ERB INSTITUTE

UNIVERSITY OF MICHIGAN

September 20, 2010

case 1-428-947

Honest TeaSell Up or Sell Out?

selling to a big corporation, or joining forces with venture capitalists, would mean selling out the very essence of organic: small, alternative and individualistic. Steve Mills of the Chicago Tribune, on Eden Foods Founder Michael Potters refusal to sell his organic foods company2

As Seth pondered Honest Teas success and the many decisions in front of him, he knew he had to answer one question first. Should he sell to Coca-Cola?

DO

The Coca-Cola Company had expressed strong interest in buying Honest Tea. Coke was well aware of the growth in the organic food and drink market and specifically aware that Pepsi controlled 40% of the RTD tea market, compared to its 11% share. Coke had an existing global bottling and distribution network, significant capital to fund marketing campaigns, and relationships and leverage with retail outlets to secure ideal shelf space. Coke envisioned success with Honest Tea like they had with their acquisition of Odwalla.

Published by GlobaLens, a division of The William Davidson Institute at The University of Michigan. 2010, Andy Hoffman. This case was prepared by Elizabeth A. Paynter, Elizabeth Senecal, Lauren Start, Tina Tam, David Weinglass, and Ryan Whisnant, under the supervision of Professor Andrew Hoffman and Arie Jongejan as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

NO T

Honest Tea CEO and co-founder Seth Goldman had seen his ten-year-old, ready-to-drink (RTD) organic tea company grow beyond expectations. Looking to the future, Seth knew he had several difficult decisions to make. Did wide-scale distribution and production go against the values of sustainability, upon which his company was founded? What compromises, if any, was he willing to make to spread Honest Teas product and message? Could Seth achieve this desired scale on his own or were outside partnerships or investors required?

CO PY

You can have the healthiest and best drink, but if you cant get it to store shelves, youre just another has-been. Gary Hirshberg, CE-Yo, Stonyfield Farm, Inc. and member, Honest Tea Board of Directors1

Honest TeaSell Up or Sell Out?

1-428-947

The Ready-to-Drink Beverage Market

The global non-alcoholic beverage market was expected to grow at an annual rate of 6% from 2008, reaching a value of $1 trillion by 2020.3 While tea was already the most consumed beverage in the world, the ready-to-drink (RTD) coffee and tea segment was expected to contribute to that growth.4 The RTD tea market experienced an estimated 12.7% compound growth rate between 2003 and 2007.5 Growth in the category was driven by the convenience of single-serve bottles, the perceived health benefits of tea, and the variety of tea and fruit and other tea combinations.6 Consumers in the U.S. had begun to see tea as a functional beverage that contained anti-oxidants and provided anti-aging, calming, or energizing benefits.7 Just as the tea market was growing aggressively, the natural foods category and organic beverage segment were exploding.8 Between 2004 and 2005, the organic beverage market grew 18%. Three years later, the market was still growing at 16% annually.9 More than 500 RTD beverages were introduced in 2007 alone. Soy, coffee, tea and fruit-based drinks were introduced in the greatest numbers.10

Defining Natural and Organic Food

The Organic Foods Production Act (OFPA) was adopted by the U.S. Congress in 1990 as part of the 1990 Farm Bill. Over a decade of discussion and input surrounding OFPA culminated in a final rule that was published by the USDA in December 2000 and implemented in October 2002. The resulting standards set up a system to certify specific methods and practices used to produce and process organic agricultural ingredients for food and non-food purposes. Although the terms natural and organic are often used interchangeably, there are important differences between the two labels. While there is no certification process to deem a product natural, the organic label requires compliance with standards set by the National Organic Programthe federal regulatory framework governing organic productsas well as certification by the United States Department of Agriculture.11 In order to call a product organic, the ingredients used to make the product must come from a certified organic farma farm whose agricultural system replenishes soil fertility without the use of toxic or persistent pesticides and fertilizers. Organic certification also prohibits the use of antibiotics, synthetic hormones, and genetic engineering. While Honest Tea did not begin as an organic beverage company in 1998, its first organic tea, First Nation Peppermint, was launched one year later, in 1999. Demand for organic offerings was so strong that by 2001, 50% of Honest Teas products were certified organic. By 2004, one year after releasing its first two fair trade certified teas, all Honest Tea beverages had completed the organic certification process.12 The Commercial Shift toward Natural and Organic Food Prior to the establishment of the Organic Foods Production Act of 1990, a small organic movement did exist. However, aside from small-scale farm stands and other local ventures, organic foods were not widely available in a commercial setting. When Whole Foods Company opened its first grocery store in 1974, with a mission to feature good wholesome food without pills and potions, they achieved sales that doubled each year for the first four years. In 1978, their sales surpassed $1 million.13 In 1985, a group of determined individuals founded the Organic Foods Production Association of North America (OFPANA), an organization dedicated exclusively to being the industrys voice to lawmakers and the public. As of 2005, the OFPANA had nearly 1,600 members, which included businesses in every part of the supply chain.
2

DO

NO T

CO PY

Honest TeaSell Up or Sell Out?

1-428-947

With the passing of the Organic Foods Production Act in 1990, attention to organics grew and led to a shift in momentum toward organic food. Mainstream supermarkets, including Safeway Inc., Kroger Co., and SuperValu Inc., caught on to the market shift and created their own name-brand organic products to meet rising demand. In 1997, when organic food sales tracking began, organic food represented 0.8% of the food market.14 By 2006, organics made up 2.8% of the market.15 Further, by 2006, organic food sales had been growing by 1520% per year, whereas total food sales had only been growing 24% per year.16 A study released in 2007 revealed that, from 2004 through 2006, sales of organic food through supermarkets, drug stores, and mass merchandisers (such as Wal-Mart) increased by 38%. The study also estimated that sales of organic foods would increase by 71% from 2006 through 2011.17 (See Exhibit 1 for a graphical representation of U.S. organic food sales over time.)

Honest Teas Foundations

After a long run through New York Citys Central Park, Seth Goldman furiously scrounged the streets for something to quench his thirst. Soda was too sugary, and water did not give him the flavor he desired. It was during this quest for a perfect, refreshing drink that Seth remembered a professor from business school at the Yale School of Management. Several years earlier, while working on a Coke vs. Pepsi case study, Seth and Professor Barry Nalebuff had lamented about the sweetness of most bottled beverages and the boringness of plain (and even flavored) water. Seth wondered if Barry had been able to find a perfectly balanced drink and decided to give him a call. Delighted to hear from his former student, Barry admitted to Seth that he, too, was still searching for the ideal beverage. He also told Seth of his recent travels to tea farms in India, where he had learned that most American bottled teas were made with tea dust and fannings (essentially low-quality tea leaf leftovers). Seth and Barrys conversation took an exciting and unexpected turn when they agreed that there was a void in the market for high-quality, healthy bottled tea. After years of fruitless searching for the perfect beverage, the former student and his professor decided to take matters into their own hands. Thus, Honest Tea was born in Seth Goldmans tiny kitchen. Driven by his new mission and Barrys support, Seth quit his job at Calvert Group and began brewing tea in his home in 1998. He put the honest in Honest Tea by brewing experimental batch after batch with only simple ingredients: water, real tea leaves, and honey or pure sugar cane for a bare amount of sweetening. He day-dreamed of a future in which his tea would not only succeed but would also establish honest, mutually beneficial relationships with suppliers and customers, while being true to the environment.

Seth and Barry moved their tea production to a facility in Buffalo, New York. Five varieties of their teas first hit store shelves in June of 1998, and they were a hit. Seths challenge quickly became how to respond to requests from his fiercely loyal consumers that he make his teas more widely available for purchase while, at the same time, keeping tea stocked on store shelves (see Exhibit 2). Stories were published in the Washington Post, the Wall Street Journal and Fitness Magazine about the up-and-coming success of Honest Tea. The buyer of new products for Wild Oats/Alfalfa Community Markets approved of Seth and Barrys new product:
3

DO

Five weeks quickly passed, and Seth was finally ready to make his pitch. He packed up some thermoses filled with tea (along with mock-up labels) and headed over to Fresh Fields, now known as Whole Foods Market. His audience was impressed and ordered a small trial allotment of 15,000 bottles to see whether or not Seths teas would sell. Seth eagerly accepted the order, even though he knew that he was limited by his bottling operation capabilities and that he had no way to make such a daunting quantity of tea. Nevertheless, he thought, he had just set the stage for an official entry into the tea business.

NO T

CO PY

Honest TeaSell Up or Sell Out?

1-428-947

Mark My Words: Honest Tea will be a success. The only bottled tea that is not loaded with sugars and tastes great. This is what people (like me) have been seeking for years. Too good to be true? No! I mean it now BRING THESE IN! In just over ten years, Seth and Barry had grown Honest Tea from a thermos out of Seths kitchen, to a business that outsold both Snapple and the house brand at Fresh Fields in the first year, to the best selling bottled tea. As 2007 drew to a close, the company had grown to 52 employees and $23 million in annual sales (see Exhibit 3).19 It had diversified its business line into the bagged tea, thirst quencher (HonestAde), and childrens (Honest Kids) beverage markets. Most importantly to its founders, Seth and Barry had created a company that stayed true to its mission of creating honest beverages while becoming a leader in the socially responsible business movement. The Honest Way of (Guerrilla) Marketing The term guerilla marketing was coined in 1984 by Jay Conrad Levinson to describe a marketing style that relied on investing energy instead of money to achieve conventional goals. Seth steered his small company to success largely through a guerilla marketing approach. In his tactics, Seth included an Honest Tea advertisement on YouTube20 and events such as an Honest Tea sponsored charity beach contest21 and music festival.22 Seth referred to his guerilla marketing strategy as a no-frills sales campaign that generally avoided media marketing.23 Their biggest sales pitch was a van, adorned with the Honest Tea logo, that offered free samples at events.24 A typical example of how Seth positioned his guerilla militants was a street team of Honest Tea constituents defying typical marketing strategy by handing out free, ice-cold, organic peach-flavored white tea to even colder New Yorkers one night in January 2009.

In January of 2008, Honest Tea helped to launch Bethesda Green, a local sustainability initiative in the town that is home to the companys headquarters. The mission of Bethesda Green was to incubate green businesses and help community members develop the skills and knowledge to lead environmentally sustainable lives in Bethesda, Maryland. Over 300 people attended the first community meeting, and in May of the same year, the first recycling bins were placed in heavily trafficked parts of the city. Honest Tea also took an active stance on reducing its environmental impact. The company worked to determine its carbon footprint throughout its supply chain, from its sustainably-grown tea bushes in India to its warehouses. In order to offset the carbon dioxide produced during the creation of Jasmine Green Energy Tea, Honest Tea purchased renewable energy credits certified by Green-e, a premier certification organization for green energy.27 Further, glass and plastic Honest Tea bottles could be reused and recycled
4

DO

A Reputation for Social Responsibility Building on its roots of producing a simple, healthy product, Honest Tea developed a reputation for genuine commitment to investing in the betterment of its surrounding communities. The company wanted to be a true change agent.26 This reputation matched the genuineness of its product and became a central factor driving its rapid, word-of-mouth growth through a base of fervently loyal consumers. It seemed that every day, fan letters and news articles praised the unique circumstances behind which Honest Tea had become not only a beverage, but also a lifestyle choice that consumers related to on a personal level.

NO T

On its 2009 Facebook page, Honest Tea had an ad entitled Searching for Marketing Road Warriors!!!. Their responsibilities would include driving to all locations in a region, setting up and breaking down event equipment, and promoting the Honest Tea brand at each event.25 This high energy, grass-roots driven marketing represented Honest Teas values-based approach and an important part of its brand.

CO PY

Honest TeaSell Up or Sell Out?

1-428-947

in many places. Honest Kids drink pouches, however, were a different story. To combat the environmental impact associated with Honest Kids drink pouch disposal, Honest Tea came up with a different solution to the problem of adding to landfillsa partnership with TerraCycle. Through the Drink Pouch Brigade program, Honest Tea and TerraCycle teamed up to encourage the recycling of drink pouches. For every pouch collected, Honest Kids donated two cents to a charity of the collectors choice. The used pouches were then turned into fashion accessories.

Significant Growth Challenges

Meeting the ever-growing demand for Honest Teas products created challenges for the company. A belief that bringing the bottling portion in-house would help meet demand and create manufacturing jobs prompted Honest Tea to make an investment in Three Rivers Bottling, a niche bottler that had worked with products, such as New Leaf Iced Teas and Whole Foods 365 brand. The investment was ill-fated, however, and Honest Tea soon realized it was better suited to focus on its core business of producing healthy, organic beverages and building its strong brand. In doing so, Seth found that rapid growth was inseparable from distribution problems. The company initially distributed its own product, but then began to experiment with several different distributor relationships. From cheese to charcoal distributors, Honest Tea searched for a way to scale, eventually fostering relationships with natural food and beverage distributors who complied with the companys mission.

Coca-Colas Growing Interest in Alternative Beverages

Historically, Coca-Cola had four major brands in the RTD category: Nestea, Enviga, Gold Peak, and Fuze. These brands accounted for 11% of the tea category in the U.S. market. Cokes largest competitor, PepsiCola, controlled nearly 40% of the tea market with brands including Lipton and SoBe. Other major players included Arizona and Cadbury Schweppes Snapple brand (see Exhibit 4).32

DO

By 2008, sparkling beverages represented 78% of Coca-Colas business, while its remaining 22% came from non-carbonated (or still) beverages. This still-beverage category had significantly expanded from 11% of Cokes business in 2000, and had driven Cokes top-line growth, accounting for 42% of its incremental volume growth in 2008.30 In order to take advantage of the growth in the still beverage market, Coke purchased small companies, such as Glacau (the makers of Vitamin Water), Fuse, Java Planet, and Odwalla. They used their existing network and global reach to extract more value out of the smaller firms. Despite this growth, Pepsi held on to 50% of the non-carbonated market compared to Cokes 23% in 2007 (before Cokes purchase of Glacau).31

NO T
5

As when it was founded, the Coca-Cola Company still specialized in selling beverage bases and syrups in 2008. The company sold to almost 300 bottling businesses. Coca-Cola owned its brands and was responsible for marketing, while partner bottling companies were responsible for the beverages production, packaging, and distribution.28 Bottlers sold the beverages to the end consumer. Coke had established distribution in over 200 countries,29 and the companys distribution channels penetrated every market in the U.S.

CO PY

Honest TeaSell Up or Sell Out?

1-428-947

Sustainability at the Coca-Cola Company In cooperation with its six largest bottlers, the Coca-Cola Company established a sustainability strategy in 2002. The plan was based on four pillars: workplace, marketplace, environment, and community. In 2008, sustainability was included in the companys growth strategy and became one of the criteria for how it evaluated its performance.33 In an opinion piece in Marketing Week, the President of Coca-Cola Great Britain and Ireland, Sanjay Guha, laid out the companys environmental goals as the following: returning or replacing every drop of water we use in our drinks and their production. We have pledged to grow our business without adding to the carbon in our atmosphere and are developing low-energy and HFC-free refrigeration. And we are stepping up our efforts to recycle and reduce the packaging we produce.34 In 2008, the company undertook a $10 million advertising campaign to educate consumers about its sustainability vision. Coca-Cola wanted its consumers to know that sustainability was not only about the environment but also about the physical and mental well-being of people and the health of communities in which the company operated.35 In 2007, the company achieved a 2% increase in water use efficiency and a 4% increase in energy use efficiency, donated $99 million to charity, and participated in over 120 community water projects in more than 50 countries.36 The company engaged in issues such as workplace rights, community development, and active and healthy living. According to Cokes 20082009 sustainability report, the company directly emitted 1.96 million tons of carbon dioxide. An additional 3.21 million tons of carbon dioxide were indirectly emitted in 2008 from the companys 58.6 billion mega joules of energy consumption. Although, from 2006 to 2008, the companys indirect carbon emissions from energy use grew by 0.32 million tons, its direct emissions fell by 0.02 million tons. During those same years, while water efficiency increased (from 2.55 liters of water per pound of product to 2.43), total water usage also increased from 290 billion liters to 313 billion liters.37 Cokes Challenges and Consumer Mistrust of Corporations A 2006 article in The Economist opened with, Who would have thought that the reputation of Americas corporate leaders since the bankruptcy of Enron, seen as no more trustworthy than politicians or journalists could fall any further? Yet that is what is happening, as the fuss over the backdating of executive share options intensifies with each day.38 The article went on to address the controversial and impending SEC action regarding compensation issues at many large U.S. companies. The scandal included well-known companies such as Apple, Microsoft, and Home Depot.39 While Coke had established its sustainability program, it had also fallen victim to issues with corporate mistrust. In 2005, Coca-Cola was under fire for water use in India. At the beginning of the 21st century, consumer groups, local populations, and NGOs accused Coca-Cola of stealing water, poisoning land, and selling drinks laced with dangerous pesticides.40 An activist website (killercoke.org) even established a movement to stop a gruesome cycle of murders... and torture of union leaders... at Coca-Cola bottling plants in Colombia. Because of these issues and related charges in India and Colombia, as well as elsewhere in the world, students on at least nine college campuses successfully lobbied their colleges not to renew contracts with Coca-Cola. Due to the lobbying efforts of University of Michigans Students Organizing for Labor and Economic Equality, the school canceled its $1.4 million contract with Coca-Cola, effective on January 1, 2006. Such decisive action on campus significantly altered product options in vending machines, cafeterias, residence halls, and campus restaurants.41 While Coca-Cola maintained that the allegations were false, the company felt the impact of the increased mistrust.

DO

NO T
6

CO PY

Honest TeaSell Up or Sell Out?

1-428-947

In an April 2007 conference call, then president of Coca-Colas Asia Division, Mary Minnick, was quoted as saying that the company still felt the residual effect of the unfounded pesticide scare in 2003.42 Cokes troubles were not over by 2007. Venezuela banned Coca-Cola Zero in 2009, claiming that testing revealed that the beverage included the sweetener Cyclamate. While Coke maintained that Cyclamate was safe, as evidenced by independent studies from the World Health Organizations Joint Committee on Food Additives,43 the artificial sweetener had been banned in both Venezuela and the United States due to health concerns.44

The Consolidation and Mainstreaming of Organic Foods

Consolidation within the organic and natural food industry began in earnest in 1997, when the draft for national organic standards was first released.45 The acquisition of smaller organic food companies peaked in 1999, marked by General Mills acquisition of Cascadian Farm and Muir Glen for an estimated $70 million.46 By the time an 18-month phase-in period for national standards was implemented in 2002, the pace of consolidation had slowed, primarily because there were few organic companies of significant size left to purchase.47 During that five-year period, the organic sector grew by almost 20%, versus only 5% for the conventional food sector. In addition, organic foods did not experience the same wild price spikes seen in conventional foods.48 It was this growth and stability that drove widespread acquisition of organic companies by large multinationals.49 Between 1999 and 2009, one-third of the top 30 firms acquired organic brands (see Exhibit 5).50 In some cases, large food companies used their relationships with organic companies to develop their own organic product lines under existing brands.51 Unilever, for instance, introduced an organic version of Ragu pasta sauce. However, this strategy was not as successful as the outright takeover of organic brands.52 Unilever struggled to recoup the $20 million it spent on advertising its organic Ragu brand.53 Large corporate ownership by companies, including Dean Foods, General Mills, Kelloggs, and Cargill, fueled dramatic growth in the organic industry.54 In most cases, the companies elected to exclude their own label from the acquired corporate brand. Owners of these once small-scale operations became overnight corporate executives, as was the case with CE-Yo Gary Hirshberg when Group Danone acquired a 40% stake in Stonyfield Farm organic yogurt.55 Some owners of smaller organic companies were wooed into acquisition by achieving a large financial payoff from their business success, while others saw it as an opportunity to reach a larger market and further promote organics. It was not only difficult to gauge the original owners motivations, but it was also difficult to determine how the new corporate stakeholder would operate the company once it took control. As a result, these sales were not without serious reputational risk to the smaller companies, which had operated in a segment of the industry particularly sensitive to the level of trust that consumers hold in a brand. For example, despite the fact that Dagoba Organic Chocolate still operated independently after its buyout by The Hershey Company in 2006, some people labeled Dagoba owner, Frederick Schilling, a sell-out.56 Popular brands such as Burts Bees and Ben & Jerrys have also been labeled sell-outs (see Exhibit 6). The amount paid for these small organic and natural food companies was often well beyond an average valuation for such a company. In 2008, Coca-Cola acquired Vitamin Water maker, Glacau, for an estimated $4.2 billion, a valuation 20 times its EBITDA*.57 These large purchases were not restricted to just the food
* Earnings Before Interest, Taxes, Depreciation, and Amortization.

DO

NO T
7

CO PY

Honest TeaSell Up or Sell Out?

1-428-947

and beverage industry. In 2007, Clorox reportedly paid five and a half times the $170 million projected annual sales for Burts Bees,58 and LOral paid $1.4 billion for the Body Shop.59 Companies were willing to pay a premium for these smaller, organic and natural firms in order to gain access to their brand identity and the high margin industry.60 Many large companies felt that they did not have the knowledge, relationships, or trust of consumers to allow them to enter the organic sector on their own.61 There were a few notable organic and natural product companies who had avoided or refused acquisition, such as Clif Bar, Natures Path, Organic Valley, and Seventh Generation.62i Despite regular offers, Ann Arborbased Eden Foods Inc., had repeatedly refused to sell. According to the Eden Foods president, Michael Potter, every major food company had approached him with an offer.63 There were some notable benefits resulting from consolidation. Due to the scale of large multinational owners, the retail price of organic food had fallen, in some cases close to conventional food levels. The result had been wider access to organics, especially for low-income shoppers. Organic foods were now found in most major grocery chains. The growth of organic food had also driven the demand for organic farms to produce the food, enabling increased organic farming practices. As Natalie Reitman-White of the Willamette Farm and Food Coalition said, The success of organic has allowed companies the means to reinvest in advocacy that moves the organic ideals forward.64

The Future of Honest Tea

When he noticed Seth lingering for a few extra moments in the top floor conference room of The CocaCola Companys world headquarters in Atlanta, Georgia, Barry walked over to steal a quick word with him. The only way Honest Tea can have a widely significant environmental and social impact is by selling lots of product, and Coke can help us do that, Barry offered.65 [And] our mission [will always drive] our strategy,66 Seth contemplated as the two walked into the elevator and descended toward the buildings exit. Seth couldnt help but continue to wonder about what impact an investment by Coca-Cola might have on his company in the long run. Would Honest Teas reputation remain strong among consumers? Would its word-of-mouth and guerrilla marketing buzz be possible on a national scale? Could Honest Teas culture influence Coca-Colas culture, or would Honest Tea be swallowed by a giant? See Exhibits 7-10 for additional information.

DO

NO T
8

To maintain the strong growth that the company had been experiencing and to be profitable in the RTD tea industry, Honest Tea needed access to a larger distribution network. In 2008, Honest Tea had the option to partner with Coke by selling a portion of its equity. Seth and Barry therefore faced an enormously difficult decision. On the one hand, consumer mistrust of larger companies, combined with Cokes reputation, might have adverse effects on not only Honest Teas brand image and company culture but also its sustainabilitydriven strategy and commitment. On the other hand, Honest Tea had always striven to be a positive change agent in the industry. Partnering with Coke would allow Honest Tea to scale up and get into the mainstream market and, in turn, to affect change by introducing competitive yet healthy and sustainable products to the industry.

CO PY

Honest TeaSell Up or Sell Out?

1-428-947

Exhibits

Exhibit 1
U.S. Organic Food Sales 19982006 (US dollars in billions)

20

15 Sales (billion USD)

10

0 1998 (.94%)

NO T
Direct
9

2001 (1.41%)

Year (Percent of Total Food Sales) Natural Food Stores Supermarkets

Source: Organic Trade Association (2004, 2006, 2007)

DO

CO PY
2003 (1.94%)

2005 2006 (2.48%) (2.80%)

Honest TeaSell Up or Sell Out?

1-428-947

Exhibit 2
Examples of Unsolicited Letters from Customers

Subject: BEST TEA EVER! Dear Honest Tea, I have never bought a product that I thought was so fantastic that I felt the need to write about it. I love tea, but I always would brew it myself and cart it around because I cant stand the syrupy-sweet tea that is sold most places. I saw your tea at Fresh Fields in Annapolis, MD. At first I was hesitant because I have it in my mind that all bottled iced teas = yucky sweet. But I was intrigued by the flavor choices and yes, the pretty bottles and bought one of each. Well, I went to my car and proceeded to drink all of them right then and there. The first one was so good and so different that I couldnt help myself and had to try the rest. It actually tasted like tea! THEN... when I turned the bottle over and saw how few calories were in it, I flipped! There is no reason not to drink this tea! You guys have truly done it, this is quality stuff! So keep it up and get this tea out there! I wish you success and happy brewing!

RE: Help! I need Honest Tea!

I just returned from a trip to Wash, DC (I live in Pittsburgh) and found that your tea is not available here. I love it and must have more. Can you ship it to me? Price is no object (to some degree). If you cannot ship it to me please advise me of any support groups or counseling that I may seek in order to recover from this lack of Honest Tea. I must warn you that I may get desperate, causing me to highjack an Honest Tea truck in the Washington area and bring it back to Pittsburgh. I am becoming a heartless Honest Tea junkie. I hope that you can help. Thanks, EEOber

Source: Honest Tea Business PlanDecember 1998

DO

NO T
10

CO PY

Cindy W., Annapolis, MD

Honest TeaSell Up or Sell Out?

1-428-947

Exhibit 3
Sales and Employees (19982007)
Honest Tea Sales
$25,000,000

$20,000,000

$10,000,000

$5,000,000

$0 | | | | | | | | | | 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

60 50 40 30 20 10

DO

0 | | | | | | | | | | 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: Honesttea.com

NO T
11

Honest Tea Employee Count

CO PY
|

$15,000,000

Honest TeaSell Up or Sell Out?

1-428-947

Exhibit 4
Ready-to-Drink Tea: Top 10 Brands by Sales and Share (2007)
U.S. Mainstream Retail Sales of RTD-Packaged, Shelf-Stable Tea Brand Lipton Arizona Snapple Nestea Enviga SoBe Fuze Honest Tea Tradewinds Tazo Total Sales ($) Share (%) 393.5 284.3 216.8 92.3 21.7 19.8 7.6 6.2 5.0 4.4 34.8 25.1 19.2 8.2 1.9 1.8 0.7 0.5 0.4 0.4 7.0

All Other, Including Private Label

Note: Figures are based on IRI sales tracking through U.S. supermarkets, drugstores, and mass merchandiserrs other than Wal-Mart. Source: Information Resources, Inc., compiled by Packaged Facts.

DO
12

NO T

CO PY
78.9 $1.130.5 100.0%

Honest TeaSell Up or Sell Out?

1-428-947

Exhibit 5
Organic Industry Structure: Acquisitions by the Top 30 Food Processors in North America

Source: Phil Howard, Assistant Professor, Michigan State University

DO
13

NO T

CO PY

Honest TeaSell Up or Sell Out?

1-428-947

Exhibit 6
Examples of Small, Growing Firms Purchased by Large, Established Organizations
Ben & Jerrys When they were acquired by global giants, both Ben & Jerrys and Burts Bees were seen as sellouts by many critics. In 2000, Unilever (a global giant that makes products such as Wisk detergent, Q-tips and popsicles) acquired Ben & Jerrys Homemade, an ice cream company whose strategy was rooted in social consciousness.* At the cost of $326 million, Ben & Jerrys became a wholly-owned subsidiary of Unilever. In doing so, Ben & Jerrys maintained a separate board that included its founders, Ben Cohen and Jerry Greenfield. The company founders stated:

Before the final agreement was reached and as the potential deal was being digested, Richard Goldstein, head of Unilevers North American operations, encouraged Cohen about the role he could play at Unilever. Ben, do you realize the opportunity you have here to help this company grow in its social commitment? In response, Cohen looked back at him and realized, this man is sincere.** Burts Bees Similar to how corporate giant, Unilever, bought out Ben & Jerrys, The Clorox Company bought privately owned Burts Bees for $913 million in 2008.*** Clorox, having been eyeing the natural-care market (whose sales rose from $2 to $6.1 billion between 2002 and 2006) pounced on the opportunity to acquire Burts Bees, whose motto was The Greater Good. With its socially responsible outlook, Burts Bees grew from a small beeswax candle business, created by Roxanne Quimby and Burt Shavitz, to a more than $250 million per year top-grossing manufacturer of natural care products (hair care, lip care, baby care, foot care, pregnant mother care). Unlike that of the creators of Ben & Jerrys, the partnership between Quimby and Shavitz dissolved. In 1999, Quimby bought out her partners one-third share in the business. In 2003, she sold 80 percent of the company to AEA Investors. In 2008, AEA accepted a bid from Clorox. Quimby then sold the remaining 20 percent share in Burts Bees to Clorox for $183 million. continued on next page
14

DO

NO T

The deal included an agreement that Ben & Jerrys would continue its practices, unchanged, and that Unilever would agree to neither reduce jobs nor alter the way the ice cream was made. Unilever also committed to contributing 7.5% of Ben & Jerrys profits and $5 million of Unilevers funds to a foundation, creating a $5 million fund to support poor neighborhoods and minorityowned businesses, and distributing $5 million to employees in six months. Additionally, Cohen would work with Unilever to evaluate its involvement in socially and environmentally responsible activities. Ben & Jerrys, a two-person company that had started in a Vermont gas station in 1978 and gone public in 1984, ensured that its social conscience framework transferred over to the $45 billion global giant.

CO PY

Shareholders will be rewarded employees will be protected; the current social mission of Ben & Jerrys will be encouraged and well-funded and an opportunity has been offered for Ben & Jerrys to contribute to Unilevers social practices worldwide.

Honest TeaSell Up or Sell Out?

1-428-947

continued from previous page

Also unlike the Ben & Jerrys-Unilever deal, neither Quimby nor Shavitz maintained future ties (environmental, social, or otherwise) with Clorox as part of the business deal. John Roplogle, the Chief Executive of Burts Bees, saw otherwise. Roplogle said that Burts Bees 380 employees had an opportunity to influence the direction of Clorox and its green initiatives. Burts Bees maintained its original green philosophies. Employees bonuses depended on how well company energy conservation goals were met, the company bought offsets for 100 percent of its carbon emissions, and it worked toward a goal of no longer sending trash to landfills by 2020. In turn, Clorox focused on reshaping its products such that more of them would be eco-friendly by 2013. Beth Springer, vice president for strategy and growth at Clorox, posited, If we think about the Greater Good, one lesson weve learned is, if you set your mind to the goal of more natural and sustainable practices, you might actually surprise yourself with what you can accomplish.
* Gram, D., Ben & Jerrys Sells Out To Unilever, AP Online, April 12, 2000. ** Hays, C., Ben & Jerrys To Unilever, With Attitude, The New York Times, April 13, 2000. *** Story, L., Can Burts Bees Turn Clorox Green?, The New York Times, January 6, 2008. Belli, B, Burts Bees Sells Out Big, The Environmental Magazine, March 1628, 2010. Story, L., Can Burts Bees Turn Clorox Green?, The New York Times, January 6, 2008.

DO
15

NO T

CO PY

Honest TeaSell Up or Sell Out?

1-428-947

Exhibit 7
Honest Teas Market Opportunity (as stated in Original Business Plan)
Beyond SnappleThe Emerging Market for Quality Bottled Tea We have identified four market trends that are fueling demand for Honest Tea within the $72 billion non-alcoholic liquid refreshment beverage market. Explosive Growth in RTD Tea and Water Markets Emergence of Tea Culture Rise of Cultural Creatives

Boom in Natural foods

Demand for a Healthier, Genuine Bottled Tea

Source: HonestTea.com

Exhibit 8

Coca-Cola Revenue and Net Income (20042008)

35000 Revenues & Net Income (million USD) 30000 25000 20000 15000 10000 5000

NO T
21742 23104 24088 4847 2004
|

DO

28857

5981

31944
|

2005 Revenue

4872

2006

5080

2007

2008

Net Income

Source: Company Annual Report, Global Markets Direct

16

5807

CO PY

Honest TeaSell Up or Sell Out?

1-428-947

Exhibit 9
Ready-to-Drink Tea Suggested Retail Price of Selected Brands, 2007
U.S. RTD-Packaged, Shelf-Stable Tea Brand Arizona Description/Size Gallon plastic jug 3-pack of 12-ounce aseptic boxes 16-ounce glass bottle 34-ounce plastic bottle 42-ounce plastic bottle 23.5-ounce can Caf Sepia Enviga Fuze Gold Peak Guayaki Yerba Mate Honest Tea 8.1-ounce can 12-ounce can 18-ounce glass botle 16-ounce glass bottle 16-ounce glass bottle 1.79(T) 1.19(J) 1.49(S) 1.49(S); 1.49(T) 0.99(S); 1.19(J), on sale for 1.00 1.69 (W) 1.29(J) 1.79(J) Price ($) $3.39 (S); $3.69(J)

6-pack of 12-ounce cans 16.9-ounce glass bottle

64-ounce glass bottle Inkos Jones Organic Tea Lipton 16-ounce glass bottle 14-ounce glass bottle

NO T
1.5-liter plastic bottle 2-liter plastic bottle 12-pack of 12-ounce cans 16-ounce glass bottle 6-pack of 16-ounce glass bottles 16-ounce glass bottle 12-pack of 12-ounce cans Half-gallon aseptic box 6.4-ounce can 17.5-ounce glass bottle 16-ounce glass bottle
17

12-pack of 16.9 ounce plastic bottles 5.99(S), on sale for 4.99; 6.99(J), on sale for 5.99 1.69(S), on sale for 1.00; 1.49(J) 3.99(S); 4.29(J), on sale for 3.33 1.69(S), on sale for 1.25; 1.79(J) 1.39(S), on sale for 1.00; 1.39(J) 6.99(S), on sale for 5.99; 6.99(J), on sale for 5.00 1.09(J)

Lipton Brisk Lipton Pure Leaf

DO
Nestea Pacific Sencha Shot Snapple

Magnolia Spice Tea

12-pack of 16.9-ounce plastic bottles 6.49(S), on sale for 4.99; 6.79(J), on sale for 6.50 3.59(S), on sale for 3.00 4.99(W) 1.39(W) 1.59(S), on sale for 1.25; 1.89 (J) 1.19(S); 1.39(J) 9.99(S); 8.99(J), on sale for 7.99

12-pack of 16-ounce glass bottles

Key: (J) = Jewel; (S) = Strack & Van Til; (T) = Trader Joes; (W) = Whole Foods

12-pack of 16.9-ounce plastic bottles 5.99(S), on sale for 4.99 continued on next page

CO PY
6.49(J), on sale for 5.99 1.29(S); 1.59(J) 2.19(W) 1.59(S), on sale for 1.25; 1.69(J), on sale for 1.25; 1.39(W), on sale for 0.99; 3.39(W) 1.99(W) 1.79(J), on sale for 1.50

Honest TeaSell Up or Sell Out?

1-428-947

Brand SoBe Steaz Sweet Leaf

Description/Size 20-ounce glass bottle 12-ounce glass bottle 16-ounce glass bottle 64-ounce glass bottle 1.59(J) 1.29(W)

Price ($)

1.19(S), on sale for 1.15; 1.39(W), on sale for 0.99 3.99(W) 1.49(S); 1.39(W) 5.39(W) 1.99(W) 1.99(W) 1.99(W)

Tazo Teas Tea Well for Tea

Source: Packaged Fa

13.8-ounce glass bottle 4-pack of 13.8-ounce glass bottles 16.9-ounce plastic bottle 2-liter plastic bottle 8.2-ounce can

DO
18

NO T

CO PY

Key: (J) = Jewel; (S) = Strack & Van Til; (T) = Trader Joes; (W) = Whole Foods

Honest TeaSell Up or Sell Out?

1-428-947

Exhibit 10
Honest Tea Products (2009)
Honest Tea 16.9 oz. PET NEW! Mango Green Tea Pomegranate White Tea with Aai Honey Green Tea Peach White Tea Lemon Black Tea Honest Ade Cranberry Lemonade Limeade Orange Mango with Mangosteent Pomegranate Blue Superfruit Punch Honest Kids Goodness Grapeness Berry Berry Good Lemonade Tropical Tango Punch Appley Ever After Honest Tea Bags Honest Tea Glass Variety Assam Black Tea Black Forest Berry Honest Mate NEW! Agave Mate Subime Mate NEW! Tropical Mate

Find Honest Tea Retailer Buy Honest Tea Online

Source: HonestTea.com

DO
19

NO T

CO PY
Green Dragon Tea Just Black Tea Jasmine Green Energy Tea Just Green Tea Loris Lemon Tea Mango Aai White Tea Moroccan Mint Tea Peach-Oo-La-Long Pearfect White Tea Pomegranate Red Tea with Goji Berry Honest Tea 64 oz. Variety Just Black Tea Just Green Tea Mango Aai White Tea Peach-Oo-La-Long

Community Green Tea

Honest TeaSell Up or Sell Out?

1-428-947

Endnotes
1

Honest Tea stays true to its roots as it grows; Theresa Howard, U.S.A TODAY; http://www.usatoday.com/money/advertising/200903-29-honest-tea-grows_N.htm Organic foods: Big companies swoop in to capitalize on lucrative market. Steve Mills. McClatchy - Tribune Business News. Washington: Aug 19, 2009. The Coca-Cola Company 2008 Annual Review (Atlanta, GA) The Coca-Cola Company 2008 Annual Review (Atlanta, GA) Tea and Ready-to-Drink Tea in the U.S., Packaged Facts, November 2007. Strenk, Tom, Ready-to-serve Heats Up. Restaurant Business. Feb2009 Berry, Donna. Tea: Make it More than a Drink. Dairy Foods March 2009 Strenk, Tom Earthly around the Earth. Beverage World. 15 Nov 2008 Strenk, Tom Earthly around the Earth. Beverage World. 15 Nov 2008 http://www.havahart.com/advice/living-organic/organic-or-natural http://www.honesttea.com/mission/about/story/ http://www.wholefoodsmarket.com/company/history.php http://www.ota.com/definition/quickoverview.html http://www.ota.com/definition/quickoverview.html Strenk, Tom Earthly around the Earth. Beverage World. 15 Nov 2008

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Libby Quaid, Demand for Organic Food Outstrips Supply, San Francisco Chronicle, July 6, 2006. http://www.honesttea.com, 1998 Business plan http://www.honesttea.com, 1998 Business plan http://www.youtube.com/watch?v=hPg9ZJoutOM

Knudson, William, The Organic Food Market, Strategic Marketing Institute Working Paper, Michigan State University, 2007.

22 23 24 25 26

http://www.bgirlmanifesto.com/casram/

http://www.foodanddrinkdigital.com/Honest-to-goodness_189.aspx http://www.facebook.com/note.php?note_id=51545688968

http://findarticles.com/p/articles/mi_qn4183/is_20031128/ai_n10058505/?tag=content;col1 The Value of the Right Partner, Blog From Seth and Barry, 19 June, 2008, <http://honesttea.com/blog/category/from-seth-andbarry/page/2/> http://www.honesttea.com/community/sustainability/greenenergy/ The Coca-Cola Company, 2007/2008 Sustainability Review

27 28 29 30 31 32 33 34 35 36 37

The Coca-Cola Company 2008 Annual Review (Atlanta, GA) Coca-Cola ready to expand noncarbonated holdings New York Times, 25 May 2007 Hein, Kenneth, Coca-Cola Adds a Little Honest Tea. Brandweek. 5 Feb. 2008 The Coca-Cola Company 2007/2008 Sustainability Review Guha, Sanjay. On the Long Road to Sustainability Marketing Week, 8 May 2008 Bush, Michael. Sustainability and a Smile Advertising Age, 25 Feb 2008 The Coca-Cola Company, 2007/2008 Sustainability Review The Coca-Cola Company, 2008/2009 Sustainability Review. <http://www.thecoca-colacompany.com/citizenship/pdf/2008-2009_ sustainability_review.pdf> Dates from hell The Economist, 22 July 2006 Dates from hell The Economist, 22 July 2006 Stecklow, Steve. Virtual Battle: How a Global Web of Activists Gives Coke Problems in India Wall Street Journal 7 June 2007

38 39 40

DO

The Coca-Cola Company Website, <www.thecoca-colacompany.com/ourcompany/index.html

NO T
20

http://magicseaweed.com/BODYBOARDING-FOR-A-CAUSE!-CHARITY-BEACH-FEST-PRESENTED-BY-HONEST-TEA-To-be-held-August16th-at-Casino-Pier-in-Seaside-Heights-NJ--Content/657/

CO PY

Honest TeaSell Up or Sell Out?

1-428-947

41 42 43

University of Michigan Bans Coca-Cola Sales MSNBC, 30 Dec 2005. <http://www.msnbc.msn.com/id/10651153/> Stecklow, Steve. Virtual Battle: How a Global Web of Activists Gives Coke Problems in India Wall Street Journal, 7 June 2007 The Coca-Cola Company 2007/2008 Sustainability Review. <http://www.thecoca-colacompany.com/citizenship/pdf/2008-2009_ sustainability_review.pdf> Sanchez, Fabiola. Venezuela: Why We Banned Coke. The Huffington Post, 12 June 2009. <http://www.huffingtonpost. com/2009/06/12/venezuela-why-we-banned-c_n_215114.html> Howard, Phil. 2007. Who owns organic? From roots to suits. PCC Sound Consumer, January. Puget Consumers Co-op. Howard, Philip H. 2009. Visualizing Food System Concentration and Consolidation. Southern Rural Sociology, 24(2), 87-110. [online] Howard, Phil. 2007. Who owns organic? From roots to suits. PCC Sound Consumer, January. Puget Consumers Co-op. Mergers and Acquisitions Journal; June 1, 2008; Organic Growth: Long-considered a recession resistant market, the food space, especially natural foods, continues to attract investors Howard, Phil. 2007. Who owns organic? From roots to suits. PCC Sound Consumer, January. Puget Consumers Co-op. Howard, Philip H. 2009. Visualizing Food System Concentration and Consolidation. Southern Rural Sociology, 24(2), 87110. [online] Howard, Phil. 2007. Who owns organic? From roots to suits. PCC Sound Consumer, January. Puget Consumers Co-op. Howard, Phil. 2007. Who owns organic? From roots to suits. PCC Sound Consumer, January. Puget Consumers Co-op. Howard, Philip H. 2009. Visualizing Food System Concentration and Consolidation. Southern Rural Sociology, 24(2), 87110. [online] Organic foods: Big companies swoop in to capitalize on lucrative market Steve Mills. McClatchy - Tribune Business News. Washington: Aug 19, 2009.

44

45 46

47 48

49 50

51 52 53

54 55 56 57 58

Howard, Phil. 2007. Who owns organic? From roots to suits. PCC Sound Consumer, January. Puget Consumers Co-op. http://www.entrepreneur.com/magazine/entrepreneur/2008/june/193660.html Mergers and Acquisitions Journal; June 1, 2008; Organic Growth: Long-considered a recession resistant market, the food space, especially natural foods, continues to attract investors progressivegrocer.com; November 2, 2007; Clorox Buys Burts Bees for Just under $1 Billion http://www.nytimes.com/2008/01/06/business/06bees.html Howard, Philip H. 2009. Visualizing Food System Concentration and Consolidation. Southern Rural Sociology, 24(2), 87110. [online] Howard, Philip H. 2009. Visualizing Food System Concentration and Consolidation. Southern Rural Sociology, 24(2), 87110. [online] Howard, Phil. 2007. Who owns organic? From roots to suits. PCC Sound Consumer, January. Puget Consumers Co-op. Organic foods: Big companies swoop in to capitalize on lucrative market Steve Mills. McClatchy - Tribune Business News. Washington: Aug 19, 2009. Howard, Phil. 2007. Who owns organic? From roots to suits. PCC Sound Consumer, January. Puget Consumers Co-op. (Southworth, 2001). Blog from Seth & Barry. http://www.honesttea.com/blog/category/from-seth-and-barry/ Blog from Seth & Barry. http://www.honesttea.com/blog/category/from-seth-and-barry/

59 60 61

62

63 64 65 66

67 68

DO

NO T
21

CO PY

Honest TeaSell Up or Sell Out?

1-428-947

Notes

DO
22

NO T

CO PY

Honest TeaSell Up or Sell Out?

1-428-947

Notes

DO
23

NO T

CO PY