Honest Tea FLAE Professor Byrde May, 2011

Retrospective, your advice on what HT should do in terms of Strategy and Resource Acquisition based upon the point in time of the case scenario.

FLAE May 04, 2011

Case Study: Honest Tea

The story of Honest Tea begins with the future founder, Seth Goldman, jogging through the park on a hot, muggy day. After completing his run, he decided to go into a local convenient store to purchase something to drink. After trying a few ice-tea and sports drinks, he realized that none of them actually quenched his thirst. It was then when Goldman realized that the beverage industry was missing something.

Goldman proceeded to contact his former professor at the Yale School of Management, Barry Nalebuff. Nalebuff and Goldman discussed various beverage ideas that could fill the need in the market before settling on the original idea for Honest Tea. The premise was that there was a space between supersweet drinks and flavorless waters, in the ready-to-drink beverage market. After further discussing their

solution, the two team members decided on the final product attributes. Their drink would be a healthy alternative drink that would provide genuine, natural taste, without using artificial sweeteners.

Honest Tea was officially founded in February 1998, by Goldman and Nalebuff, who both personally invested $300,000. The initial start-up funds were used to prove the concept, define the product, and land distribution agreements. An additional $217,500 was invested by family and friends shortly after the start-up of the company. Because no market for this type of drink existed, the pre-money valuation was assumed to be zero for all of the initial financing.

By late 1998, Honest Tea was in need of another round of financing. Money was needed to expanded production capabilities and push distribution into several new channels. While searching for other investors, Goldman discovered there were already satisfied customers, who were so pleased with the product, that they were willing to invest in the company. Through this round of financing, Goldman received $1.2 million from helpful customers. With the additional financing, healthy sales figures, and aggressive projections, Goldman placed a pre-money valuation of $4 million on Honest Tea.

The next round of financing started in late 2000, when Honest Tea began discussions with a venture group. The venture group wanted additional funding from existing investors before jumping into an investment with Goldman and Nalebuff. The team responded by raising $1 million at $8.5 pre-money valuation

Goldman forecasted that the team would need an additional investment of $2 million to begin making a profit. The resources needed and capital requirements will be discussed at greater length later in this study. The team emerged at a crossroads, where they were given two options. The options consisted of receiving funding from either a venture capital group or an angel investor group.

The venture capital group valued Honest Tea anywhere between $5 and $7 million; although, in 2000 the financing raised a pre-money valuation of $8.5 million. But, Angel investors would be the most appropriate course of action to secure the capital needed. Honest tea did not seem to have a problem raising the sufficient capital needed to attain their goal. During the initial search process for potential angels, Goldman returned to a pile of e-mails he had received from loyal customers. Customers who had tried the tea loved the product so much that they responded by sending e-mail to Goldman praising the cleaner refreshing taste of Honest Tea. Several satisfied customers even wrote that they would consider

investing in the company should honestly need financing in the future. Goldman was pleasantly surprised to receive commitments for $1.2 million. That round placed a pre-money valuation of $4 million on the Company. Nalebuff's novel financing structure help to avoid contentious discussions about what the value of the company should be in that round. The financing structure allowed the owners to exercise warrants, and give a large fraction of the company to them if the company did not do well.

According to Honest Tea's mission statement they seek to provide bottled tea that tastes like tea- a world of flavor freshly brewed and barely sweetened. They seek to provide better-tasting, healthier teas the way nature and their cultures of origin intended them to be. They strive for relationships with customers, employees, suppliers and stakeholders which are as healthy and honest as the tea they brew. So they continued their successful venture.

Year three (2000) put Honest Tea into the tea bag business in addition to their bottled beverage business. They added another organic variety, Jakarta Ginger, in the summer months and launched eight varieties of tea bags (five organic). Honest Tea then became the fastest-growing bottled tea brand in natural food stores (SPINS) with sales weighed in at $1.9 million.

In 2003 they launched two new flavors, Peach Oo-la-long and Green Dragon Tea and reformulated Lori's Lemon to create a new line of "a tad sweet" teas. Peach Oo-la-long, the first Fair Trade certified bottled tea and Green Dragon Tea were the two most successful product introductions to date and the two most successful new beverages launched in the natural foods industry in 2003.

In 2004, they gained full USDA organic certification on all twelve varieties of bottled tea and eight tea bag varieties. With this certification, Honest Tea became the only tea company to offer an entire line of organic bottles and bags. They introduced a line of tea in PET-1 Bottles which was met with rave reviews and won several packaging awards. The tea bag line was re-designed to include individually overwrapped bags in response to requests from foodservice accounts. The company was again listed on the Inc. 500 list of fastest growing private companies.

In 2005 Honest Tea's first white teas were introduced in both the glass and PET bottle lines. These included Mango White Tea, Pearfect White Tea, and Vanilla Mint White Tea. Heavenly Honey Green was

also introduced. In May, the company made its first foray into a non-tea product with the introduction of Honest Ade Limeade and Cranberry Lemonade organic citrus quenchers

During 2006 The Honest Tea and Honest Ade lineups expanded even more with the addition of Pomegranate Blue (which became one of their top-selling varieties in a matter of months), Just Green Tea and Just Black Tea, two unsweetened fair trade teas. The "Just Teas" barely hit the shelves before being named a Clear Choice Award winner by the Glass Packaging Institute for excellence in packaging. The July issue of Consumer Reports runs a feature story on bottled teas and selects "An Honest Winner", Lori's Lemon gets the #1 ranking. Sales hit $13.5 million.

2007 welcomed new investors and board members with the launch of nine new products. New flavors that have already hit the shelves include Pomegranate White Tea with Aa and the newest Honest Ade, Orange Mango with Mangosteen, both in plastic, and Sublime Mate (Honest Tea's first yerba mate drink) and Pomegranate Red Tea with Goji Berry in glass. Our Just Green and Just Black are the first of our teas available in 64-oz. bottles. In the spring they launched the much-anticipated new line, Honest Kids, with three flavors of low-sugar organic thirst quenchers - Goodness Grapeness, Tropical Tango Punch, and Berry Berry Good Lemonade!

Honest Tea celebrated their 10th anniversary in February 2008 and also announced that The Coca-Cola Company purchased 40 percent of Honest Tea, presenting opportunities for even further growth and expansion nationwide. Five new flavors included Citrus Green Energy Tea, Peach White Tea, Lemon Black Tea in 16.9 oz. PET bottles, as well as Citrus Spice Decaf and Jasmine Green Energy Tea in 16 oz. glass bottles. Consumer Reports again ranks Lori's Lemon as the best bottled tea in its May issue.

In 2009 Honest Tea continued to push the envelope of sustainability by introducing a new plastic bottle that is 22 percent lighter, conserving over a million pounds of packaging material from the production line each year. The first few tries weren't perfect, as they dealt with dented bottles and puzzled consumers. They were awarded Greenopia.com's coveted 4-Leaf Rating "the greenest beverage company" and partnered with the Sierra Club for a national marketing program. They launched two new Honest Kids varieties, Super Fruit Punch and Appley Ever After, which earned its name from an online contest inviting kids to submit imaginative names online. They launched Honest Kombucha an innovative line with active probiotic cultures that promote digestive health. Additionally, they introduced Mango Green Tea, and expanded their mate offerings by creating Honest Mate, with two new varieties, Agave Mate and Tropical Mate. With their support, Bethesda Green cuts the vine on a new green business incubator down the street from headquarters. Sales hit $47 million.

Rachael Miller ~ Chris Galasso ~ Chris Carlino ~ Hurley El ~ JJ Vogel ~ Jeff Heller