Click here to read Seth’s latest blog, “The Customer Is Always Powerful.”*

*SETH’S MOST RECENT BLOGS ARE FEATURED FIRST AT INC.COM.

Click here to read Seth’s latest blog, “For Honest Tea, Coke Is It.”*

*SETH’S MOST RECENT BLOGS ARE FEATURED FIRST AT INC.COM.

Growth often has a bittersweet element to it. Last month, we announced plans to switch the distribution of our plastic bottles for most of the West Coast to Coca-Cola Enterprises (CCE), the largest beverage distributor in the world. Because we’ve endured agonizing distribution challenges over the past seven years, there’s an indescribable sweetness to actually be able to have our product distributed in almost every possible account: colleges, convenience stores, restaurants, stadiums, even Disneyland!

And yet, having spent our first seven years begging distributors to carry Honest Tea, it felt very weird to tell the independent distributors who we once idolized and who helped build our brand that we would be terminating our distribution contracts. Some of them congratulated us, some of them were bitter, all of them are being compensated. But as much as money plays a role, there really is more to these relationships than money, and in many cases, just being able to buy someone out of a contract feels a bit hollow. Our sales team worked passionately to get these guys (more than 90% are men) to have the same passion we do, and many of our distributors did drink the Kool Aid, or in this case the Honest Ade.

When I called to tell them of the switch to CCE, many of the owners, who are often second- and even third-generation owners, lamented that every year it’s getting harder to run an independent distribution business. Last year many of these same folks lost Vitaminwater and Fuze to Coke, and before that they lost Snapple to Cadbury and Sobe to Pepsi.

One of the best pieces of advice I’ve ever received came from our former board member Jeff Swartz, CEO of Timberland, who told me to “run the business like you’re going to own it forever.” And though we were mindful to create distribution contracts that anticipated changes in ownership, we have always run it that way. And that mindset has been one of the keys to our success — while other beverage companies were more focused on flipping the company, jumping on fads and trends instead of building an enduring brand.

I expect that once the orders from CCE start rolling in, we will celebrate the new opportunities, but as an entrepreneur at heart, I will always have an appreciation for the folks who got us to this point.

My co-founder Barry Nalebuff celebrated his 50th birthday last week. Since we started the company almost exactly 10 years ago, the occasion gave me the chance to reflect on our partnership. I remember when I told my Yale School of Management classmates that I was going into business with our former professor. They were puzzled, to say the least.Barry had a reputation as a cold-calling, occasionally heartless egghead who was a genius with numbers and strategy and less adept with interpersonal skills. I had a reputation as almost the polar opposite. And though neither reputation was completely accurate, we were — and still are — a study in contrasts, or as Barry likes to say, complements.

Before we launched Honest Tea, I traveled up to New Haven and spent the day with Barry at his kitchen table talking about our hopes and dreams for creating the business. For Barry, it was a chance to bet on his own ideas, as opposed to consulting for others. For me it was the chance to create an organization that could be an agent of social and environmental change. So our motivations weren’t exactly the same, but they were easily aligned and ten years later I can say that it has been an almost perfect partnership.

Over the years we have each had to draw on our different skill sets, sometimes to offset each other. When Barry’s bluntness alienates a prospective investor or customer (his attempts to get HT sold at the Yale cafeterias ended with shouting and slammed doors and phones), I am usually able to smooth things over. My tendency to trust people at their word and hope that things will work out has occasionally resulted in production headaches and cost overruns. But Barry comes in with his hard-nosed analysis and occasional tirade to get things back on track. Our CFO Jonathan and I joke that when a banker or a supplier is being a little inflexible, we offer to arrange a conference call with Barry to explore different solutions, and they often cave before the call even starts.

As Chair of our board, Barry has the benefit of familiarity with the business and the luxury of not being involved on a daily basis. This helps gives him the opportunity to ask insightful and creative questions. One of the most important ways that Barry’s creativity paid off has been with respect to our equity structure. He devised a capital structure that gave us warrants as we grew so that we could maintain control. As a result, we never fell prey to investors who wanted to take a more intrusive role in the company (and there have been many over the years). I especially appreciate this fact because I have seen lots of beverage entrepreneurs lose control to heavy-handed investors calling the shots.

Of course there have been disagreements — usually around label messages, with Barry leaning toward intellectual, snarky language and me leaning toward more down-to-earth wording. But having endured more than our share of challenges over the past ten years, I wouldn’t trade Barry for all the Fair Trade organic tea in China — unless it came at a really good price.

See the special Black Forest Barry label we created for Barry’s birthday.

We had some fun this week when our Black Forest Berry was mentioned on the front page of The New York Times as the drink of choice for presidential candidate Barack Obama. Our office gets requests every day from consumers trying to find our tea and so we were happy to help Obama campaign aides find stores that carry Honest Tea (we’re trying to make it easier, but it’s still a challenge in places like Kentucky!).  I saw Obama earlier this year and he told me that while he had previously been a big Community Green drinker, he was steering himself away from the caffeine in green tea in favor of our herbal Black Forest Berry.

I know this kind of publicity can’t hurt but am not yet clear how much it helps. As a company we certainly don’t take political stances, and I know that our tea has been spotted on the desk of more than one conservative talk show host, so it’s nice to know people on all sides of the political spectrum can enjoy a bottle of tea together.

I saw a blog that cited Obama’s preference for organic bottled tea as an indication that he had elitist tastes. I know there are always people looking for opportunities to throw the “E” word around, but there are few words I find more contrary to what Honest Tea stands for. In fact, I would argue it’s elitist to suggest that only rich or highly educated people should have an interest in healthy beverages. From our beginnings ten years ago, we have always strived to offer affordable organic and healthier choices for everyone. In fact, our original $1.19 price point was too low for our own good, especially when most of the competition was out there at $1.69 per bottle for non-organic tea. We lost lots of money in the early years, but we stuck to our lower price because we sold more tea, and we knew we were reaching more people. I know there are stores and restaurants that sell our tea for as much as $6.00 per bottle, but I can assure you that we don’t make any more money on those sales than the stores that carry it at $1.49!

In many ways, the deal we made with Coca-Cola will help ensure that we don’t become an elitist brand. If our tea is only available at higher-end stores, then the pricing and the venues help feed that elitist image. By contrast, if we’re sold wherever Coca-Cola is sold, then we’ve succeeded in democratizing organics. And that’s the kind of democratization all voters can endorse.

Today Bethesda Green, the local sustainability initiative we helped launch in January of this year, unveiled the first public recycling bin in Bethesda. Here are a few notes from my remarks:

When we launched Bethesda Green in January, I quoted the Chinese proverb, “If we don’t change the direction we are headed, we will end up where we are going.”

Today Bethesda is taking a step in a new direction.

You might ask why make such a big deal about one recycling bin? Changing the environment happens in steps, one bottle at a time, one bin at a time, one community at a time… and that’s what Bethesda Green is all about. It is what happens when people think globally and start acting locally.

When we launched Bethesda Green in January we weren’t sure what kind of turnout we would get. We thought if 35-40 eager and dedicated people came to our first meeting, that would be a great start. More than 300 people showed up. We realized that even if the only thing Bethesda Green accomplished was to give these folks an outlet to express and act on their environmental concerns that would be a service in itself.

But now, just four months later, the volunteers are organized into different working groups and are starting to deliver results. Today’s recycling bin is the first Bethesda Green program that allows residents to exercise a concern for the community’s environment on a daily basis.

Thanks to the generosity of The Coca-Cola Company and our community sponsors as well as the support of Bethesda Urban Partnership, we will initially be placing 20-30 recycling bins in the most heavily-trafficked areas of Bethesda – Bethesda Row, Woodmont Triangle and the Bethesda Metro. Once this initial test is implemented, we will seek to expand the program. And I’m confident that as Bethesda Green starts to deliver results, other communities will learn from our model, and start taking their first steps in a new direction.

This is especially exciting for me because when Coke made its investment in Honest Tea earlier this year, many people were curious to see what would happen. Skeptics said we would be adding high fructose corn syrup to our drinks, and tripling the calorie count. I’m excited that the first public manifestation of our partnership with Coke, before we’ve even sold a single case together, is our mutual support of a sustainability effort in Honest Tea’s hometown of Bethesda. There will be more to come.

Photos by Brian Lemley

Even though Honest Tea has enjoyed an annual compound growth rate of 66% for the past ten years, there’s never been a day or a week where I’ve walked in and said, “Wow! We’re growing.” Until now.

Lately, we’ve been ringing the gong in our office (reserved for company milestones) on a weekly basis as we break sales records. And though we expect great things to happen when we start distributing our drinks through the Coca-Cola system, all the growth we’re seeing so far this year is happening before the Coke distribution kicks in.

Last year our best sales month was $2.8 million for August. So when we set our April 2008 sales goal of $2.9 million we thought we were being aggressive. But we hit that number on April 15th, and eventually we took in orders for more than $5 million!

My immediate reaction is to try and explain the growth – maybe it’s our new products, our great new salespeople, our new label designs, our new presence with Honest Kids at Sam’s Club or more people looking for organic foods – it’s certainly not the weather! But at a certain point, all the possible reasons can’t explain everything, so perhaps it’s best not to overanalyze and just enjoy. And ring the gong!

Last week I had the chance to visit one of the tea gardens that supplies us with our chun mee (translated means “spring’s eyebrows”), a variety used in most of our green tea blends, including our new Citrus Green Energy Tea and Jasmine Green Energy Tea.

After the international flight, a long drive, a short flight and then another long drive through the countryside of Anhui Province, historically one of China’s poorest areas, our one-lane road got bumpier, then eventually ended. So we set out on foot until the path ended as we came to a twenty-foot wide river. As my hosts pointed to the tea bushes on the other side, I asked, “So, where’s the bridge for us to get to the other side?”

But my hosts told me, “There is no bridge.” The entrepreneur in me immediately identified a problem waiting to be solved. But my hosts looked at it a different way. “Aside from the fact that a bridge is expensive to build, the river overflows during the rainy season, so how would we know what height to build the bridge? A bridge would mean roads and roads mean cars and cars mean more pollution and traffic. And besides we have our own way to get across.” Then they pointed to a bamboo raft on the river bed. We were ferried across three at a time on the raft. Our feet got a bit wet, but otherwise no one fell in.

Since it’s an organic tea garden they don’t have to worry about bringing over heavy bags of chemicals to the garden, and the finished product, tea leaves, are light and easy to transport. The lack of a bridge was a way for the garden to protect its own pristine surroundings, which can be a challenging thing to do, especially in China, where much of the country is on a rampage to develop infrastructure and industry.

Entrepreneurs are inclined to solve problems, but as I learned in Anhui, some problems are their own solution.

Earlier this month we announced that Coca-Cola was making a 40% investment in Honest Tea. Though most of the feedback from consumers has been positive (”finally I won’t have to drive 2 hours to get your drinks!”), we have received heartfelt notes from loyal customers who are disappointed with our new investor. We take these concerns seriously. I am pasting below a recent exchange with a customer, Julie, who agreed to let me share her comments. As you will see, we end up agreeing to disagree, but at least we both understand where the other is coming from.

Hi Julie,
Thanks for your honest opinion, even if it’s not what I was hoping to hear. As someone who comes from an activist background, I certainly understand the nature of your concern. I don’t expect that I’ll convince you otherwise, but I do want to share a few thoughts on why this investment from Coke does make sense to me — I’ve tried to insert comments in green italics below. Please let me know what you think, honestly yours, seth

——————————————————–

From: Julie
Sent: Tuesday, February 19, 2008 4:12 PM
To: Seth Goldman
Subject: Honest Tea, Health, Environment, and Social Justice: Where Does Coca-Cola Fit In?
Dear Mr. Goldman,

I am writing to express my surprise and disappointment upon hearing the recent news that Coca-Cola will acquire a 40% stake in Honest Tea, making it the company’s largest stakeholder, and that it will have the option to purchase a majority stake after three years. As a business that has built its reputation over the past decade on a commitment to healthy organic products, environmental quality, and social justice for its producers, Honest Tea’s decision to partner with Coca-Cola–a multinational corporation that has consistently violated all three of these principles in their global business practices–confounds me.

I won’t try to defend Coca-Cola here – that’s not what this deal is about. However, based on your remarks I think it’s fair to say that you believe the world would be better if Coke sold products more like ours. So then the question is whether we believe that Honest Tea will be “corrupted” by Coke. I’m confident that Honest Tea will continue to sell the products it’s been selling – we painstakingly built our business over ten years in a very deliberate manner. We were constantly presented with the option of making the products cheaper (e.g. using high fructose corn syrup instead of organic cane sugar or honey or without Fair Trade certification) or with more calories but we consistently chose to keep the brand “Honest”. Coke found value in what we’ve created – if they wanted to change our company into one like theirs, they wouldn’t have invested in ours.

Coca-Cola’s extensive business network and far-reaching marketing capabilities have been built upon a foundation of worker and farmer exploitation and environmental degradation, particularly in developing countries. The idea that a partnership with Coca-Cola will help Honest Tea to expand its so-called health, environmental, and social mission seems naively optimistic, if not grossly misguided. For a company that was founded on a vision of long-term sustainability, I find your new business affiliation with Coca-Cola to be surprisingly short-sighted.

I believe that every time we sell a bottle of Honest Tea we are doing a positive thing for the people picking /processing the leaves, the ecosystem and the consumer. If you accept this first assumption, as I do, then I believe it is my responsibility to make Honest Tea as powerful as I can. The more we sell – provided it is the same product we have been selling for the past ten years – the more good we do. And the more we convince the larger beverage companies that there is a market for a product like ours.

By partnering with Coca-Cola, you may gain a net increase of customers at mainstream retail outlets, but you will alienate those who previously valued your commitment to social and environmental responsibility. Even if the end result for Honest Tea is increased consumption of a healthy, organic, Fair Trade certified beverage, loyal and “conscious” customers will find themselves confronted with the dilemma of supporting a multinational corporation that has a history of violating global social and environmental rights, and that already owns more than a fair share of the beverage market.

Here I think it is important to avoid creating a sense of economic exclusivity. Organics need to be democratized. I love Whole Foods and independent natural food stores – we wouldn’t be in business without them. But if we’re really serious about making an impact on the environment and on the American diet, we have to expand the reach of organics and healthier products to regions and populations where they are not widely available. I would understand if our core consumers were alienated because we changed our product but if they become alienated just because more people can buy our product, then that’s a trade-off I’m willing to make.

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.

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.

After all, they’re the ones who now have two of five seats on the board of Honest Tea…not the other way around.

But we still maintain governance control – and last week when the President of Coke North America was receiving an award from the National Recycling Coalition, he said, “We want Coca-Cola to be more like Honest Tea than the other way round.”

Even if Honest Tea maintains its commitments, and even if Coca-Cola continues to honor the traditions of Honest Tea after three years, how can one overlook its simultaneous ventures in worker endangerment and exploitation, environmental degradation, water depletion, and high fructose corn syrup…ventures that blatantly contradict Honest Tea’s founding commitments?

I believe that by working with Coke to sell Honest Beverages, we are helping to make change happen.

I have no doubt that you have already asked yourself some of these very difficult questions. Unfortunately, it appears that we have come to different conclusions because Honest Tea has chosen to continue its growth with the monies and connections of a corporation that has done much to harm human health and the environment, at home and abroad. Like you, I want to see an increase in healthy, environmentally sound, and socially just products in the market. But in the end, even after considering the positive health, environmental, and social outcomes of mass-market distribution of your healthy, organic, Fair Trade certified product, I still can not condone your partnership with Coca-Cola as a means to this end. As a consequence, I will no longer consume or purchase Honest Tea products. I will also be informing my family and friends, who I originally introduced to your product, of this decision.

For the past ten years, we have built the Honest brand with passion, effort, and a great deal of sleepless nights. Whether it’s not knowing how we’ll pay bills or personally guaranteeing bank loans far in excess of my net worth, I have built this company with its mission ingrained in its product. If I am still running the business (which I am) and Honest Tea is still selling the same kind of products (which we are), I believe we have earned the opportunity to prove ourselves. We have the chance to make change happen in a powerful way – of course there’s the risk that we won’t succeed, but I’ve lived with risk for ten years and can live with the odds.

I hope that time will prove me wrong. For now, however, I feel personally obligated to part ways with Honest Tea.

Respectfully Yours,
Julie

——————————————————–

From: Julie
Sent: Thursday, February 21, 2008 10:26 AM
To: Seth Goldman
Subject: RE: Honest Tea, Health, Environment, and Social Justice: Where Does Coca-Cola Fit In?
Hi Seth,

I very much appreciate your articulate and personal response, and I have a lot of respect for the opinions and information that you’ve shared. The arguments that you make are thoughtful, compelling, and obviously genuine.

But in the end, I still feel that supporting Honest Tea now forces me to indirectly support Coca-Cola, which is something that I’ve made a conscious decision and effort not to do. That decision may change in time, but that will depend more on Coca-Cola than it does on Honest Tea.

I do not worry that Coca-Cola will adulterate your product, or that Honest Tea will change its practices–you’ve made it clear that Honest Tea is still in charge of Honest Tea. But at this point, I do not share the belief that by working with Honest Tea, Coca-Cola is changing its harmful business practices, particularly abroad. (When working in rural China, I was disturbed to find children drinking very old Coca-Cola out of very old cans that no longer meet U.S. safety standards due to choking hazard). Expanding their product line-up to include something healthy, organic, and socially just does not do anything to change the rest of their products, or to change the practices involved in making those products. Until I see those changes, I choose not to support Coca-Cola or any of their subsidiaries and associates.

I thought a lot about your argument that organic products need to be democratized, and that they should be available in regions of the country where organics are not widely available. I do share this vision, and while I agree that it’s important to avoid being “elitist” in how products are distributed, I also think that it’s my responsibility as a global citizen and consumer to be critical of the means that are used to accomplish that end. What I wonder is whether partnering Coca-Cola was the only means to achieve wider distribution of Honest Tea products?

As I said before, I know you’ve asked yourself these questions, and I have a lot of respect for the values and integrity you’ve demonstrated in building your company, advancing the availability of organic options in the market, and even taking the time to personally respond to disgruntled and demanding consumers. Therefore, I can respect your path, as I’m sure you respect mine. As their new business partner, I sincerely hope that your values and integrity will inspire some tangible changes in Coca-Cola’s practices.

Thank you again for your honest response,
Julie

Thanks Julie. I talked with my wife last night about your note and she said “The world needs more people like her — people who hold their convictions firmly and act on them.” And I think that’s true but we still hate to lose you as a customer!

Today Honest Tea and Coca-Cola announced that the world’s largest beverage company is buying a 40% stake in our much smaller enterprise [press release]. While Coke is now our largest shareholder, the agreement was negotiated to ensure that Honest Tea will not be managed or controlled by Coke. We will continue to operate as an independent business with the same leadership and mission. Here are some thoughts on the decision. Please excuse the length, but the deal took months to put together and even longer to think about:

When Barry and I launched Honest Tea in February 1998 the only assets we had were the name “Honest Tea”, a Snapple bottle with a label pasted on it, and five thermoses (and the thermoses were on loan!). Our beginnings were modest but our vision was bold – we wanted to create a delicious, healthier drink with a consciousness about the way the ingredients are grown. We always hoped that the “Honest” brand would stand for a different way of doing business – a product that is what it says it is, a company that strives for authenticity in the way it treats its customers and stakeholders.

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, (most recently we were delighted to see Kraft join our Terracycle Drink Pouch Brigade), 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.

So what does it take to get to the next level of impact – to see Honest products sold wherever beverages are sold?…. schools, colleges, restaurants, and all the other places Coke is found…? Certainly access to capital plays a role in making that happen, and we are fortunate that our 100+ private investors have never failed to support our ambitions and growth plans. But money on its own doesn’t make distribution happen – (I note with caution the story of my friends at Jones Soda, who last year saw their market value grow fivefold without a comparable rise in sales).

I have the same passion and drive for building Honest Tea that I had in1998 but I want to focus less on raising money, managing production and distribution challenges and more on building the brand and our mission. If we could find an investor who will help us build our business while still honoring our style of business, then that seems like an ideal scenario.

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 great-tasting, 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.

It can work – I’ve seen it firsthand with my board member, Gary Hirshberg at Stonyfield Farm yogurt. In 2001 Groupe Danone purchased 40% of the company and now owns 80%, with an option to buy the remainder in the future. Stonyfield continues to be on a growth tear (more than $300 million in sales 2007, limited more by capacity than demand) and Gary continues to lead the enterprise and the organic food movement with all the fire and wisdom he had when the deal was put together. They continue to innovate on packaging (they were the first to eliminate plastic lids) and just this year converted their entire line to organic. (read more in Gary’s new book Stirring It Up, How to Make Money and Save the World)

That’s one of the reasons we are glad Gary will continue to serve on Honest Tea’s board, along with Barry, me and two Coke representatives. Of course there are risks to this deal:

• Things may not work out with Coke’s investment
• Our customers may revolt against the notion of our brand being associated to a much larger company (though I hope they give us a chance)
• I may get hit by a bus…

In the course of negotiating this transaction, there were safer alternatives – an outright sale would have locked in the gains versus the continued risks that come with this kind of investment. I’m sure there will still be cause for cold sweats at 3 a.m. – I don’t know a beverage entrepreneur who doesn’t have them but I’ve lived with risk ever since Barry and I started brewing tea in my kitchen, and while there have clearly been moments I would love to forget, I wouldn’t trade this experience for all the tea in….well, for all the tea we will sell together with the Coca-Cola Company. As we see the U.S. shift toward healthier and greener living, it doesn’t seem like the right time to take our cards off the table.

Ten years after starting Honest Tea, we can be proud that:

• We were the first company to introduce a certified organic bottled tea
• We were the first company to introduce a certified Fair Trade bottled tea
• We have won awards and top rankings from national consumer publications and organizations for creating great-tasting, healthier products.
• We continue to be on the leading edge (sometimes bleeding edge) of innovation in terms of new ingredients, packaging and packaging re-use.
• We have assembled a team of 60+ wonderful people, winning awards for our employee-friendly practices, sharing stock options and bikes with them.
• We have become a leader in our local community, launching the Bethesda Green initiative to develop a model sustainable business community.

And yet the best reward has been the support and loyalty of customers who care as much about what we’re doing as we do. As we enter a new phase of our business, I hope you will help keep us Honest as we try to balance the challenge of building a sustainable enterprise in a consumer economy. Please don’t hesitate to contact us either by responding to this blog or emailing sethandbarry@honesttea.com (or both) with suggestions or feedback, especially if you see us backing away from our commitment to organics, healthier products and sustainability.