Honest Tea Exec: Distribution "Easily the Biggest Point of Stress"

Seth Goldman and Barry Nalebuff founded Honest Tea in 1998. In the recently released Mission in a Bottle, the co-founders tell -- in comic book form -- the story of building a successful mission-driven business. Goldman, now president and "TeaEO" of Honest Tea, joins Motley Fool CEO Tom Gardner to discuss sustainability, entrepreneurship, and what it means for a socially responsible, health-oriented business to be bought by Coca-Cola  (NYSE: KO  ) .

Breaking into mainstream distribution channels was a major challenge for the young beverage company. In this video segment, Goldman recalls that, in the early days, Honest Tea would work with "anybody who had a truck," including charcoal and cheese distributors.

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Tom Gardner: One thing that comes through in the book is the brutal nature of distribution in the beverages industry. If we think about it, it's not something that changes very much. It's not like the Internet opened up this huge opportunity and a flood of new entrants came in. It's that there are 300 new beverage brands launched every year and there's a limited amount of shelf space out there.

Can you talk about some of the battles that you had? We'll tee it up this way. How about Honest Tea versus Snapple?

Seth Goldman: Writing this was very therapeutic, because that was easily the biggest point of stress. We knew we had to get in with beverage distributors to build the brand.

We were in the natural foods channel, and that was good, but to get to the delis, to get to the supermarkets and gourmet shops, we needed to be on trucks that carried beverages because the product is heavy. There's no way we're going to ship it UPS, and obviously you can't ship it through the Internet like you guys can. We had to go to beverage distributors.

We went and, in some cases, literally begged. There's a scene with Barry on one knee, asking a distributor to carry us! And they'd say, "Well, the product's not sweet enough. It's too expensive." Or, "We have a contract with Snapple that prohibits us." We really were, in a lot of markets, locked out, so we had to find other ways to get around.

We would work with anybody who had a truck -- charcoal distributors, cheese distributors; we had a corned beef distributor -- anybody. A bagel distributor.

What was interesting was, eventually we were taking enough shelf space that some of the distributors who had the Snapple contract were willing to overlook that contract. It was an interesting evolution.

Gardner: Then another part of that evolution is that Snapple is acquired by Quaker Oats and tries to go it without distributors.

Goldman: Yes. They tried to go direct.

Gardner: Can you explain what happened there?

Goldman: Well, it was a great example -- and a real cautionary tale -- of the danger of being acquired and doing it wrong. They said, "We can make more money, we'll have more margin." They cut out the distributors, and the brand lost the soul, the entrepreneurial spirit.

There have been so many other beverage acquisitions that haven't worked, that it's certainly something I keep in mind -- as we started thinking about if we were going to sell -- making sure we ended up with a partner that wasn't going to mess it up.

Gardner: Andy Grove, the founder of Intel, wrote a book entitled, Only the Paranoid Survive. Did you get to points of paranoia along the way -- because there were some unusual things that happened -- that you maybe thought ...?

Goldman: No. I'm probably too trusting. That was my weakness.

Gardner: Barry was paranoid.

Goldman: Barry was paranoid! That why it was good to have a partner. Yes, there were a lot of times where I got close to making a deal that would have put us in the wrong direction, and Barry was just conservative enough.

A lot of times with private equity investors we got in situations -- one of which we share in the book -- where there was an investor who wanted to invest and set aside all these options for management. I'm like, "Well, what does that mean?" I didn't find out until later that meant it was options to attract a new CEO, so I was glad we didn't take on that ...

Gardner: There's not a lot of full disclosure "Honest Tea" -- enough of it -- in the private equity world.


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