Drink maker finds Coke its cup of tea

The Baltimore Sun

Organic drink maker Honest Tea has built its business on a reputation as an eco-friendly company with a do-good mission.

Now it is hoping to expand its cause with an unlikely partner: Coca-Cola.

Honest Tea says that teaming up with Coca-Cola, which recently pumped $43 million into the Bethesda company in exchange for a 40 percent stake, will boost its business - and its social mission - by taking advantage of the soft drink giant's vast distribution network and manufacturing prowess.

Honest Tea is the latest of a string of self-professed socially conscious companies to join corporate giants they once targeted. It is a dicey proposition. The companies, such as Honest Tea, often argue that their mission will be enhanced, not compromised. Critics, some their own customers, accuse them of selling out, betraying their values and allowing corporate giants to latch on to brands whose "green" aura is a valuable asset.

When natural-products company Tom's of Maine, now the world's largest producer of natural toothpaste, sold to Colgate-Palmolive in 2006, it faced such charges. So did Body Shop International, which was bought out two years ago by L'Oreal, a company its owner had lambasted as part of a cosmetics conspiracy to make women insecure.

Burt's Bees Inc., maker of natural lip balm and hand cream, faced critics when it sold a majority interest to AEA Investors, and even more skepticism when AEA flipped it to Clorox last year.

When Ben & Jerry's sold out to international conglomerate Unilever in 2000, it said the deal would result in an "even more dynamic, socially positive ice cream business with global reach." Its sales soared, but in 2005 a newly installed CEO acknowledged that it had softened its founders' social mission and pledged renewal, even launching a television campaign to help revive that image.

It can be hard for a small company to keep its identity after a merger, some business experts said.

"The cultures of a large company and a small company can invariably clash," said David Urban, a professor of marketing at Virginia Commonwealth University. "With some larger organizations, once you are brought into the fold you become a part of us instead of us becoming a part of you."

The social mission is often the hardest to maintain.

"It is easier for acquiring companies to maintain the consumer brand than it is to maintain other commitments the company made when it was independent, such as giving away a percentage of profits to community causes, maintaining a plant in a community and treating employees in a certain way," sad Jill Bamburg, dean of the MBA program at Bainbridge Graduate Institute, which offers a degree in sustainable business.

Seth Goldman, who co-founded Honest Tea with Barry Nalebuff, his former Yale professor, a decade ago, said he knew some people would not support the decision. To some, Honest Tea represents everything that Coke is not.

Honest Tea uses cane sugar and honey in its "lightly sweetened" drinks and makes some that aren't sweetened. It buys "fair trade" teas and encourages sustainable farming practices. It buys bicycles for its workers. It operates from a "green" building with recycled tea crates as tables, bamboo floors, desks from a used-furniture store and an exposed-brick wall made of bricks from an old Baltimore church.

"I understand there are concerns," Goldman, who calls himself TeaEO of Honest Tea, said in a recent interview. "I've gotten the e-mails. And I know there is risk attached here."

But Goldman said he can have more influence under Coke's arm. Honest Tea products have the potential to be in thousands more retail outlets, such as McDonald's, with which Coke has an exclusive contract. With its drinks reaching more consumers, Goldman believes Honest Tea can influence a "national shift" toward healthier diets. And with broader distribution and higher sales volume, Honest Tea will have more marketing influence to encourage sustainable agriculture among growers.

"This is about working with the world's largest beverage company to get more sustainable health beverages to people," Goldman said. "I won't apologize for that to anybody. That was our original goal, and now we have the opportunity to do that."

Under the deal with Coke, Honest Tea will operate independently, with Goldman and a separate board in control for three years, when Coke will have the option of buying a majority stake.

As larger companies start to realize that operating in a more environmentally friendly way can be as good for profits as image, many are starting to make more concessions to smaller companies in mergers.

"Living 'green' is more popular these days," said David Willett of the Sierra Club. "The reasons these companies are being purchased is because the parent company wants in that market."

When Tom's of Maine was bought by Colgate in 2006, the company asked that several covenants be included in the contract to ensure independence. Tom Chappell would keep the chief executive officer title for three years and remain a part of the company for five. Manufacturing and distribution would continue from the Maine headquarters and Tom's products would not include the Colgate/Palmolive name on packaging.

It has not always been easy for organic companies to get deals that left them in control.

Organic yogurt maker Stonyfield Farm negotiated for two years before selling a 40 percent stake to French food company Group Danone in 2001. Founder Gary Hirshberg said most bankers laughed at his request for autonomy. Group Danone now owns 80 percent of the company and Hirshberg, an Honest Tea board member, is still at its helm.

He said that being under the larger company's realm has helped. All of its products are now organic, whereas 50 percent were organic before. The company has helped increase the number of organic farms. Sales have grown from $96 million to $325 million.

"What we've been able to do is influence Danone to look at sustainability as a business opportunity," Hirshberg said.

Not all deals have turned out so well. Kraft bought herbal tea company Celestial Seasonings in 1984, but Kraft's corporate culture clashed with the laid-back atmosphere at Celestial, which traces its roots to a 19-year-old gathering herbs in the Rockies in the late 1960s. The relationship became increasingly strained. Kraft tried to sell Celestial to Lipton, but it was blocked on antitrust grounds. Celestial was then taken private in a management-led buyout in 1988, subsequently went public and in 2000 merged with natural products company Hain Group.

Silk soy milk parent White Wave ended up in a lawsuit with Dallas-based Dean Foods, the company that invested in and eventually bought Silk.

"I think there are certain risks to selling your company to one of the large guys," said Andrea Moffat, director of corporate programs of CERES, a coalition to promote sustainability in businesses. "The plus for it is you have these smaller companies that really are value-based and have the opportunity to influence a larger company and grow its base."


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