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Reading the Tea Leaves

Seth Goldman, the founder of Honest Tea, offers his take on corporate responsibility, the secret to steady growth, and taking on Coke.
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Back in May, Coca-Cola spent more than $4 billion to buy Glaceau, maker of the popular Vitamin Water beverages. According to Seth Goldman, co-founder of Honest Tea, the landmark acquisition represented Coke's acknowledgment that the market for soda has gone flat -- and a validation of his own company's strategy.

In 1998, Goldman and Barry Nalebluff, one of his business school professors, turned a shared vision for a less sweet, but flavorful bottled drink into Honest Tea, a company dedicated to healthful, all-natural products, and social responsibility. Almost ten years later, the Bethesda, Md.-based tea manufacturer -- which first appeared on the Inc. 500 list in 2003 -- is thriving and taking on new challenges.

This year, Honest Tea, whose board of directors includes Jeffrey Swartz of Timberland and Gary Hirshberg of Stonyfield Farms, took in $13 million in investments to support growth. The company also introduced a children's line designed to compete with Capri Sun and moved into a new eco-friendly office. As part of the move, Honest Tea launched the Bethesda Green Zone Initiative, which will encourage environmentally conscious behavior by putting hundreds of bike racks and recycling bins throughout the area.

According to Goldman, these projects are part of a continuing effort to extend the Honest brand beyond "just tea." And while you might assume Goldman is working toward a Vitamin Water-like deal, the self-proclaimed "Tea-EO" has other ideas. Inc.com recently spoke with Goldman about Honest Tea's sweet (but not too sweet) success.

What was your reaction when you heard that Coke had paid $4.1 billion for Vitamin Water?

That's an amazing deal -- the biggest deal for a brand ever. I'm happy for those guys. It also has a tremendous ripple effect. The biggest subtext of the Vitamin Water deal was the world's largest carbonated beverage company saying, "We're not going to bet our future on soda." It's really a validation of what the market has been saying for a while. For the past few years, that market hasn't been growing. What else is interesting is that, since the deal was made, Coke's share price has gone up despite the fact that they paid an unprecedented amount of money.

Has Coke called you?

We've been approached by larger food and beverage companies out there, but we're more focused on what kind of brand we're building. Vitamin Water was doing $500 million in sales or even more. We're at $23 million in sales. The core of our consumer base knows our product, loves it, and lives it. But a lot of people don't, and we want to introduce it to them on our terms. As much as a deal like Vitamin Water did is a home run financially, I don't think for us it would make sense based on the way our brand has evolved and is evolving. What we've been doing has really been street-focused selling -- almost like guerilla tactics.

Why did you decide to introduce a kids brand?

It started, just as Honest Tea did, by identifying a personal need. In this case, it was my son. Most kids drinks actually have more calories per ounce than soda. I met a dentist who used the phrase "liquid lollipops" for what parents put in their kids' lunch boxes.

The kids line has really helped demonstrate that what we've created as a brand is extendable. We started in tea, but "tea" isn't as important as "honest." And that's really our brand platform -- a line of products that are healthy, organic, and authentic. And it hits completely in the sweet spot of where all the trends are. People are seeking out products that are more sustainable and healthier for them. They're moving away from sodas.

You've teamed with TerraCycle, the plant food maker, to recycle the Honest Kids pouches. How did that come about?

We're always looking for ways to push the envelope. And when we looked at the kids package, we realized that most of the package is recyclable, but there's a foil liner at the bottom that makes it non-recyclable. We use the most recyclable form of plastic for our bottles and we wanted to find a way for the pouches to be reused. So I was talking to [TerraCycle CEO] Tom Szaky and he said, "We can use them," before he even knew how. He already has a model where he collects bottles, so it was a natural partnership. And it empowers children to play a role in recycling for a product that they consume. Kids are more eco-centric, but they don't necessarily have the opportunity to take action.

How is Szaky using the pouches?

Kids collect these pouches and send them in groups of 100. For every Honest Kids they send in, they get two cents per pouch. One of the ways we're using them is to make pencil cases, which have gotten preliminary approval from some large national chains. Another neat development that we just heard about is that Capri Sun and Kool-Aid are interested in participating in the project too.

What prompted the move to the new office?

In our old office, we were able to walk across the room from desk to desk -- it was 2,100 square feet. The new space is 4,800 square feet. But we tried to do it in a way that was consistent with the brand. For example, what's the point of brand new desks? We have reused desks. The drawers open, and it's absolutely fine. We made sure the windows could open, so we get natural air conditioning. And since we're located near a bike path, we thought, "Why don't we give every employee a bike?"

How are you going to spend the investment money you raised this year?

We took in $13 million in investments and used $1 million to buy out some investors. We had one investor who invested with us in 1998, at the very beginning. He came in at 50 cents and sold at $5.11, so he made 10 times his money.

And the rest of the money?

We've been hiring. We started the year with under 30 people on staff. We're at 56 now, so we've almost doubled. We did more promotions, so we had to invest in those. We did a national promotion with Jamis Bikes where we gave away bikes at 500 stores around the country. We also launched a lot of new distribution with new distributors. The main use is building up the inventory for the 70 percent growth we've had this year.

Is Honest Tea profitable?

We are definitely not robustly profitable as a company. We're growing so quickly, and if we decided that our business plan was to just make money, we could trim down spending and hiring and we'd have a sustainable business. It's not as much about creating a sustainable business as it is creating a sustainable brand. That's not to say we don't make as many smart financial decisions as we can -- but the mandate this year was growth.

What's your favorite Honest drink?

That's hard, there are so many. In the morning, especially if I've gone running, I'll have Community Green. Around midday, I'll have an Orange-Mango. I'll even sneak in an Honest Kids after lunch.

Last updated: Nov 16, 2007




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