Seth Goldman never expected to take on the likes of Lipton, Nestea and Snapple.
But looking back, the 33-year-old former investment fund vice president can see how his varied experiences led to his founding Honest Tea, a Bethesda-based company that makes all-natural, barely sweetened bottled tea.
After just 15 months, Honest Tea is being sold in about 800 supermarkets across the nation, among them Fresh Fields and Graul's Markets and, soon, Giant Food.
As a State Department intern in Hong Kong, then an English teacher at a university in Beijing, Goldman learned to forge business relationships while sipping tea. While a graduate student at Yale School of Management in 1995, he'd studied the Coke and Pepsi rivalry. And he'd always experimented with juice concoctions at home.
But it took a jog through New York's Central Park on a warm fall day in 1997 to get Goldman seriously thinking about creating and mass-producing a bottled drink. Goldman and a friend he was visiting stopped at a diner after their run and found nothing to quench their thirst.
"We have to do something about this," Goldman told his friend. They couldn't be the only ones seeking an alternative to syrupy teas and colas, he reasoned.
The thought had crossed his mind in more than a passing way before. Goldman's Coke vs. Pepsi case study for a competitive strategies course at Yale had shown lightly sweetened, natural bottled tea virtually nonexistent.
He even went as far as talking with his professor, Barry Nalebuff, about creating their own. Nalebuff was intrigued, but neither followed through. Goldman went on to graduate and work for the Calvert Group, a mutual fund company in Bethesda.
Soon after his Central Park jog, Goldman contacted his former professor, reminding Nalebuff of the tea business idea. The professor, who had since done a case study of the tea industry, hadn't forgotten, and even came up with the "Honest Tea" name.
"I don't think I would have done this without him," Goldman said. "Psychologically, I was there. Then everything fell into place."
Nalebuff became a partner and investor, kicking in the bulk of the $500,000 start-up costs, while Goldman raised his share from his family and savings. By early 1998, Goldman had quit his job. The new Honest Tea president set up office in the guest room of his Bethesda home, where he lives with his wife and three young children. The kitchen became the tea-blending lab. He hired a brew master who temporarily moved into the basement.
The honest blend
Goldman came up with a blend to keep his tea "honest," using tea leaves brewed in spring water and barely sweetened with natural sugars or honey -- no powder, concentrate or high-fructose corn syrup. At 18 calories per 8-ounce serving, the tea has about one-sixth as many calories as most tea-flavored drinks. He wanted unique flavors as well, and now has seven on the market, among them an herbal cinnamon blend, a spiced Indian black tea and green tea with peppermint.
Goldman was well aware of the competition from brands Nestea, Lipton, Snapple and Arizona, which make up about 75 percent of the ready-to-drink tea market.
"So why would anyone go into this?" Goldman said he heard from naysayers. He took inspiration from Nantucket Nectars, begun on the back of a boat in Nantucket Sound. "It showed the opportunity was there if you had a product that was distinctive."
Realizing Honest Tea would need a sizable account before pitching other chains, Goldman targeted Fresh Fields, taking a thermos of tea to the chain's grocery buyer. It was the company's big break. The buyer placed a $15,000 order last spring.
Goldman had to scramble to get the first batch on the shelves by last June. First, he needed a bottling plant that would use his unconventional procedure. Some refused, citing the expense and difficulty of using spring water, tea leaves and organic sugar, then pasting, rather than wrapping, the labels, which feature artwork from the culture of origin. A plant in Buffalo now bottles the tea.
"It's really caught on," said Sarah Kenney, director of marketing for Fresh Fields' mid-Atlantic region, adding that Honest Tea met the grocer's requirement for no artificial flavors, colors and seasonings. "In our opinion, they have created a bit of a category in tea, because it's lightly seasoned, and some of the seasonings are exotic in the tea market."
The approximately 800 stores now selling the tea, at $1.19 to $2.25 per bottle, include Whole Foods Market stores around the country, Harris Teeter in North Carolina, Ukrop's and Albertson's in Florida, Waldbaum's in New York, Food Emporium in Manhattan, and Super Fresh in New York and New Jersey. Soon, the tea is to be sold at Giant Food and at Ralphs Grocery Co. on the West Coast.
Honest Tea, which has six full-time employees and recorded sales of $250,000 last year, projects sales this year of $3 million to $3.5 million.
"They seem to be on the right track," said Greg Prince, executive editor of Beverage World magazine in New York. "It's a unique product. They have apparently tapped into a desire for alternatives to the alternative, and made their case compellingly with distributors and retailers, the whole bit about social responsibility and unique flavors."
He believes the demand for the product, if less than overwhelming now, could be created.
"I'm sure there are people who are not satisfied with lemon iced teas, who want herbal, but that's a small segment," he said. "Honest Tea, if they succeed, will have created a demand for themselves."
This year, Goldman has raised $1 million in financing, including an investment from the president of his former employer, Calvert Group. That will enable the company to expand its staff, start manufacturing on the West Coast and develop a tea bag line.
"Barry and I don't think in small terms," Goldman said. "Tea is international, the second-most popular drink in the world. This should be an international company."
Already, Honest Tea has sniffs of interest from Caribbean importers. Goldman can envision expanding to South America this year. For the next few months, though, he'll be happy with a heat wave.
"The challenge for the summer is to get off the shelves," he said.
Pub Date: 5/05/99