PODCASTS / E80
OCTOBER 15, 2022
Welcome to Episode 80, Why I’m Not Surprised That Coke Shut Down Honest Tea.
Earlier this year, Coca-Cola chose to shut down most of the Honest branded beverage business, the tea side of it, that it acquired from Seth Goldman years earlier. Shutting down an acquisition is a rare decision in CPG firms. Often, leadership tends to harvest these businesses somehow to get their money back. The surface-level explanation we receive from the company has something to do with needing the distribution space immediately for other businesses. And presumably, these other businesses command higher-priority access to the red trucks, because they’re either more profitable or had significantly more upside potential in the eyes of bottlers and KO leadership. I’ll come back to the latter in a bit.
My prior experience consulting for public beverage companies suggests that it is hard for large firms to scale premium-priced acquisitions internally, and hard for them to build large businesses from scratch as well. But the difficulties doing either are mainly political and not inherent to the talent or capabilities in the building. Successfully scaling up any brand tends to occur when C-level leadership has directly ordered sales, marketing, and R&D to make something happen jointly. Things tend to go sideways when the idea originates in just one of these three silos. My favorite example of Big Beverage, who some of you probably can’t stand, doing it right is Simply Juice, founded in 2001, inside the Minute Maid division of Coca-Cola.
Simply is one of the most successful internal brand incubations ever pulled off at a public beverage company. The brand innovated a technically-unique process to blend random oranges from multiple sources into a super premium, consistently tasting result. Minute Maid leadership was smart enough to put it under a new trademark, at a significant initial price premium per unit, i.e., they did not just turn it into a Minute Maid line extension. At over $800 million in annual sales today, Simply Orange is the country’s number two orange juice brand. The entire Simply brand yields well over $1 billion in annual revenue for Coca-Cola. So why didn’t Honest Tea wind up like Simply?
Coca-Cola used its Venturing And Emerging Brands Group to make a $43 million minority investment in Honest Tea in 2008, when the brands’ trailing revenue was only about $23 million. Think about those numbers. Honest Tea’s primary benefits were the cash and potential distribution access via Coca-Cola. In 2011, Coca-Cola made an unusual decision for a public company. It bought the rest of the Honest business when it was only around 70 to $80 million in annual revenue. This is quite early for new brand M&A in CPG, especially if we look at the acquisitions of other beverage companies like Fuze, Snapple, Glaceau, Bodyarmor, Naked Juice, Core, et cetera.
In 2011, Honest was a phase four early-stage business, and this is the phase when growth is not the challenge; it is a brand’s growth rate. Phase four is a typical deceleration period for new brands that are not firing on all cylinders. Although Honest Tea had grown exponentially before 2008, the 2008-2011 top line numbers available publicly to me suggests the first warning sign of a long-term problem for a premium-priced beverage brand inside a public company’s vast holdings. During this period, Honest witnessed a deceleration to a 45% CAGR. When viewed from inside a public company like Coke, this is not lousy growth, but it’s a yellow flag to me. It’s easy in phase four for a confident founder to point to lack of distribution as the business’ primary growth problem. This is because premium-price brands generate 50 to 200% more revenue per point of ACV than large iconic brands in the same categories. In this case, Lipton. So they routinely get to $100 million with only 30%, 20%, and sometimes even 15% ACV.
In most cases, there appears to be tons of upside in distribution. No doubt the impetus to fully acquire Honest in 2011 was to get it access to the red trucks, or at least try to do so. But distribution is not the only challenge for early-stage beverage brands. The scale of the long-term audience for the brand is another challenge, as is the ability for the brand to relax its average unit pricing to unlock less frequent-using households. At premium prices, the productivity of every additional point of ACV past 30 to 40% of MULO ACV in all outlets, usually declines. Finding ways to cut costs, to maintain margins as you reduce unit SRPs is critical in the nine figures. Yet premium brands tend to rely initially on expensive ingredients in the global supply chain. The challenge becomes reducing their cost with scale. Honest Tea’s fair trade organic tea was undoubtedly one of these expensive ingredients, but quickly lowering the cost of agricultural commodities by 20 to 30% requires a substantial increase in volumes.
And the killer attribute for Honest Tea was neither organic nor fair trade in my opinion. It was the brand’s low sugar volume per bottle and its noticeably lower sweetness. It actually tasted like tea. Seth Goldman achieved both without industrial additives of any kind. And today this design trifecta doesn’t seem very innovative in the category after the rise of Teavana RTD drinks, Gold Peak unsweetened, and Pure Leaf teas. But in 1998, the average RTD tea beverage, Lipton, Arizona, Snapple and private label was loaded with sugar, corn syrup and all manner, blah, blah. There was very little tea at all in these bottles, nor was it of the same quality found in emerging bag tea brands like traditional medicinals, Yogi or Numi. Honest Tea’s design trifecta was years ahead of its time in 1998 in RTDT, probably too far ahead of its time.
But it was 2006 before the initial minority investment, when the irony of Honest Tea’s later acquisition becomes clear in retrospect. In that year, Coca-Cola launched Gold Peak, its take on a premium brewed tea with apparently a definable origin in Kenya, featuring an array of sweetness levels, sweetened, unsweetened, lemon, diet, and green tea. Gold Peak grew rapidly in the red truck system offering Coca-Cola a broad platform to grow an ice tea brand. It wanted to compete with Unilever and Pepsi and the timing of this explosive growth couldn’t have been worse for Honest. During Gold Peak’s nine year journey to $1 billion in 2012, Coke launched another tea business extended from the Fuze brand purchased earlier from Lance Collins, and Fuze tea became a $1 billion ready to drink tea brand in just three years. This gave Coca-Cola now two billion dollar plus ready to drink tea brands. Fuze for the masses and Gold Peak for more premium discerning consumers.
Although Honest has much lower maximum sugar content in its flavored UPCs. The symbols of organic and fair trade made the brand a niche offering in 2011 to retail buyers, and definitely to Coca-Cola’s bottlers and their red truck drivers. The real issue that Honest Tea faced, I believe, is that Coca-Cola simply had better performing higher profit, ready to drink tea brands growing like badass crazy.
I’ve studied emerging symbolism in premium early stage brands for a very long time. And organic folks is simply not a meaningful symbol in beverages outside of fluid milk. This is because organic requires a broadly disseminated consumer fear of impurities in a category supply chain to have any power. And this is why organic sells mostly in produce, dairy, and eggs. If organic Pop Tarts seem like a stretch to you, so should organic tea. Fair trade is much more compelling than organic because poor labor conditions on tea and coffee plantations have received broad coverage in the past 20 years. Fair trade chocolate specifically has done a lot of this work in marketing, the fair trade attribute. However, neither organic nor fair trade connect to powerful large scale consumer outcomes in beverage consumption. They are moral attributes, signaling moral outcomes at best to drive what I have found is mainly added loyalty in the medium term.
Honest Tea’s key scalable attributes were premium tea flavor and low sugar content. Low sugar content remains a long term mega trend in soft drinks to this day. In fact, it’s only getting more powerful as it connects to weight management and blood sugar regulation outcomes. I believed Honest Tea was a casualty of several factors, lack of a real need for another big tea brand at Coca-Cola by 2015 entering Coke through the absolute wrong doorway to be taken seriously in its distribution system and touting on the label ultra niche attributes that just don’t have a large enough of a committed audience even now in 2022. And finally getting acquired way too early in the life cycle of any new beverage brand. I believe that Coke made the right decision given its very narrow public company of priorities.
Why do I think this? It’s most likely never would’ve scaled Honest Tea much farther in the ready to drink tea space than it already had because it’s a lower margin business than the two $1 billion brands it already owns. And because for this reason, it just won’t command a serious consumer marketing budget and it is marketing that separates the brands that get from 100 million to 1 billion from those that stall before 300 million and flounder. Nor would it have commanded enough attention from Coke R&D to put out a custom multi serve size carafe that helped explode the volumes of Gold Peak or even a non-custom sized carafe.
That’s all I’ve got today folks. And as always remember, be safe out there.