calif., USA) and formerly a beverage analyst for nearly 30 years. “It is viewed as healthy and that’s important today. The urgency here for the CSD players is that CSDs, which were going to grow forever and ever, are not growing recently.”

So the folks at Honest Tea now find themselves having in just 10 years gone from distributing out of the back of Seth Goldman and co-founder Barry Nalebuff’s cars, to being part of the largest beverage company in the world.

‘Tough, Very Tough’
Success certainly did not come easily. Ask anyone who has worked for Honest Tea from the get-go and it becomes obvious that this company had to fight every inch of the way. After all, the concept of less-sweet teas was not one that most Americans originally took to very easily—or still do.

Nalebuff recalls clearly the environment the company found itself in a decade ago when it first began bringing its teas into stores: “In terms of drinks, there was either liquid candy, or artificial ingredients, or water, whereas most people who go into a restaurant put one or two teaspoons of sugar in their beverage, they don’t put 10. So for some reason there was this giant hole in the market, which I actually think of for a normal beverage, not an unusual one. People ask me, ‘What’s the size of your market?’ Well, my view is it’s actually what most people should be drinking.”
He continues: “I think it was PT Barnum who said, ‘Nobody ever lost a nickel underestimating the American public.’

But I think there is something incredibly rewarding about making a product which actually appeals to the intelligence of your customer and treats them with respect and doesn’t assume that they won’t read the label and that they won’t be able to tell the difference. So, people are incredibly cynical, and I guess, jaded and a healthy dose of optimism and perhaps even naivety is worth giving a try.”

And you could say Honest Tea’s Goldman and Nalebuff—who had been Goldman’s business professor at Yale when the two originally struck up a friendship—had plenty of both. Those who worked with them in those early years say, ironically, the fact they knew little about the beverage business ended up only helping them in the long run.

“That enabled them to do so many things that some of us might have said, ‘Oh, you can’t do it that way,’” says Melanie Knitzer, Honest Tea’s vice president of sales for the natural food/specialty stores, the third employee to join the company. “And certainly consultants, I’m sure, would have said, ‘Oh, you can’t do that.’ But they didn’t know enough to know they couldn’t do it, so they said, ‘We’re going to do it this way.’ And a lot of times it worked. They just plowed right through it and got it done.”

Goldman himself is given a lot of the credit for combining the rare mix of charisma, vision, intelligence and perseverance needed to build the company from scratch.

In fact, one of the strengths of the company has been that it draws talent from two mindsets. There is the visionary leadership of Goldman and Nalebuff, both of whom have spent much of their lives in academia. Goldman was brought up by two parents who were university professors, his mother an expert on China, his father, on Russia, and Nalebuff continues to teach and reside at Yale while also managing to be chairman of the board of Honest Tea. And then there also is the nose-to-the-grindstone efforts of men and women who have had beverages in their blood for decades: like Knitzer, and also Dan Cavanaugh, who has spent his entire working life in the beverage business, starting in the 1970s at age 15 as a helper on a truck, and now manages Honest Tea’s distribution to mainstream, up-and-down the street accounts, including convenience stores, independent grocers and bodegas.

“It was hard in the day,” recalls Cavanaugh of his early years at the company. “We were out there pushing, doing a lot of sampling, opening new accounts, shelf resets. Just going to these stores, trying to sell it and getting better space, better location, believing in the brand. But Seth continued to evolve it and we went from a low-sugar drink to putting a little more sugar in it, we went to mainstream flavors, and then when we came out with the PET bottle right around 2004 is when our sales started to skyrocket.”

Adds Lewis Hershkowitz, COO of the Maspeth, N.Y., USA-based Big Geyser Distributors, one of the largest distributors of Honest Tea, “It was tough, very tough. Their glass bottle had its own limitations. The product was not well-received by the mass market. It was certainly a specialty, very high-end consumer that it was attracting and while we certainly had some success, we also had plenty of failures. And a couple of years ago when they decided to launch the PET and change it up a little bit, that’s when things started to happen.”

Colleagues also give a lot of the credit for Honest Tea’s success to Goldman’s optimism, which they found contagious. “We have a great quote on our wall and on our 10th anniversary T-shirts which says, ‘Those who say it cannot be done, shouldn’t interrupt the people doing it,’” says Knitzer. “When I first met Seth, that was printed out on a little piece of paper and taped to a wall behind his desk and we’ve always operated that way.”

Adds Manny Goldman: “Remember, when this was started it was just a little company. And if there’s anything important in business, it’s perseverance. And that’s what Honest Tea had. They developed their products and they were very, very perseverant during a time when people didn’t care about them very much, they just kept trying to get distribution and develop their products and keep plugging away and that’s what they did, and it paid off.”

Now, with Coke as a partner—and soon, possible owner—Honest Tea’s Goldman says he feels confident that his company and its culture will be able to maintain the independent, some might even say revolutionary, spirit and culture on which it was built. “We were very deliberate about creating a brand that stood for certain things and one of the things I’ve always said is if we create it where it stands for something, no one’s going to try to buy it and take those things away,” he says. “And I do believe that’s what we’ve done now—time will tell, but that was certainly the idea behind it.”

From Beverage World April 15, 2008