In March 1998, 32-year-old Seth Goldman of Bethesda, Maryland, sat down with executives from a regional Whole Foods office. His goal was to sell bottled ice teas sourced and brewed from organic tea leaves, not from concentrate or powder. Seth and his business partner, Barry Nalebuff, who also happened to be his former business school professor, had brewed about five thermoses of the tea to bring to the meeting. That was all they had.
“Aaand, you wouldn’t believe it, but they totally went for it and ordered 15,000 bottles on the spot,” Goldman says. “It was our first sales call; we were delighted and horrified at the same time.”
They asked the executives to give them until late May to fulfill the orders. Miraculously, the duo achieved their goal, and Honest Tea was born. The following years consisted of ups and downs (“A lot of the population wasn’t ready for our product yet,” Goldman says), but growth grew at around 66 percent year over year, and by 2008, large beverage companies were knocking on Goldman’s door.
“Coca-Cola bought 40 percent of our company in 2008 and then had the option to buy the rest three years later,” Goldman says.
The beverage behemoth did buy all of Honest Tea, less Goldman’s equity (he did not disclose exact numbers) in 2011, and has since grown the brand to epic proportions. According to Goldman, sales were around $20 million per year when Coke invested; annual sales today are more than $100 million. More people are able to try the product, too. The company had 15,000 accounts before Coke came on board; today the brand has more than 100,000 accounts.
To entrepreneurs just starting out, Goldman says it's important to come to market with something that is “meaningfully different." He asks, "What will stop the larger companies from copying you, and if they do, what will you do to continue to succeed?”
How did you get interested in tea in the first place?
My business school roommate and I used to always mix fruit juices together for fun. When I was in my freshman year at Yale School of Management, I was doing a comparative analysis of beverage companies in Barry’s class and he asked us if we thought there was anything missing in the beverage aisle of a grocery store.
I raised my hand and said, “Yes, there are sweet drinks and water, but nothing in the middle [with less than 100 calories].” That concept piqued Barry’s interest and he wanted to start focus groups and maybe even a company. I was more interested in getting a job after school, and I didn’t revisit the idea until more than two years later.
What made you come back to tea?
I was running through Central Park one day and stopped at a bodega for something to drink. I wanted that “in the middle” drink—not water, but not a soda either. I called up Barry and he had recently come back from consulting in India and doing a case study on the tea business. It was serendipitous timing.
Did you have funding or savings?
Well, it just so happened that my parents had invested money in my name back in the '70s and it vested in 1997, the year before I started Honest Tea. One day I came home to a check for $50,000. It was out of nowhere, as far as I was concerned, and I knew I could live on it for at least a year, so I thought I’d go for it. I quit my job as a consultant to start a tea company without any beverage experience whatsoever. Crazy, right? [Laughing] Barry put in money, too, as did my parents and our friends.
What challenges did you face starting out?
Distribution. We could make the product, but how do you get it on the shelf? We went to the traditional distribution folks that did AriZona [Iced Tea] and Snapple and they wouldn’t look at us—we weren’t sweet enough and we were too expensive. We ended up finding other ways. We’d go through a cheese distributor to get into a gourmet store. We’d go through a charcoal distributor to get into a grocery store. Pretty soon we were stealing shelf space from the other beverages and those original distributors came calling.
How did the Coke deal come about?
Back in 2007, there was a group within Coke that was looking at emerging trends. Beverage trends were changing; carbonated drinks weren’t growing and mega trends were leaning toward health, wellness, environmental consciousness and social responsibility. They saw us as a company that was already operating in a space where the trends were going.
Were some of your customers upset when you sold out to Coke?
Yes, many of them objected. They were concerned that Coca-Cola would cheapen our product, that they would take shortcuts. Our staff worried that they would cut head count and that leadership wouldn’t stay. None of that has happened, thankfully. We have 117 employees in the company, which is down just 10 people from our peak. And Coke has allowed us to do incredible things.
A few months after they came on, we announced that all of our teas were Fair Trade Certified, which would have cost too much money for us to do without them. They also invested millions into tea brewing systems at Coke plants to help us continue to operate the way we always had, by brewing with real tea leaves.
Why have you decided to stay and what is the story behind you buying back shares?
I’m still here because I am motivated about what our company stands for. I get an average of six hours of sleep—heck, I woke up at 4 a.m. today—but that is okay. I wake up feeling fired up every day.
I bought back most of my shares in the company the same week we were acquired. It wasn’t a precondition of the sale; I just wanted to have a continuing source of motivation to grow the company and make it successful.
What’s next for you?
I don’t really have a “next plan.” I’m enjoying this work and want to stay. I do have a book coming out in early September titled Mission in a Bottle: The Honest Guide to Doing Business Differently—and Succeeding. I’m really excited about it; the book tells the story of how Honest Tea got started in comic book form. No one wants to read another boring business book. Just like our company, my book offers something different to the consumer.
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