Honest Tea Challenges an Industry

When Seth Goldman, TeaEO and co-founder of Honest Tea, visited the tea garden in central China that would supply the leaves for his organic tea, he was puzzled by its remote location. Locals explained that the organic garden, located across a river with no bridge, was better served cut off from vehicles that could pollute it.

"That's when I got it," Goldman says. "What I saw as a problem, the lack of a bridge, was already a solution to another problem, that of pollution."

5 Thermoses and a Snapple bottle
Several years earlier, Goldman had seen another problem. An avid athlete, he found his post-workout beverage options were either sugary sports drinks and soda or watery drinks without much flavor.

Knowing that if he wanted something different he'd have to make it himself, Goldman and co-founder Barry Nalebuff brewed the first batches of Honest Tea in Goldman's kitchen. Goldman brought the drinks to a Fresh Fields Market (now owned by Whole Foods (NAS: WFM) ) representative in five Thermoses and a Snapple bottle with a mocked-up label. The grocery company placed an order for 15,000 bottles on the spot.

Mere months after that first order, Honest Tea became the best-selling tea in the grocery chain's 17 stores in the local metro area. This led to a problem in search of a solution: distribution.

Cheese, corned beef, charcoal...and tea?
Traditional beverage distributors didn't think the not-so-sweet tea would be able to compete with the sugary bottled teas available at the time, and declined to distribute them. So Goldman and Nalebuff got creative.

First, they worked with a cheese distributor who serviced the gourmet stores. Then, to access a local bagel shop they had targeted, Goldman and Nalebuff approached a corned beef distributor with a relationship to the store. To deliver to supermarkets, they worked with a charcoal distributor. Eventually, the tea became visible in more outlets, and traditional beverage distributors came calling. That brought another challenge.

From the beginning, Honest Tea has been run as an environmentally and socially responsible company, with a strong commitment to healthy living. The founders quickly understood that beverage distributors didn't exactly share their cause. "No matter how much commitment we have to sustainable fair trade," Goldman says, "we had to deal with traditional bottlers with different priorities."

The little tea that changed an industry
Distribution became easier when Coca-Cola (NYS: KO) took a minority share in the company in 2008, eventually acquiring the entire company in 2011. But the sale brought other challenges, including how Honest Tea could remain committed to sustainability and healthy living while working hand in hand with a conglomerate not known for either. But Goldman says Coca-Cola has committed to Honest Tea's mission, and is incorporating it into many of its own business practices.

It's just one way that the ripple of Honest Tea has caused large waves. Dr Pepper Snapple (NYS: DPS) has taken note of the popularity of Honest Tea's teas with less sugar and fewer calories, and is slowly decreasing the sugar content in its Snapple teas, as well as in its sodas. Kraft (NYS: KFT) is following suit, lowering the sugar content of its children's drink, Capri Sun, by 25%.

Honest Tea was also the first to offer organic and Fair Trade Certified teas -- offerings that are now commonplace among competitors such as Hain Celestial (NAS: HAIN) .

Thinking outside the bottle
It would be enough just to make a product that customers love, but the team at Honest Tea doesn't content easily. The company is leading the charge in full calorie disclosure on labels (rather than just per serving, which can be misleading), minimal packaging designs, creative grassroots marketing, and, of course, delicious tea. From 1998, when the tea was first brewed in Goldman's kitchen, to today, when the products are bottled in organic certified Coca-Cola facilities, this company is challenging the way people drink and its competitors operate.

Honestly, that's a good thing.

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At the time thisarticle was published Foolish contributor Molly McCluskey doesn't own shares of any of the companies mentioned. She tweets about finance and other things on Twitter at @mollyemccluskey. The Motley Fool owns shares of Whole Foods and Coca-Cola.Motley Fool newsletter serviceshave recommended buying shares of Whole Foods and Coca-Cola. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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