Honest Tea Plus Coca-Cola Equals National Distribution When Seth Goldman and Barry Nalebuff cofounded Honest Tea in 1998, their idea was to “democratize organics

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Honest Tea Plus Coca-Cola Equals National Distribution

When Seth Goldman and Barry Nalebuff cofounded Honest Tea in 1998, their idea was to “democratize organics.” The two met when Nalebuff was Goldman’s professor at Yale University’s School of Management. A few years later, Goldman recognized an opportunity to market a distinctly different, healthy, bottled beverage made with organic ingredients, and he teamed up with Nalebuff to form Maryland-based Honest Tea. The entrepreneurs decided on tea because it has widespread appeal, and Nalebuff suggested the company’s name, a play on words that reflects natural rather than synthetic ingredients.

Despite the challenges facing traditional products in the soft-drink industry, Honest Tea made inroads because its beverages taste good, have fewer calories than many competing beverages, and cater to the growing market for organic foods. However, the company had difficulty obtaining distribution at first. Retailers were unsure about stocking beverages that were far less sweet than so many already on store shelves. Finally, they found a positive reception at a natural-foods grocery chain, which agreed to buy 15,000 bottles. That order helped establish Honest Tea as a serious competitor and laid the foundation for approaching other multi-store regional retailers.

Eight years after it began operations, Honest Tea had increased annual sales to $13.5 million and was shipping 1.5 million cases of bottled drinks every year. Yet when the mainstream supermarket giant Safeway was ready to stock Honest Tea’s products in all its stores, Goldman and Nalebuff realized they lacked the ability to deliver coast to coast. To make the leap from regional to national brand, Honest Tea needed a partner with a dependable distribution network to serve the entire U.S. market.

Enter Coca-Cola, which in 2008 invested enough to buy 40 percent of the Honest Tea company. Coca-Cola saw this investment as a way to enhance its own line of soft drinks. Honest Tea gained a partner with huge buying and marketing power, as well as distribution to every corner of the country. Once Coca-Cola was involved in the distribution process, Honest Tea was able to supply Safeway and a host of other large retailers. In 2011, Coca-Cola purchased the rest of Honest Tea and left the founding management in charge to continue the company’s success.

Within a few years, Honest Tea had leveraged the Coca-Cola network to expand market coverage from 15,000 stores to more than 130,000 stores throughout the United States. Its annual revenues have skyrocketed to more than $218 million as it introduces new products and enters new channels. For example, Honest Tea has begun marketing bottled lemonades and organic sports drinks. It has also created a lightly sweetened herbal tea, called Heavenly Lemon Tulsi, which is now being sold through restaurants and stores. In addition, Honest Tea markets K-Cup pods for people who want to use single-serve coffee makers to make organic tea at home. On the other hand, the company dropped its CocoaNova line of brewed cacao herbal beverages after it found that stores were confused about whether to stock these products with chocolate drinks or coffee drinks.

The new products and expanded distribution have led to double-digit growth for Honest Tea, which has now sold more than 1 billion units and is racing toward its second billion. Just as important, the company has been able to expand its purchasing of sustainably sourced sugar and other ingredients, and reinvest in the communities where its ingredients are produced.

Questions

1. How would you describe Honest Tea’s ideal level of market coverage? Why would this intensity of market coverage be appropriate for such beverages?
2. Should Honest Tea use the same distribution channels for its K-Cup pods as it uses for its bottled and canned tea beverages? Explain your answer.
3. What aspects of physical distribution are particularly important for Honest Tea’s products that are packaged in glass bottles?