President and CEO of Honest Tea
Monday, May 18, 2009 12:00 PM
Growing a small business into a big business is no easy feat. Seth Goldman started beverage firm Honest Tea out of his kitchen in Bethesda, Md., after quitting his job at a social investment fund. His gamble paid off. Last year, Goldman sold 40 percent of Honest Tea for $43 million to Coca-Cola and it has the option to buy the company outright in three years.
Seth hosted a discussion on Monday, May 18 at 12 p.m. on how to grow a successful small business.
For more from our Small Buinsss Week series of live discussions, click here.
Alexandria, Va.: What does your deal with Coca-Cola allow you to do that you couldn't achieve on your own?
Seth Goldman: Since we started working with Coke, we have expanded our distribution into markets and channels that we never before had access to. Honest Tea is now distributed through the Coke system on the West Coast and Mountain States. Our product can also now be found in dozens of universities and hospitals, and we are in the process of working with several school systems.
Bethesda, Md.: When did you know you had to move out of your kitchen and into a bigger facility?
Seth Goldman: Once we had finished product, we had to store it somewhere and my wife wasn't fond of the idea of storing it in our garage. We started by working out of a generic office building in downtown Bethesda. We weren't really meant to work out of there either -- we were on the 3rd floor and had to use the elevator to take in deliveries. We had our share of messy spills, but it was enough to get us up and running!
Baltimore, Md.: In the U.S. where people seem to be driven to maximize, maximize, maximize, could there possibly be an optimum size or ideal for a small business?
Or is it just a matter of you'll be eaten by the big fish if you yourself don't grow up to be one?
Seth Goldman: I think the right size depends on the nature of the business. A local restaurant, or service-oriented business, should be able to thrive with its own local footprint. On the other hand it's much harder for a beverage company to suceed by only serving a local niche --you need purchasing and production scale to get decent margins. And it's very hard to reach that scale if your sales are only reaching a local audience.
Denver, Colo.: Why did you decide on a beverage-related business? Did you do a lot of market research beforehand?
Seth Goldman: I had toyed around with several entrepreneurial ideas before launching Honest Tea. A classmate and I had won the New Enterprise Competition at the Yale School of Management for a diagnostic idea, and we came close to launching that business. But when I faced the decision I knew that I wasn't passionate about the idea. When the ideas for Honest Tea started to gather momentum, I knew that it was an idea I was excited about -- especially because I was thirsty and there was nothing out there like our product!
Arlington, Va.: How important was it to you that your company's products become certified organic? Is that something you'd recommend for small firms to look into?
Seth Goldman: Organics have become a central part of our brand's identity because it fits naturally into our mission of health and sustainability. When we learned that tea leaves are one of the few agricultural products that are never rinsed, we realized that any chemicals sprayed on tea leaves end up in the drink. So we worked to convert our entire line to organics.
From a sales perspective, I wouldn't recommend organics for every firm -- I think it depends on what you are selling. For example, I'm not sure someone buying candy is worried about purchasing organic candy.
But from a sustainability perspective, I think organics are a critical step toward healing our planet -- though there is not yet definitive data that proves organics are better for the human body, we know our ecosystem (and the people picking/proceesing the ingredients) doesn't need more toxins.
New York, N.Y.: I always believe that learning from mistakes is the key to success. Can you share some of your early mistakes and how you overcame them?
Seth Goldman: We have made many mistakes over the past 11 years, but among the most painful:
-- Co-owning a bottling plant that lost a lot of money -- the lesson there was to make sure you know what you're business you're in. We realized we were brand builders, not manufacturers.
-- Placing too much trust in distributors that ended up not paying us -- the lesson there was to keep tighter control on our receivables.
-- Focusing on our tea bag line even though the bottles were selling much faster -- the lesson there was to realize that the most important part of our name wasn't "Tea", it was "Honest".
-- Occasionally letting our passion for a mission get ahead of our customers' needs. We brought out a product called Haarlem Honeybush that had an amazing connection with a cooperative in South Africa, but the product was not well-designed and did not succeed. We retrenched and launched Pomegranate Red Tea, which better communicates what we're selling, and still supports sustainable agriculture in South Africa.
Washington, D.C.: What is the best piece of advice you can give an entreprenuer in any field?
Seth Goldman: Make sure you're pursuing something you're passionate about. The work is too hard, the odds are too steep, that you have to feel good about what you've done whether you succeed or not. And if you really love what you're doing, then you won't accept failure as an option.
Philadelphia, Pa.: A lot of your success seems to be word-of-mouth, was this a lucky break for you? or do you have any marketing advice to make it appear that way?
Seth Goldman: We've definitely invested in word-of-mouth marketing. In fact, it's really the only kind of marketing we do. We have a team of samplers around the country who act as our ambassadors for our brand. They give out more than a million samples every year, and as a result, we spread our excitement to thousands of adopted ambassadors who share our drinks with their friends. From the outside it may seem that we get lucky when celebrities such as Oprah, Rachel Dilson or President Obama get sighted with our product. But for every high-profile consumer we gain, there are thousands of other ambassdaors out there who are still spreading the tea.
Washington, D.C.: While you were growing your business, did you ever have to make any layoffs? If not, what kinds of structuring did you do to avoid them?
Seth Goldman: Fortunately, we've never had to lay off anyone for financial reasons. We've definitely had to terminate employees who didn't work out. When times were tough, we enlisted everyone in the organization, including our accounting folks, to get out and sell.
18th Street: My own business has declined twenty percent since the Wall Street implosion. How do I grow sales in a bad economy?
Seth Goldman: Every business is different, but one of the best ways to build sales is to focus on the customers you already have. Whole Foods is our top account, but when we analyzed the regional data, we realized that we sell three times as much tea in the Mid-Atlantic stores as we do in the Northwest. So we stepped up our focus on that region by scheduling more samplings and merchandising support.
Rockville, Md.: What does sustainability mean to your organization?
Seth Goldman: For us sustainability is a continuous effort to lighten our environmental footprint. Organics is a central part of it, but so is our packaging. Just this month we are shifting to a new plastic bottle that is 22% lighter than our previous bottle. We are also launching our own internal sustainability working group to focus on projects such as extending the life cycle of our tea leaves and preparing an annual report to hold ourselves more accountable along all the different ways we impact the environment.
Ellicott City, Md.: How did you fund your company at the beginning? Did you rely on friends and family? Did you ever take out a bank loan and was that scary?
Seth Goldman: In the very beginning my co-founder Barry and I relied on funding from the only people we knew who couldn't say no -- ourselves, our parents, my sister and Barry's college roommates. Once we started selling, we were approached by consumers who loved the product and wanted to become angel investors. We've relied on bank financing for more than seven years, and indeed it was scary to have to personally guarantee loans (and something I still have to do today) but I realized that if Honest Tea didn't work out, I'd have more than bank loans to worry about!
Rockville, Md.: Do you conduct focus groups to better understand your product? Do you think that's something a micro business should do or is it a waste of time until you grow?
Seth Goldman: Every once in a while we'll do paid focus groups. They're useful if we want to learn about a particular ingredient, or label idea. I think they can be misleading when you're trying to gauge the response to taste -- that's best done on a one-on-one basis. When we are trying to gain a sense of how people respond to a new product, we enlist our sampling teams to get feedback during their samplings. As a result, we can get responses from hundreds of people within 24 hours.
Woodbridge, Va.: Do you think it helps a business to give to charity or become tied to a charitable event - not just for doing good but also for recognition? What has HonestTea done that way?
Seth Goldman: Every year we give hundreds of thousands of dollars worth of product to charitable events. For us, product donations can be an effective part of our marketing strategy -- cold samples in the hands of our target-consumers where we benefit from the halo effect of supporting a good cause. Like many early stage companies, we aren't in a position to donate money, so I think the question of when and what to donate depends on the nature and life-cycle of the business.
Bethesda, Md.: Is Honest Tea going to move to Atlanta?
Seth Goldman: We have no plans to leave Bethesda, and neither do I!
Silver Spring, Md.: How do you motivate and keep your team of samplers enthusiastic and energetic - i can't imagine it's the most high paying job?
Seth Goldman: One of the very cool benefits our samplers enjoy is that they get to be on the receiving end of most of the enthusiasm our consumers have for our products. So though their work can be physically demanding and even a little repetitive, it's always invigorating to feel like you're connecting with people who share our passion for our mission. In addition, we do a lot of promoting from within, so there are opportunities for advancement, and they get all the tea they can drink!
Seth Goldman: Thanks for all the great questions. Please help spread the word -- we are still a local company and rely on our customers to help spread the word!! Honestly yours, Seth
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