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A Stronger Brew?

Honest Tea Says Coke Buy-In Will Extend Its Reach

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Honest Tea's leaders anticipate questions about whether the brand is selling out, but they say the Coke deal will help them sell more fair-trade products.
Honest Tea's leaders anticipate questions about whether the brand is selling out, but they say the Coke deal will help them sell more fair-trade products. (By Susan Biddle -- The Washington Post)
CEO Seth Goldman said the deal with Coke would help Bethesda-based Honest Tea reach more customers.
CEO Seth Goldman said the deal with Coke would help Bethesda-based Honest Tea reach more customers. (By Susan Biddle -- The Washington Post)
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Washington Post Staff Writer
Wednesday, February 6, 2008; Page D01

Honest Tea, the Bethesda organic beverage firm launched 10 years ago in its co-founder's kitchen with five borrowed thermoses, sold a 40 percent stake to Coca-Cola in a move designed to extend its not-too-sweet drinks to more mainstream palates.

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Coke's investment of $43 million values the company at more than $100 million, according to a person familiar with the transaction who spoke on the condition of anonymity because the terms were not publicly disclosed.

The agreement gives Coke, which last year bought the maker of Vitamin Water for $4.1 billion, a relatively inexpensive way to continue diversifying its beverage offerings as healthy, non-carbonated drinks surge in popularity. For Honest Tea, which has yet to turn a profit, Coke provides access to a deep distribution network and a potential way into national food chains such as McDonald's and Subway.

Seth Goldman, the borrower of the thermoses who founded the company with a professor from his days at Yale's business school, will continue to run Honest Tea for the next three years, after which Coke has an option to buy the company outright. Honest Tea insiders will also continue to control the board of directors. The arrangement is intended to protect Honest Tea from floundering the way other small beverage companies such as Snapple or Mad River did after big corporations entered the picture.

Apparently Coke considers Goldman's do-good vision central enough to Honest Tea that it required the company to purchase a large life insurance policy for him. The arrangement leaving Honest Tea executives in control provides Goldman with additional peace of mind.

"Seth has done a very good job running this business, but it's still very small and it needs to ramp up quickly to stay competitive," said John Sicher, editor of Beverage Digest.

But the combination of Honest Tea, so eco-conscious that it buys bicycles for its employees, and Coke, one of the country's largest corporations, raises inevitable questions about whether Goldman and his team are selling out. Honest Tea's bottled iced tea has surged in popularity because the product is what its mainstream competition is not: healthy, less sugary, made from tea grown in a sustainable garden in India.

Goldman said he expects tough questions, but he has answers -- namely that this deal helps Honest Tea sell more of its fair-trade products, thus expanding the company's reach, not damaging it. It's still Honest Tea, he said. He is so zealous about the company's mission and ability to sell a great product that he travels to business meetings, including the negotiations with Coke, with a cooler of iced tea.

"It's easy for someone to think that you are selling out both literally and figuratively, but what we are trying to communicate is that they are buying in," Goldman said.

In a blog entry yesterday titled "The Next Stage of Growth -- An Honest Deal," Goldman said that despite growing 70 percent last year, the company still wasn't reaching as many customers as possible and that Honest Tea had the potential to be an even more powerful corporate citizen.

"When we buy 2.5 million pounds of organic ingredients, as we did in 2007, we help create demand for a more sustainable system of agriculture, one that doesn't rely on chemical pesticides and fertilizers," Goldman wrote. "But when we buy ten times that amount, we help create a market that multiplies far beyond our own purchases."

The idea: Socially conscious independents can do more good for the world with the help of big corporations than they can in fighting them. "If we are able to sell 10 times more product, we are doing 10 times more in terms of bringing a great healthy product to consumers," said Barry Nalebuff, Goldman's former business professor at Yale and the company's chairman.


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