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A Boston Tea Party: Seth Goldman of Honest Tea Visits HBS

The nation’s best-selling and fastest-growing organic bottled tea company, Honest Tea, could be the most exciting revolution in the beverage industry since the Boston Tea Party. The company’s slightly sweetened, all natural teas are an alternative to high calorie carbonated beverages and are catching on with consumers. Honest Tea ranked among the top 25% of Inc. magazine’s 500 fastest growing companies in 2003.

Seth Goldman, founder and CEO of Honest Tea, is taking on the gorillas of the beverage industry, “Given that it is a highly competitive market, the most important factor in our favor is that we offer a differentiated product.

A company like Coca-Cola is a 1,000 times our size….What we are offering is a very strong brand that is consistent with what is in the package and very meaningful to consumers.” Goldman was speaking on February 11th as part of the Sustainable Development Society’s speaker series.

Honest Tea’s roots date back to 1995 when Goldman was an MBA student at the Yale School of Management. During a case study discussion on the Coke-Pepsi wars with Yale Professor Barry Nalebuff, Goldman explored ideas for alternative products in a saturated beverage market. Three years later, after leaving his job at the Calvert Group, he took the plunge into the natural tea business. Goldman explained that he started his company simply because he was thirsty. “I do a lot of running,” Goldman said. “There wasn’t a drink out there that quenched my thirst without a lot of calories.”

Yet with all of his business training, Goldman didn’t begin Honest Tea with extensive quantitative analysis or a thoroughly researched business plan.

After experimenting with several tea flavors, he made an appointment with a buyer from the Fresh Fields/Whole Foods grocery store chain through a Yale contact. Goldman brewed up several batches in his kitchen and brought five thermoses to the sales pitch. “[They] loved it and ordered 15,000 bottles,” Goldman said, adding he then had just a few short months to figure out how to make and deliver the promised tea.

Honest Tea’s distribution network started small. From walking the streets deli to deli, to selling through local cheese and corned beef distributors, Goldman now works with Snapple distributors nationwide. Gaining sought-after shelf space in a dog-eat-dog beverage market has not been easy, explained Goldman, who approached Canada Dry Potomac officials five times before they agreed to distribute his tea. “My attitude is that no one says ‘no’. They just don’t say ‘yes.'” To close the deal, Goldman presented Canada Dry with a “low-tech” video sales pitch that likened his nimble, upstart company to the boxer Rocky Balboa from the movie Rocky.

In an industry in which sales growth of carbonated soft drinks is flat, the market for natural beverages is growing rapidly. Honest Tea currently holds 64% of the organic bottled tea market and 30% of the natural bottled tea market. Honest Tea’s revenue target for 2004 is 100,000 cases, or roughly $8.4 million.

Goldman believes that one of the key factors for Honest Tea’s success is his consumer’s demand for a healthy beverage alternative. Honest Tea has about one-sixth to one-third the calories of Snapple or Arizona Iced Tea. Goldman humorously described the declining marginal utility of sugar in bottled beverages. “A teaspoon of sugar enhances the flavor of tea”, he explained. “And two make it taste great. By the time you put 10-15 spoonfuls of sugar in, it’s liquid candy.” Goldman believes that his tea addresses the nation’s obesity epidemic by offering a low-calorie alternative.

Earlier this year, Honest Tea achieved 100% USDA organic certification for its entire line of tea bottles and bags – the first and only company in the industry with this distinction. He explained that during the process of organic certification he learned what many consumers don’t yet know about conventionally grown tea “that pesticides and fertilizers remain on the leaves through the brewing process and aren’t scrubbed off.”

Goldman is proud of his company’s strong commitment to social responsibility. “It’s very nice when a company can give profits to charities.

And it is very important when a company treats its employees well. But I almost take these for granted.” Goldman explained, “What is most important is that the products or services that you are selling are intrinsically good. Every time I sell a bottle, I’m promoting an alternative to the sweet drinks in the market.”

Honest Tea engages in partnerships that help to support the communities where its tea is grown. The flavor Community Green is marketed in partnership with City Year, an AmeriCorps service program, Haarlem Honeybush is sourced from a subsistence farming community in Haarlem, South Africa, and Peach-Oo-la-long, is the first bottled tea in the US to carry the Fair Trade logo, a certification that helps to ensure the workers on the Makaibari tea plantation in Darjeeling receive a fair share of profits.

Although highly successful in the natural foods space, Goldman is turning his attention to the mainstream beverage market. Honest Tea launched three new Stock-Keeping Units (SKUs) for 2003 that are, as Goldman puts it, “a tad sweeter” in order to meet consumer demand, including Green Dragon, Peach Oo-la-long and Lori’s Lemon Tea. Honest Tea is moving ahead on national distribution as well as starting trials with several national chains such as Marriot International and La Madeleine.

Goldman believes Honest Tea’s survival depends on its mainstream success. “In the beverage industry, you either make it or you don’t. If you make it, you make it big. There are very few beverage companies that are $10 or $15 million beverage companies. You either grow to $80 or $100 million and really make it or you go out of business.”

Yet Goldman’s vision may be even bigger than becoming a national brand.

Honest Tea might also be subtly changing the “flavor” of the beverage industry-through high quality organic ingredients, healthier beverages, and ethical supply chain practices. Goldman gave the crowd some final advice: Think about what is going on in our country and in corporate America. If you’re happy about where it’s going, get on the bus. But our situation is only going to improve if leaders like you make a decision to make it change.” As a Chinese proverb says on one of Honest Tea’s bottle caps: “If we don’t change the direction we are headed, we will end up where we are going.”

February 23, 2004
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