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Coca-Cola Acquires a Stake in Honest Tea

The best thing that ever happened to organic tea company Honest Tea or a slow but controlled brand implosion?

The best thing that ever happened to organic tea company Honest Tea or a slow but controlled brand implosion?

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Coca-Cola announced today that it is buying 40% of Honest Tea, the nation’s largest selling brand of organic bottled tea. Coke’s decision to become a majority player in the organic tea brand is in line with earlier decisions to cast its net outside the traditional soda industry with brands like Minute Maid (bought over forty years ago now), Powerade, Nestea, Dasani and most recently vitamin water producer Glaceau.

Coke’s decision to invest in Honest Tea, although unforeseen is unsurprising, given the company’s strong growth rate and increasing popularity in recent years on the one hand, and a rising demand for beverages outside the traditional soft drinks/soda industry on the other.

“In terms of sales trends, you can see there’s a large uptake in health food and beverages. In 2006 for instance, the soda, water, sports and energy drinks sector earned about 35 billion,” says Daniel Fabricant, Vice President of Scientific and Regulatory affairs at the Natural Products Association.

In fact, this is a great time to be in natural foods in general — the industry is experiencing exponential growth, having gone from $2 billion in sales in 1990 to about $55 billion at the end of last year. The explosive growth, fueled by more educated, health conscious consumers and a bigger distribution opportunity, is dragging companies like Honest Tea along with it.

Honest Tea’s own acceptance of Coke’s investment comes from a desire to reach a broader audience, according to CEO Goldman — to go from being simply “important” to acting as a “agent of change” by leading “a national shift toward healthier diets.”

“Despite our 66 percent annual compound growth rate (70 percent in 2007), we still aren’t reaching all the people we want to reach. We want to see Honest be an agent of change, not just through the example it sets but through its own actions as well,” he says.

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With this deal, Goldman expects sales of Honest Tea to rise dramatically. He sees the venture as a good thing for anyone concerned with social responsibility. “The world of social responsibility should not be restricted to the smaller, more boutique companies. With things like this, more consumers will have access to social responsible products.”

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Being an agent of change and an advocate of social responsibility is a long-standing goal for Goldman, who writes a blog entitled The Mission Driven Business for Inc.com. The question is whether a small company that promises to be honest, to be in favor of economically disadvantaged communities, to have a commitment to social responsibility, and to strive for “authenticity, integrity and purity, in (its) products and in the way (it) does business” is hacking away at its own brand base by agreeing to an alignment with a beverages giant like Coca-Cola.

“If we could find an investor who will help us build our business while still honoring our style of business, then that seems like an ideal scenario,” says Goldman. So is Coca-Cola really that investor?

When quizzed about the risk of doing business with a company like Coke, Goldman admits that while diluting the consumer base could be a legitimate concern, Coke is not acquiring the company, merely investing in it. “My team and I will, at least from a board governance perspective, retain control.”

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He points out that Coca-Cola is diverting from its normal route by investing rather than buying, and that the soft drinks giant “understands what we’re doing and they want to buy into it…” Sounds like the idea is that Coke, while offering added resources and distribution, leaves the organic tea brand relatively untouched — at least in terms of its fundamental ethos and mode of doing business.

According to Gary Hemphill, Managing Director, Beverage Marketing Corporation, a number of failed ventures by bigger corporations to swallow up smaller companies have made the former smarter. “They’ve realized that if they’re going to acquire a smaller company whose big reason for success is its uniqueness and mission, it’s really crucial to try to retain as much of that as possible in order for the company or brand to survive and thrive.”

He cites Snapple as an example of a brand that was diluted – “they betrayed the core Snapple consumer” — by Quaker, the company that purchased it in 1994, only to sell it a short three years later. He points out that Energy Brands however, which was acquired by Coke last May, maintains a fairly independent functioning, indicating perhaps that Coke really is capable of being a participant from the side lines.

Hemphill told Fast Company that he sees no reason why Coke’s investment in Honest Tea should ruin the brand, as long as Goldman retains his position and people.

“We painstakingly built our brand with its attributes ingrained in it,” says an impassioned Goldman. “I don’t want to sound naïve, but given what we’ve been through, every consumer owes it to us to give us the chance to fail. If we do then we can be held accountable.”

Coca-Cola now becomes Honest Tea’s biggest shareholder, after a long drawn out dealing process that began in the fall of last year.