How Honest Tea Stood Up to Coca-Cola -- and Won

The future of the beverage industry, and why Honest Tea is good for Coca-Cola

Mar 16, 2014 at 5:00PM

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) .

In this video segment, Goldman explains what's right about Coca-Cola's acquisition of Honest Tea, and how the tiny organic tea company has held its own, even after becoming part of the soft drink giant. Honest Tea even came out on top in a disagreement over language regarding high-fructose corn syrup on the Honest Kids label.

A full transcript follows the video.

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Tom Gardner: I like to ask the dangerous questions toward the end. I feel like I've earned some unfair questions. Feel free to dodge them. What would you do if you were the CEO of Coca-Cola and why aren't you? We would all want you to be, and I don't mean to knock the existing CEO of Coke...

Early in the book there was a customer who said, "Do you call yourselves Honest Tea because you think everyone else is dishonest?" I wonder -- that tension that exists -- and I'm trying to dodge that a little bit by saying what steps would you take if you were the CEO of Coke?

Seth Goldman: I actually think part of it is what they're recognizing: the world has changed. The beverage industry has changed. It has to change. Sodas -- no surprise -- have not been growing, and they're not going to be growing. Even diet sodas are in decline. So, you have to prepare for a different future.

That's what they did by creating this entity that invested in honest brands like Honest Tea. It's a great example of it.

I don't want to flatter, but I really am impressed with Muhtar Kent, who leads Coca-Cola, because he was the one who said, "Not only do we want to keep Seth around, we want to actually have him continue to hold equity in this company" -- so he appreciated what entrepreneurship means -- and it was only going to happen through his support.

If anything; I'm biased of course, but I'd say let's continue to accelerate these brands that are going to be part of the future.

Gardner: The fear that a consumer has, who loves the product, is that Honest Tea will be co-opted by the parent.

I'll give an example outside of the industry of just how wrong acquisitions can go. If you think about Lands' End -- that was a great business, for those of us who remember it, and then it was bought by Sears. I don't know who has ever shopped from Lands' End, ever since.

What is it that allows you to believe, or demonstrates, that Honest Tea is having an impact on Coca-Cola rather than Coca-Cola the other way?

Goldman: The first thing -- not that I'm not worried, but why am I more optimistic -- and the title of the book, Mission in a Bottle, means that the equity of the product, the value of the product, the selling proposition, is that it's lower sugar, organic, and Fair Trade. That's in the bottle.

It's not about the profits we give away. It's about every time we sell a bottle. If this is where the value is, one company that's learned not to mess with something that's working is Coca-Cola. Remember New Coke was not a very successful experience.

I'm not saying it's an impenetrable fortress, but in a way the best defense is a good offense and the more we build this brand -- and we'll do over $100 million in sales this year -- to get to this scale with these values, every time we go grow it makes it harder to strip away; and there's been no pressure to strip it away. I'm just saying, that's the value we've created.

Gardner: There was maybe one pressure point, and you stood up publicly, and your leadership team did. That was over the reference to high fructose corn syrup on the bottle. Tell us about that.

Goldman: Yes. Honest Kids -- the package -- on the front would say, "No high fructose corn syrup!" We started selling that through the Coca-Cola organization, so there was a question from Coke: "Hey, if we're selling this, we'd rather not have that on the package."

I said, "I understand. I'm not a scientist, so I'm not going to have a discussion about the science, but I do know the consumer views high fructose corn syrup as a processed sugar, and we're selling something that's less processed, so we're not going to take it off."

To their credit, they said, "Well, you're the owner at this point," -- this was when Coke had 40% -- "so we're not going to take it off." Then when Coke exercised the option, they still didn't insist on removing it.

Actually, just this year we removed all of the added sugar and we sweetened it with organic kosher white grape juice. Now the sugar, obviously, is in the grape juice and nutritionally it's the same, but as a result, the main language is now about "sweetened only with fruit juice." We have, on the side panel, "no high fructose corn syrup."

Gardner: Love it.

Tom Gardner has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Coca-Cola and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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