How Honest Tea has kept its corporate soulSeptember 17, 2012: 5:00 AM ET
One year after Coke bought organic tea company Honest Tea, its CEO reflects on its foray into Big Beverage. No regrets, he says, but plenty of tough conversations.
FORTUNE -- About 10 years ago, you could only find Honest Tea in small grocery stores and co-ops – the kind of joints that also hawk kale chips and bulk-bin nutritional yeast.
Since then, the company has come far, having partnered with a beverage industry heavy-hitter. In 2008, Fortune 100 company Coca-Cola (KO) first paired up with Honest Tea by purchasing a 40% stake for about $43 million. Three years later, Coke exercised its right to purchase the remaining 60% of the company for an undisclosed amount, although Honest Tea CEO Seth Goldman reportedly bought back a significant amount of his personal equity.
Unsurprisingly, some of the former Honest Tea patrons didn't take kindly to Honest Tea's entry into Big Beverage. But it has been a beneficial, if not always easy, process, says Goldman, who co-founded the company and still runs it out of its Bethesda, Maryland headquarters. He spoke toFortune about how a small green business can keep its soul even after being bought by the largest beverage company in the world.
Since being acquired, Honest Tea has gained access to Coke's giant reach. About 15,000 stores stocked Honest Tea in 2008, Goldman says, and now you can find the product in over 100,000 places.
Coke also knows its way around an ad campaign, and it helped Honest Tea scale from guerilla marketing tactics -- like giving away free samples at stores or trading cases of tea for a magazine spot -- to sporting big billboards and television ads. Its first TV commercial, released this summer, features animated tealeaves and a lemon trying to get into a bottle of Honest Tea. They fail though, presumably because they aren't organic.
Everything Honest Tea sells is organic, Goldman says, and the company tries to be transparent, rather unlike its parent. "We have videos and footage and pictures of tea gardens in India that I visited," Goldman says. "By contrast, and not to put down Coca-Cola, but they have a secret formula. Most people don't know where the ingredients come from, and that's by design."
That cultural gap has generated some cognitive dissonance among Honest Tea's customers. Consumers told Goldman that while they liked Honest Tea, they couldn't get behind Coke. Goldman argues that he's looking at the partnership as a way to change Coke from within. "Look, I love small companies and for 10 years we were a small independent company." But Goldman has big goals for Honest Tea: "We're talking about changing the landscape of agriculture in the developing world. That happens when you get to a scale where you can really make an impact."
And quietly, Honest Tea seems to be chipping away at its parent company. In 2007, before working with Coke, Honest Tea purchased 790,000 pounds of organic ingredients. Last year, it bought over 4 million pounds, supporting more sustainable farming worldwide. Also, because of Honest Tea's demands, Coke has gotten several of its bottling plants certified organic.
But like any relationship, this one has hit its roadblocks. In 2010, Coke asked Honest Tea to remove the text on some of its products that said there was no high fructose corn syrup inside. Coke thought it might reflect poorly on its other products, which do contain the ingredient. Honest Tea put its foot down though, and the claim stayed, keeping its organic drinks attractive to the fructo-phobic market.
More recently, the two companies have diverged on their stances towards Proposition 37, which, if passed this November, would require all food products in the state of California to list any genetically engineered ingredients. Coke has spent millions to campaign against the proposition. Honest Tea doesn't really have a dog in this fight, since it doesn't use GMOs. But it still received flak from customers despite the fact that, says Goldman, "Honest Tea is barely at profitability. We're not pouring any money into any political anything."
The question is whether a little green company can benefit from being part of a major conglomerate but still operate autonomously enough to keep its core values and customers. Goldman thinks it can, although he admits, Honest Tea's livelihood is tied up with Coke's now.
Companies like Coke are big, rich, and complicated. "We certainly have a strong interest in seeing the overall company succeed because we're part of it," Goldman says.