SEFSAF

Yannis

Case Study: Coca-Cola acquires a 40% stake in Honest Tea

Question 1
Examine Honest Teas sustainable practices and determine whether Honest Tea runs a sustainable
business.

To determine whether Honest Tea runs a sustainable business, we first have to define what
sustainability means for a business. Sustainability hinges on 3 pillars: environmental, social and
economical. A sustainable business has to be environmentally sustainable & socially responsible, but
also be profitable. Following this definition, Honest Tea is indeed a sustainable business.

On the environmental side of things, Honest Tea has implemented a wide variety of measures to
minimize its environmental footprint. First off, all varieties of tea sold by Honest Tea are certified
organic since the end of 2003. Its tea bags are biodegradable and the tea packaging consists of 100%
recycled material. The farmers cultivating Honest Tea leaves use environmentally sustainable farming
practices and are monitored and certified by third parties. For some of the tea varieties, Honest Tea
calculated the environmental footprint in terms of carbon dioxide emitted and purchased renewable
energy credits for the amounts of carbon dioxide produced. Its bottle was eco-designed: it is fully
recyclable and environmentally friendly in terms of energy consumption and weight. Finally, even the
office was made in an environmentally friendly way with use of recycled materials etc.

On the social side of things, Honest Tea has always been committed to making a difference in the
communities it works alongside with. It has established partnerships with farmers, as well as with the
communities where it sources its products. Its products are certified by the Fair trade commission,
which means that they are bought at fair trade prices and respecting fair trade practices, and some
of the money is even given back to the communities through programmes. Among other initiatives, it
supported a woman-owned business, a community service programme, as well as a whole
community in South Africa to develop farming. Finally, it also benefits the consumers as it is a much
healthier alternative to sugar-loaded sodas.

Eventually, Honest Tea is sustainable as it is economically viable. Tea leaves represent only 4% of the
product cost, so paying $5000 for a ton of organic tea vs. $3000 of non-organic tea doesnt make
much of a difference. The 20 to 30 cents price premium on other bottled teas available in the US
more than makes up for the cost difference, even taking into account the cost of workforce paid at
fair trade prices. Therefore, Honest Tea is a profitable business. More importantly, it has been
growing at a mind-blowing CAGR of 66% from 1998 to 2008. It is niche market that is exploding,
hence the interest of Coca-Cola.

Question 2
Discuss Coca Colas acquisition of 40% stake in Honest Tea. What advantages for Honest Tea? What
disadvantages?

The advantages for Honest Tea are twofold. First off and most importantly, it will benefit from the
supply chain and distribution channels of Coca Cola. The investment helps accelerate Honest Teas
growth tremendously. From an availability in 15,000 stores prior to the acquisition, Honest Teas
products were stocked in over 100,000 only a few years later. It used to be sold only in organic
supermarkets and niche selling points. It is now available almost everywhere in the US, including in
fast food chains Chick-Fil-A and Wendys. After the acquisition, Honest Tea is now better positioned
to compete with other leading soft drinks, taking advantage of the growing interest in healthy soft
drinks.
Which leads to the second advantage: it allows Honest Tea to democratise organics, and bring them
not only where healthy beverages are sold to healthy people, but everywhere beverages are sold.
Other advantage, the 40% stake acquisition provides money for Honest Tea to invest, which can be
invested in socially and environmentally responsible ventures as well.
Finally, and during 3 years following the stake acquisition, the Honest Tea company would remain
totally independent, although Coca Cola had an option to buy the entire company after the 3-year
period.
In terms of the disadvantages, most of them would come once Coca completed the full acquisition of
the firm, with Goldman and Nalebuff ultimately losing control of the firm. The acquisition would also
tarnish the image of Honest Tea, with Coca Cola selling a highly unhealthy product loaded with sugar
and caffeine. Also relevant, Coca cola has been involved in scandals for exploiting workers, further
tarnishing its reputation.

Question 3
According to you, what are the reasons for Coca-Cola acquiring a stake in Honest Tea?

The reasons are twofold. Honest Tea is a high-margin high-growth business (66% CAGR from 1998 to
2008) operating in a niche market, allowing Coca Cola to expand its portfolio of brands beyond the
traditional unhealthy and sugary soft drinks.
Honest Tea also benefits from a great image, being a very sustainable business which respects the
environments and society, having taken up lots of initiatives to improve the lives of the people and
communities it works alongside with. In buying the company, Coca cola can hope to embellish its
reputation.

Question 4
What did you learn from this case study that you particularly appreciated?

This case study was very interesting. Trying myself to live a healthy lifestyle and drinking organic tea
on a daily basis, it was fascinating to get an in-depth dive into a business selling organic tea and
operating in a sustainable way. I didnt know much about how sustainable companies interacted with
the communities it worked with and the case study sheds some light on this, which was very
enlightening.
This case study was all the more interesting as I have experience in the field of mergers and
acquisitions, with this case study showing how big multinational firms can disturb the equilibrium of
smaller sustainable firms by pursuing profits, although in this case its the honest approach of the
firm that allowed it to be so successful.