ANALYSIS: Coke Seemed to Do It Right This Time with Honest Tea It would have to qualify as landmark moment in history of bev innovation: Coca-Cola’s closing today of acquisition of Honest Tea, which left some of earliest-stage investors with 20X return on their capital. As anticipated, KO bought 60% it didn’t already own of co that did about $73 mil in gross sales in 2010 and is well on track to break $100 mil in 2011. In contrast to approach in many prior efforts to buy its way into innovative side of biz, KO this time started with minority investment 3 yrs ago, allowed Honest Tea ceo Seth Goldman broad autonomy in determining product strategy and migration to bottling system, and seems determined to give founder meaningful ongoing role. As anticipated, HT will remain based in Bethesda, Md, and Goldman is reinvesting substantial share of his buyout back into co as means of motivating himself to maintain operating intensity that has given Honest Tea brand a shot at eventually attaining $1 billion sales, Coke’s benchmark for new-brand success. Is it risky not to collect his winnings and scram? In conversation today, Seth jokingly paraphrased Mark Twain’s advice: “Put all your eggs in one basket and watch that basket.”
During 3-yr courtship, “we demonstrated we’re capable of doing that (operating biz effectively) and they demonstrated that they’re capable of supporting us,” Seth said. “We learned to live with each other and don’t expect big surprises going forward.”
Even execs at rival brands have acknowledged to BBI that both Goldman and his overseers at KO – notably, Venturing & Emerging Brands chief Deryck van Rensburg – have played their hands shrewdly. KO has allowed HT to undertake gradual transition to bottlers, parachuting substantial share of staff to insure that bottler in new market can experience brand ethos, then moving on to next. It’s retained separate glass-bottle line and distributor, UNFI, for natural foods retailers who’re often averse to having red truck parked anywhere in vicinity, avoiding mistake made on Vitaminwater. And KO has allowed co to venture even into arcane and possibly risky segments like yerba mate and kombucha as way of maintaining cred as innovator, not to mention greenlighting expensive move into 100% Fair Trade certification.
For his part van Rensburg, who came into post a few years ago with little knowledge of noncarb side, says HT has served as effective learning lab, encouraging KO to obtain organic certification at 3 facilities, establish sophisticated tea brewing system at Mass bottling plant and expanding sustainability initiatives. “All of these efforts reflect why VEB has chosen to invest in entrepreneurs like the team at Honest: they provide a source of innovative ideas and energy that enhance our own efforts,” he said. In intriguing twist, Honest Tea will put its natural-channel unit to work selling other, unidentified VEB brands to segment. VEB is investor in Zico Coconut Water and has launched its own brands under names like Vio, CasCal and Sokenbicha.
Overall, KO’s stewardship of HT investment seems to rep encouraging endorsement of new approach that KO ceo Muhtar Kent has expressed on coupla occasions: to eschew risky multibillion-dollar acquisitions of more-established cos like Glaceau – which plateaued almost immediately – in favor of getting into innovative bevcos at earlier stage and finding way not to screw up their continued development.
Cos released few details of transaction and transition. But key mentors Barry Nalebuff, Yale prof who cofounded co, and Stonyfield Farm ceo Gary Hirshberg, will step down from board while retaining some advisory role. Tho there’s been speculation that Goldman aspires to broader sustainability role at KO, that will have to wait for now – Seth said he’s got his hands full managing Honest Tea.