Seth Goldman, chief executive and co-founder of Honest Beverages, knows what happened to Planet Java. He has studied the fate of Mad River, too. Both were small soft-drink brands that were acquired by Coca-Cola in 2001. Two years later, the brands were dead, pulled off the shelves by the world’s largest soft drinks company after they failed to excite Coke’s US distributors.
“They have probably killed more brands than they have built,” says Seth Goldman, somewhat wryly, of Coke’s record with small independent brands.
But Mr Goldman, 43, whose company produces bottled iced teas and low-sugar fruit drinks, is now in business with Coke, which last year acquired a 40 per cent stake in his company.
Unusually for Coke, the deal involved making a big US investment in a drinks brand without taking full control, a move repeated this year in Coke’s £30m ($48m) deal for a 10 to 20 per cent stake in Innocent, the UK smoothie maker
But the transaction also represented a challenge for Honest Beverages. With sales of about $25m at the time of the deal, the company is a minnow compared with Coke’s whale-like $32bn in annual sales. Moreover, like Innocent it is a brand built around an ethical identity, and its pledge is to “create honest relationships with our employees, suppliers, customers and with the communities in which we do business”.
Mr Goldman had the idea of launching the company in 1997 when he worked for Calvert, one of the leading US ethically directed investment funds. Attempting to scratch his “entrepreneurial itch”, he came up with the idea of a refreshing low-sugar drink while jogging in New York. The name for it – Honest Tea (sounds like honesty) – came from his co-founder Barry Nalebuff, at the Yale School of Management professor who had been studying the Indian tea industry.
Tasks on the train extend a shuttling commuter’s working day
Barry Houlihan lives in Hove on the south coast during the week and spends his weekends with his 18-month-old daughter, fiancée and her two daughters in Manchester. “They’re moving down soon, I’m trying to get some work-life balance. I realised that if I’m going to be a good leader I need to get some normality.”
During the week his alarm goes off at 5.45 and he first looks at his BlackBerry. “I never switch it off. It’s the first thing I reach for in the morning.” Then he catches the 6.15 train to London and works for an hour before arriving at the office at 7.30.
At 9am he meets one of the division managers. He usually has lunch with the management teams. He tries to keep the afternoon free for customers.
In the evening he tends to entertain clients: “I’m pretty obsessive about that.” But if not, he will leave the office at 6.30 and catch up with any outstanding work on the train. “I get a lot done then.”
The combination of some home-made flavoured tea, a label design and an inspired buyer from what was to become Whole Foods Market, now the leading US natural and organic supermarket group, led to the first order of 15,000 bottles in 1997. The business has sought to create direct relationships with tea and herb growers in Africa, Asia and the Americas, and it has set up environmental initiatives, such as a scheme to “upcycle” waste juice pouches into school bags and other items.
The business flourished, prompting the need for a bigger partner that could help Honest Beverages expand distribution and provide some returns to investors. But deals between big corporations and ethically motivated independents have a troubled history in the US, still epitomised by Unilever’s controversial takeover of Ben & Jerry’s ice-cream in 2000. After unsuccessful talks with another suitor, Mr Goldman had decided the existing board needed to maintain control of the brand.
“When Coke called ... I knew what we were looking for,” says Mr Goldman, who talks with an infectious enthusiasm. “I said I was ‘happy to talk to you’, but I wanted them to understand we wanted to keep control, the brand had to be what it is. And they said, ‘Yes, yes, and that’s what we want to invest in.’”
But Coca-Cola has its own ethical issues. In spite of efforts to improve its reputation on social and environmental issues, it remains the target of campus boycotts at US universities and colleges – among the kind of ethically concerned young people who are Honest Beverage’s customers. Mr Goldman says the deal led to concerns within the company being expressed in the company “about how we would communicate with our customers and stakeholders about the deal”.
A suggestion was made from the Coke side that the investment could come through a private entity that did not carry the Coke name. “But I insisted that if we believe the transaction was worth doing [which we did], we wouldn’t try to cover it up,” he says. “In fact, we would have to be proactive in how we communicated about it.”
That included a long blog posting on the day of the deal to set out the rationale, followed a few weeks later by publication of an even longer e-mail exchange with a disgruntled customer.
Mr Goldman says his board was supportive, including Gary Hirshberg, a leader in the US organic food movement who heads Stonyfield Farms, the organic yoghurt company that has been majority-owned by Group Danone, the French food group, since 2001. Mr Hirshberg played an important role in shaping the transaction. Mr Goldman also insisted that he remain on the board alongside Prof Nalebuff, his co-founder and two Coke executives.
There were other interests to be consulted too. Whole Foods Market had been Honest Beverages’ first customer and helped it grow into the best-selling bottled tea in natural and organic food stores.
“We would not be in business without [Whole Foods],” he says. The retailer made clear its concerns over the Coke deal, with one executive warning that Whole Foods did not “want this brand that we helped build to be cheapened and end up in Wal-Mart three for a dollar”.
Just over a year into the deal, Mr Goldman says it is working out. Honest Beverages has gained access to Coke’s wider distribution channels, while keeping its freedom to continue its “mission”.
Coke’s purchasing power has also helped secure a lighter plastic bottle for Honest Beverages drinks, which suppliers were previously not prepared to do for the company on its own.
For an entrepreneur motivated by social and environmental objectives, the Coke deal clearly had the attraction of potentially increasing Honest Tea’s ethical impact through the increased distribution. Mr Goldman argues that his company has already played a role in the transformation of the US soft drinks business to focus on lower-sugar, healthier drinks – after “a lot of blank stares and no calls returned” in the company’s first years.
On the environmental side, its partnership with TerraCycle, a “green entrepreneur” company, has been followed by Kraft, the largest US food company, vastly extending the project’s scope. “The model led to much wider change than we were able to make by me selling a few bottles of tea on our own,” he says.
But of the deal with Coca-Cola, he says time will tell. “To me, the real judge will be five years from now. Have we made an impact on people’s diets and on the agricultural system in the way we strive to? Do we still stand for what we have always stood for?”
In the meantime: “There’s no question we’re growing, that our mission is still very much intact.”
