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When Seth Goldman and Barry Nalebuff, co-founders of Honest Tea, set out to make a tea that they would want to drink, they knew they wanted to create a product that wasn’t too sweet and build a brand that was socially responsible and environmentally friendly. But they had no idea what it would take to get the tea to market. Their new book, Mission in a Bottle: The Honest Guide to Doing Business Differently and Succeeding, tells the story of their start-up in a graphic novel format. Nalebuff is a professor at the Yale School of Management; Goldman, a graduate of the school, is one of his former students.
Recently, Knowledge@Wharton had an opportunity to talk with Goldman and Nalebuff about how they created a financially sustainable company that serves a mission, how they navigated the beverage distribution challenges, why they decided to sell the company to Coca-Cola — and how they did it on their own terms.
An edited transcript of that conversation follows.
Knowledge@Wharton: The simple answer to why you started Honest Tea — and it’s on all of the bottles — is that you were thirsty. You talk in the book about how you wanted to create a beverage for people like you, who thought most of what was already on the market was too sweet. But what was it about tea that really captured your imaginations, that told you this was the venture you wanted to pursue as entrepreneurs?
Barry Nalebuff: Tea is really one of the world’s healthiest foods. It’s full of antioxidants, flavonoids. It’s interesting; it’s culturally authentic. There are lots of different varieties. It’s a truly gourmet experience, and great tea only costs a nickel a cup. So the question is, could we do for tea what Starbucks had done for coffee?
Seth Goldman: On top of that, tea is produced in some of the poorest countries in the world and consumed and enjoyed by some of the wealthiest. That means you have an opportunity to create wealth at the community level, in communities that really need that opportunity. You can do it in a way that isn’t charity, but that is driven by the market. That means it’s sustainable.
Knowledge@Wharton: One of the major themes that I saw running through the book was the sheer number of variables that you had to think about when developing a product and then getting it on the shelves. On the one hand, you want to be a socially responsible and environmentally-friendly company. But on the other hand, you’re dealing with customers and their tastes and also a complex distribution network. What did you learn from trying to both serve the mission that you wanted to pursue, but also be a financially sustainable company?
Nalebuff: It would certainly be a whole lot easier if there weren’t any customers or distributors you had to worry about.
Goldman: Our business plan is on our website at HonestTea.com. We had a lot of foresight, in terms of what we wanted to create [with] the brand. What we had almost no sightline to was what it would take in terms of distribution. We learned very quickly that the beverage business is very dependent on distributors because the product is heavy. You can’t ship it through the mail, and you certainly can’t ship it through the Internet. So, we needed feet on the street, and trucks and warehouses, and bottles in warehouses, for them to get off the shelf and in front of consumers. There was a lot of work, and there were a lot of pain points along the way.
Knowledge@Wharton: In the book, you mention that you were using charcoal distributors and corned beef distributors. You couldn’t get beverage distributors because they had, in some cases, exclusive contracts with other brands.
Goldman: Right. It was just however we could get to the shelf. The traditional beverage distributors really did not give us full consideration because our product wasn’t as sweet as what they were carrying, and it was a little more expensive. They didn’t think it was going to work.
Knowledge@Wharton: One of the rules for the road that you mention at the end of the book is, don’t compromise on the big things, but compromise on everything else. But when it’s your company, and you founded it, you feel really personally connected to everything. How do you figure out which is which? Can you give an example from the Honest Tea story that shows that?
Nalebuff: Here’s a case where we compromised on a little thing. We liked the idea of having labels that were front and back, like you would see on a wine bottle or on high-end vinegar. You can easily mark the product. It’s absolutely beautiful. But the problem is that the machines that put on front-and-back labels are rarer. They use more time, go slower. Sometimes people put on the wrong back label or front label. Labels can be put on upside-down. They slip off in coolers. Even if we might like to have separate front and back labels, it really wasn’t worth it. So, we went to a wrap-around label. Not quite as elegant, but a whole lot simpler and less expensive.
Knowledge@Wharton: Can you give an example of a big thing that it was important not to compromise on?
Goldman: [It was] the idea that we wanted to have a less-sweet drink. There was tremendous pressure in the marketplace to have a sweeter drink. The beverage distributors … and even some stores said, “We’ll take this product if you’ll make it sweeter. We just don’t think the market’s ready for that.” The short-term opportunity would have been to make it sweeter. But we knew in the long term, in order to create something meaningful, we really needed to stick to that less-sweet taste profile.
Knowledge@Wharton: Can you take us through the process of developing a new flavor of tea?
Goldman: We had some more and less successful explorations there. First of all, in terms of the R&D, tea is the world’s second most popular beverage. It really is enjoyed by almost every culture, so there was no shortage of tea varieties. Our challenge was to, number one, make the tea in a way that could taste good cold. And could we make a formulation that would be accessible to a large part of the population? Then, could we make the packaging and the flavor profile something that would attract people? We had a [tea called] Peach Oo-la-long, which [is] an oolong tea. Then we got an image of Opus the Penguin from “Bloom County” from one of our investors, Berkeley Breathed, the comic book designer. That one really worked.
Then, we had a product using a honeybush tea from South Africa. We named it after the community that sourced it, Harlem Honeybush, and we made it unsweetened. That one didn’t work. People didn’t know what honeybush was. They didn’t know anything about this community. The normal association with Harlem is Harlem, New York, and that’s not a place that evokes images of tea gardens. I would say we got a better feel for the market. But it was a process.
“Tea is produced in some of the poorest countries in the world and consumed and enjoyed by some of the wealthiest. That means you have an opportunity to create wealth at the community level, in communities that really need that opportunity.”–Seth Goldman
Knowledge@Wharton: Honest Tea committed very early on to producing products that were organic, fair trade and also packaged in recyclable materials. Did finding ingredients and materials that allow you to do that get easier along the way, as those things became more popular and more of a trend among food and beverages in general?
Nalebuff: Exactly. As we started out, there wasn’t enough organic tea produced in the world to supply what we’re doing today. The good news is that the world has caught up, in terms of consumers and producers, to what consumers are demanding.
Knowledge@Wharton: There are a bunch of stories in the book about how just being in the right place at the right time with a bottle of tea ended up being a big win for the company — for example, when Barry gave a bottle to Oprah Winfrey [during a yoga retreat]. Barry, I also enjoyed the story when you took your daughter on a college tour, and you kept stopping at Whole Foods to check on the tea displays.
Nalebuff: Sure enough, there was that one person who was interviewing her for college who was drinking [Honest Tea] at the same time, which still is remarkable. It’s a lesson that some entrepreneurs don’t really get. They should have their product with them at every possible moment, because you just never know who you’re going to run into. If the right opportunity is there, and you don’t have your product, you’re not going to get a second chance.
Goldman: It is one thing when you’re opportunistic, but I’ve had entrepreneurs come and talk to me about a food business they’re trying to launch. The first question I’m going to ask them is, “How does it taste, or what does it look like?” They’ll say, “I don’t have any samples with me.” The nice thing about the food and beverage business is it’s not theoretical. It is tangible. You’re selling a real product. You have always got to be able to have that tangible product to show people.
Knowledge@Wharton: What were some of your most instructive failures when you were building the brand?
Nalebuff: I’d say the biggest is really understanding what you’re good at and not trying to do things that you don’t have a passion for. In our case, we really weren’t great at running a bottling plant. Although we had lots of good reasons to own one, at the end of the day, it was a distraction. It took away our time and our money…. In the end, when we sold it, we continued producing at the same bottling plant. It just wasn’t our headache, and it wasn’t our ownership, and it wasn’t our losses.
Knowledge@Wharton: You negotiated a deal in 2008 to give Coca-Cola a 48% stake in Honest Tea. The company became full owner of the brand two years ago. How were you able to complete the deal and feel comfortable that the core of Honest Tea would remain intact and that it would still be the brand that you meant to create when you founded it?
Goldman: Well, it was really important the way we structured the deal. When Coke first invested, they were a minority investor. That meant they had a seat at the table, but we were still running the company. They certainly helped us grow. But they also got to see, number one, how we worked together, and number two, how we continued to build a brand. When Coke had the chance to buy the company, they chose to exercise that option. But they also chose to keep the structure in place because it was working. That same structure has stayed in place through today.
Nalebuff: I don’t think we did that with an intention in mind. We were having so much fun, and we wanted to continue being in charge, growing the brand and bringing it closer to a hundred million [in sales]. But the fact that we had control for three years really allowed [Coke] to get comfortable with our style and how we were doing things. As opposed to them coming in and being able to say, “Look, we’re going to change everything today, because this is how it’s done.” They got to appreciate that, no, the way it was was just great.
Knowledge@Wharton: Coca-Cola wasn’t the only major beverage competitor that you could have encountered along the way. I think there was somebody from Pepsi who was on your board for a while. You were also in discussions with Nestlé at one point. It showed that you can’t just remain in the silo of being a small brand and not encounter these other people. What would your advice be for entrepreneurs, in terms of dealing with the major brands along the way and considering different offers from them?
Nalebuff: It’s a long process, and the fact is, it’s a small world. People really want to appreciate what your capabilities are, know you as a person and know you as a brand. The fact that we had a longtime relationship with Pepsi as a distributor, with investors from Danone and from Inventages, meant that they got a sense of how we created the products, how we did in terms of meeting our financial projections. Therefore, they didn’t have to start to get to know us [during] a negotiation, which is really not the best time to get to know someone….
“As we started out, there wasn’t enough organic tea produced in the world to supply what we’re doing today. The good news is that the world has caught up ….” –Barry Nalebuff
Knowledge@Wharton: There’s a point in the book, Seth, where it shows you responding to an example of some of the e-mails you got when Honest Tea and Coca-Cola first began their relationship. How did you deal with the backlash from drinkers of the tea who had some reservations about Coca-Cola?
Goldman: Well, we tried to have an open and honest dialogue. I did respond directly to a lot of people. But I also posted on the blog, and we put a video out on YouTube to talk about it. But ultimately, the best response was to continue to run our business the way we always have. We told them, keep an eye on us, and if you see us compromising around what we’ve built this brand on — around organics, around fair trade, around lower-calorie drinks — let us know. That’s where they have proven the skeptics wrong. Because not only have we continued to make organic drinks, but before Coke invested, we weren’t all fair trade. And today, all of our teas are fair trade. We’ve continued to move our products closer to the mission and the aspiration that we have.
Knowledge@Wharton: Where do you see the future growth for Honest Tea? Over the course of the company’s lifetime, you tried tea bags for a while. You have introduced a line of lemonade. There’s also been a line of kids’ drinks.
Goldman: Certain innovations have worked, and others haven’t. An innovation like Honest Kids is continuing to grow very impressively. It’s still growing around 40% a year. Then, we launched “Honest Fizz” this year, a zero-calorie, naturally-sweetened soda line. That’s gotten a very good reception. It’s clear that the Honest name is certainly not just about tea. It’s much bigger than that. But, we also see opportunities beyond beverages. There are other categories of food that could stand to be a little more “honest.” By that, I mean a little bit less sugar and a little bit more organic and authentic ingredients.
Knowledge@Wharton: Barry, I understand that you have a new venture that you’re working on?
Nalebuff: Absolutely. We, at Honest Tea, had this great product called “Honest Kombucha,” which is a fermented tea. It sold like gangbusters. I love the taste of it. But it turned out to be accidentally alcoholic. As a result of that, we had to discontinue making the product. But there’s a saying in software: When you have a bug, turn it into a feature. In this case, it’s literally a bug. It’s yeast. I’ve started a new company to make mildly alcoholic kombucha called “KomBrewCha.” The motto is, “Get tickled, not pickled.”
Knowledge@Wharton: One last question. The book is a graphic novel, as opposed to being a traditional-format business book. Seth, you said in the book that this was inspired by graphic novels that you have read with your kids. What did this format allow you to do that you couldn’t have done with a traditional-format business book?
Goldman: Our story has so many visual elements, whether it’s how we designed our labels, how we use our bottling plant or where we source our tea from, these amazing tea gardens. But what’s been so fun about the market is it’s not just those elements that we made vivid with pictures. We actually illustrate how the equity structure works. Doing that in a visual form helps clarify how it works.
Some of the conversations from Barry’s classroom [at Yale] use visuals about the declining marginal utility of sugar. These are things that most people wouldn’t expect to find in a business book. But they really make the story come alive. We’ve heard repeatedly from people who are delighted to find not just that they have enjoyed a business book and actually read it to the end, but their kids, unsolicited, picked up the book and got absorbed by it.
Knowledge@Wharton: There was a mention at the end that you had to work really hard to make sure there weren’t too many scenes with just the two of you sitting at a conference room table.
Goldman: That’s already a challenge, right? But even then, our illustrator, Sungyoon Choi, found creative ways to make the story come alive.
Illustrations reprinted from the book Mission in a Bottle: The Honest Guide to Doing Business Differently and Succeeding, by Seth Goldman and Barry Nalebuff, illustrated by Sungyoon Choi. Copyright (c) 2013 by Seth Goldman and Barry Nalebuff. Published by Crown Business, an imprint of the Crown Publishing Group, a division of Random House LLC, a Penguin Random House Company.