More Than Tea, "Honestly"

May 1, 2007
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More Than Tea, "Honestly"

By SARAH THEODORE

Honest Tea built itself a tall order when it came up with such a virtuous name. But this growing brand on the cusp of a nationwide breakthrough is out to prove it can stay true to its socially conscious mission while accomplishing an aggressive distribution push that will bring better-for-you, organic products to a mainstream audience.  
During the past two years, Honest Tea has grown at a rate of 50 percent a year, and its products are available nationwide through natural foods retailers. This year, with the organic movement in full swing and an infusion of cash from investors, company executives have been criss-crossing the country to build its direct-store-delivery presence, thus solidifying its place in the rest of the retail world. Their efforts have paid off. The company has signed on five new Coca-Cola distributors during the past year, as well as a number of independent soft drink bottlers, such as Polar Beverages, and beer wholesalers. Just this spring, the company opened 2,000 new, decidedly mainstream, retail accounts, including Wawa, Duane Reade, Circle-K and Smart & Final.
Higher learning
Based in Bethesda, Md., Honest Tea was founded in 1998 when President and “TeaEO” Seth Goldman and his former professor at the Yale School of Management, Barry Nalebuff, teamed up with the idea of creating a low-sugar beverage product.
“There seemed to be a large hole in the beverage market,” says Nalebuff, who still teaches at Yale while serving as chairman of Honest Tea. “Given how many thousands of products are introduced each year, you would have thought that there couldn’t be any holes. Despite all the flavors, caffeine levels and carbonation levels, there was essentially no difference in the sweetness levels."
During a trip to India, Nalebuff discovered the broad range that exists between varieties and qualities of tea, and decided there was not only a market for low-sugar beverages, but there also was a void in ready-to-drink teas made from high-quality varietal teas.
“Just like there are all these different varieties of grapes and wine, there was that same type of range for tea,” he says.
At the time, Goldman was working with the Calvert Group, a financial firm that specializes in socially responsible investment. The former teacher and student decided they had the seeds of a business idea in a company that would focus on better-for-you tea products with a social message.
“Before we launched Honest Tea, when Barry and I were talking, one of the things I suggested was putting a little logo on the back of the bottle that said, ‘Plant a tree,’” Goldman says. “Barry said, ‘What does that mean?’ and I said, ‘I’m not sure yet, but I know it’s going to be a sort of placeholder for saying we have a commitment to doing more than just selling a lot of tea. It’s going to be in a way that we’ll be able to consider the environmental impact of our decisions, and beyond that.’”
The first batches of Honest Tea were brewed in Goldman’s kitchen and bottled in a Thermos for the pitch to natural foods retailer Fresh Fields, which was the predecessor to Whole Foods. According to Goldman, they walked away with an order for 15,000 bottles, and they were in business.
“We told them we would deliver it by the end of May — then we had to find a plant,” he says.
A natural progression
Honest Tea did not start out as an all-organic product line, but as the organic movement took hold, and the United States Department of Agriculture developed certification standards for organic products, the company transitioned all of its products to be USDA certified. Today, the company carries 20 varieties of organic tea, including black, green, red, white and peppermint offerings. Last year, it introduced Heavenly Honey Green Tea, which quickly became one of its top sellers. This year, the company rolls out Sublime Maté, it’s first maté offering, and Pomegranate White Tea with Acaí. The tea products contain zero calories for the unsweetened varieties, and 17 to 35 calories per serving for the rest of the line.
In 2004, the company launched a line of fruit drinks under the Honest Ade brand, with the goal of producing a line of juice drinks that had less sugar than traditional fruit drinks on the market. Today the line consists of Cranberry Lemonade, Limeade, Pomegranate Blue and the new Orange Mango with Mangosteen. Each variety has about 50 calories per serving.
Goldman says the lack of competitive products on the organic market, as well as the appeal of the “Honest” brand allowed it to make the progression from teas into fruit drinks.
“We realized it wasn’t as much about tea as it was about ‘Honest,’ where ‘Honest’ really comes to stand for organic, authentic and healthier,” he says. “There are other products that fit that umbrella. Honest Ade was the first.”
Beginning this month, the company is expanding the brand again, this time into kids’ drinks with the rollout of Honest Kids juice pouches. Available in Berry Berry Good Lemonade, Goodness Grapeness and Tropical Tango Punch, the products contain about half the sugar of similar products on the market, and have about 40 calories per serving.
Goldman says the company has the potential to take the “Honest” theme in any number of directions, but says all products have to meet three key criteria.
“The first is it has to be authentic,” he says. “It has to have the taste of the natural products. We’re not going to make a Bubble Gum flavor or a Blue Raspberry. We’re not going to make something that isn’t found [in nature].  “It also has to be authentic in terms of the way it’s marketed and presented,” he adds. “We’re not going to make claims on the package about curing cancer or renewing sex drive. We’re not going to make claims we can’t substantiate. It has to be organic — has to be USDA certified. And it has to be healthier than the mainstream alternative. What we sell, in general, has to have less than half the calories of the mainstream options that are out there.”
In many ways, Goldman says, the beverage industry is still feeling the effects of the low-carb trend. “Even though it’s not called the low-carb trend anymore, I think it sent tremors throughout the industry,” he says. “Consumers are looking for lower-carb, lower-sugar offerings.”
According to Nalebuff, one of the challenges Honest Tea faces is getting consumers to understand that the products are lower in sugar and calories, without branding them as diet drinks.
“We’ve got to get people to understand what our category is,” he says. “We’ve created a category of the 30-calorie beverage; it did not exist before this. We could call it a diet drink, but that’s not right because it’s not that you’re giving something up.
“Sugar, in moderation, is OK,” he adds. “But people have taken this to an extreme. Once you’re below 30 calories or so, it doesn’t make much of a difference. But that category hasn’t been there for them.”
From niche to mainstream
While he is motivated by environmental concerns himself, Goldman is the first to recognize that most consumers are turning to organic products for more selfish, health-conscious reasons. “As much as it used to be that people chose organic 15 years ago because they wanted to help save the earth, now they’re doing it because they want to help save themselves,” he says. “Organic is another way to talk about a healthier product as well as a higher quality product.”
Honest Tea is following in the footsteps of other organic companies that have gone mainstream, such as Stonyfield Farm, Londonderry, N.H. Stonyfield president Gary Hirshberg sits on Honest Tea’s board of directors, and Stonyfield was part of a group — which also included several of the company’s top distributors and private equity firm Inventages Venture Capital — that announced a $12 million equity infusion in the company earlier this year.
“Gary Hirshberg has been a great mentor to us and to me since we started,” Goldman says. “Gary had taken a direct interest in our business, partly because he has a restaurant called O’Naturals, where they’re selling our product, but also because he saw a lot of similarities in what we were trying to do and what he had done — a lot of the same challenges in distribution, and obviously in financing as well. It’s especially helpful when you’ve got people who have been through a lot of the same phases that we’ve been in.”
Goldman draws comparisons between Stonyfield’s yogurt business and Honest Tea’s business, and says his company sought the additional funding this year because it wants to establish itself as the leader while the category still is in high-growth mode.
“To pull a page out of the yogurt industry … that’s about a $3 billion industry in the United States, and about 10 percent is organic,” Goldman says. “We believe that in bottled tea, [organic will] get to 10 percent of the market. Right now it’s less than 1 percent.
“With 60 percent or better of the organic bottled tea market, Honest Tea is the brand that is best positioned to capture that opportunity, and we want to make sure that as it grows, we are positioned as the category leader,” he says.
The companies also have a lot in common when it comes to balancing the growth necessary to become a major national brand while adhering to the socially responsible practices they preach.
Honest Tea carries several products that are Fair Trade certified by Trans Fair International. To be certified, companies pledge that growers receive a fair share of profits and reinvest some of those profits for community development projects. When it rolled out its First Nation Peppermint Tea, the company teamed with I’tchik Herb, a woman-owned company on the Crow reservation in Montana, to supply the peppermint. And its Community Green Tea supports the City Year AmeriCorps program, in which 17- to 24-year-olds commit to a year of community service in underprivileged areas.
Nalebuff says the balance is not as difficult as one might imagine. “Our social responsibility is rooted in the products we create,” he says. “The fact is, they are great for people, so the more products we sell, the more people drink, and the more of a difference we make in this world.
“It’s true that we go farther and we have teas that are organic and teas that are Fair Trade,” he adds. “We’ve worked with the Crow Nation, with farmers in South Africa, and we want all of our practices to reflect the same type of integrity that goes into our product. But it starts with the product.”
Social responsibility also is built into the company’s marketing. Through a partnership with Ford Motor Co., Honest Tea uses a fleet of Escape hybrid vehicles for its sampling tours. This summer it plans to have 10 hybrids on the road, decked out bumper to bumper with Honest Tea graphics. The company also is a sponsor of this month’s Earth Fest in Boston, and plans to give away 500 Jamis bicycles as part of a retail promotion.
Beyond organic
Just as it has expanded from tea into a variety of beverage products, Honest Tea believes its brand has the ability to go even farther in the future. And Goldman believes organic might be less of a defining quality in the years ahead.
“We feel organic is an important point of differentiation for us now, but three to five years from now, that might not be the case,” he says.
That’s not to say the company plans to stray from organic products, but as organic becomes more common in the marketplace, Goldman says the company may find its point of differentiation in its other attributes.
Both Goldman and Nalebuff say future products will not be limited to the beverage arena.
“We want the Honest brand to be a major national brand,” Goldman says. “Those three words — authentic, organic and healthy — will be the foundation for whatever we offer. We do think, although we’re certainly focused on beverage now, there’s the potential to do something much broader than that.
“There clearly is the opportunity to expand what we’re doing, but first we need to make sure we’ve created something powerful in the beverage market. That means we need to be available wherever beverages are sold. We need to be able to provide healthier products for consumers across the range of beverage options. That has to happen through distribution, and that’s something we’re working on very aggressively right now. There’s wonderful potential to go beyond that.”

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