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) .
Pursuing socially responsible business practices involves some trade-offs, Goldman says. In this video segment he describes the process of developing Honest Fizz, and the decision to introduce the product -- at least initially -- with nonorganic ingredients.
A full transcript follows the video.
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Audience member: Thanks so much for a great presentation.
Socially responsible companies are often known for having double bottom lines -- sometimes triple bottom lines. Can you talk about how you managed those bottom lines when it came to decision making, and also perhaps give an example of a time where you had to make a decision where you favored one bottom line over another?
Seth Goldman: Yes. If you will, let me just talk about terminology. I actually think there's no such thing as a socially responsible business. You can say it's a destination, but if you call yourself socially responsible, then you're not being honest with yourself, because every business has an impact and what you really need to be is engaged on a path to reducing that impact or improving the impact, if you think you're doing something positive. But if you think you're there, you're not being honest.
For us, we always have seen this as being a journey. We started with low sugar, then we went to organic, then we went to Fair Trade. We've done it around packaging, where we can lightweight our packaging.
But there are still trade-offs. One that was so vivid for us; when we created Honest Fizz, we wanted to make the product organic because since 2004 everything we've made is organic. We looked at the recipe for Honest Fizz and we said, "If we make it organic, we'll have to price it at $7.99 a six pack. If we make it nonorganic, we can price it at $5.99 a six pack." That's a very different cost when we think about trying to market soda.
What we said was, "We're not going to make it all organic." We made one of the varieties organic, and we have put ourselves on a timeline to get to be all organic -- and we literally say this on the package. We say, "It feels weird to have a product not be organic from Honest Tea, after doing only organic for eight years. But we have to evolve the supply chain," and as I said, with Fair Trade, we did.
There was definitely some sleep lost over that, but it felt like the right decision.
Gardner: That could be a system that you have put in place, which is to launch something that isn't where you want it to be, but to articulate that you're on a journey to get it there.
Goldman: Yes. I don't want it to be a precedent. I think the reason we were a little more comfortable was that soda is not necessarily a health occasion in the same way that tea is.
We know that people move to tea when they're on a path toward a healthier diet. They move away from sodas. They move, usually to a sweet tea, and then they move to Honest Tea. They're trying to get healthier; organic makes sense as a healthy part of that journey. Soda is not thought of as a health drink in the same way.
Audience Member: First off, again, I'll echo everyone's comments; great presentation.
My question is, is the new model now big companies are going to cut their own research and development, or their new ways of developing, and then just have teams looking for people to develop a new product?
Goldman: Yes! It's interesting, because Coca-Cola, and Pepsi and other companies, had done these little pilots where they'd create brands. It cost a lot of money, and it was synthetic. If you remember, there was a brand -- Fruitopia -- that Coke created. We were like, "What is that?"
So, yes, I think it makes a ton more sense because, first of all, think about just R&D expenses. We raised $10 million to create Honest Tea in the first ten years -- and we got to a success level, obviously -- but if we didn't succeed, that was $10 million Coke wouldn't have spent trying to develop a brand like that.
I think the kind of risks we're taking, and going into the market segments we're going into, aren't necessarily ones worth exploring. Let someone else endure the pain, and if it makes sense then it's worth buying.
For our investors ... we were losing money every year. "Why is this worth it?" Well, it's only worth it if we get bought. So, I do think that model -- that's how change happens. Maybe it's different with the car industry. Even Tesla, I guess, is going out and doing something. But in general, where the costs of entry aren't high it makes sense to let someone else do the R&D.
Tom Gardner owns shares of Tesla Motors. The Motley Fool recommends and owns shares of Coca-Cola, PepsiCo, and Tesla Motors 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.