Chapter 6
What Could Be More Inspiring Than Honesty?

In marketing terms, sugar sells. Food packagers usually find that the more sugar they can add to almost any food product, the bigger their sales. Whether it’s good for customers is another matter. Well-known nutritionist and best-selling author Marion Nestle calls bottled drinks “liquid candy,” and the harm they do extends not just to decaying teeth, but also to the obesity and diabetes epidemics that now plague the United States.

Acutely aware of the health issues, Nalebuff and Goldman were personally frustrated by their inability to find bottled drinks that weren’t overly sweet. At the same time, they were struck by the obvious market opening created by the uniform overload of sugar. Given a choice, most people don’t use more than a teaspoon or two of sugar in their tea or coffee. And it’s a good bet that few consumers, health-conscious or not, would freely choose as many sugar calories as the drinks provide. Clearly, the right product could exploit that disparity with a drink sweetened only lightly. Both men liked the idea, but Goldman, a runner who had long despaired of finding a really refreshing drink to imbibe at the end of a jog, was particularly excited by it.

After their discussion at Yale, Goldman and Nalebuff half-joked more than once about the company they would found to make a low-sugar, bottled drink. They even explored mixing natural fruit juice with carbonated water and a touch of sugar, but any drink made with real juice would be too pricey to compete in a market in which the contents of most products cost hardly anything.

The critical piece dropped into place in 1996 when Nalebuff flew to India to write a case study of the Tata Tea Company and discovered the intricacies of that country’s vast tea market. He found that what most American consumers know as tea is actually the sweepings and fannings left over after the good leaves are packaged for more discriminating palates. Particularly when used in bottled iced tea, the leavings make for a bitter, unpleasant taste. However, U.S. bottlers such as Snapple actually seek out the most astringent teas, because anything less pungent loses all flavor when mixed with 10 teaspoons of sugar.

As with fine wine, Nalebuff told me, really good tea might cost a hundred times as much as the cheap stuff. Still, even the best tea costs only pennies a pound, and a pound of tea will make 62.5 gallons of Honest Tea. “Good tea is one of the world’s cheapest luxuries,” he explains.

The business case was undeniable: A bottled drink made with quality tea would cost just a bit more than one made from the sweepings, and it wouldn’t need as much sugar to mask the bad taste. In addition, a bottler using one-tenth as much sweetener could afford to buy a better form of it—honey or maple syrup, perhaps. And a tea that promised fewer calories and a healthier drink could command a premium price from health-conscious consumers. It would be a new kind of venture, violating every fixed tenet of the bottled-drink game. So be it. Nalebuff realized that this was the product that he and Goldman had long envisioned.

By coincidence, Goldman called Nalebuff shortly after the professor returned from India, and he once again raised the subject of a subtly sweet drink. “He asked if I remembered the idea about a low-calorie beverage,” Nalebuff recalled, and wondered if “I’d ever done anything with it. I told him I hadn’t, but that now I was ready.” In short order, Goldman assumed the title of CEO (or Tea-EO, as he likes to say). “Seth has been the person who’s really completely responsible for taking the idea and making it happen,” Nalebuff graciously claims. Well, not completely: Nalebuff came up with the brand’s clever name.

Certainly, a company called Honest Tea would need to live up to its name if it wanted to truly engage its customers. That prerequisite dictated the strategy for the company’s wholly unorthodox business model. Honest Tea would be real tea, made by real people, starting with Goldman and Nalebuff themselves, and their signatures would appear on every bottle. The bottle itself would display a tasteful, understated main label, a jujitsu-like engagement tactic to make Honest Tea stand out from its garish competitors on grocery shelves. The back label would contain a chatty, slightly nerdy message explaining the drink and its history to the buyer. And, most important, truth would be the touchstone for everything that was said and done in making and marketing Honest Tea. Total transparency in all aspects of the operation would be the means of engaging with customers.

After raising $500,000 in start-up money from family and friends, the partners began experimenting with some fairly exotic brews of tea for family, friends, colleagues, and students to sample. They soon realized they were too far ahead of American tastes when one of the tasters in a focus group hired to sample the winners implored, “I know you’re paying me to drink this, but do I have to?” With that, Nalebuff and Goldman regrouped, falling back on flavors that are more recognizable and acceptable to American palates—flavors such as mint, blood orange, and lemongrass. They also gave their drinks catchy names such as Tangerine Green, Just Black, and Peach Oo-la-long.

The partners’ breakthrough came when Fresh Fields, a health-food chain that Whole Foods Markets has now acquired, sampled five flavors and ordered 15,000 bottles. After a search, Goldman and Nalebuff located a manufacturing plant that could brew and bottle their teas the way they wanted. And early in 1998, Honest Tea was in business.

However, attracting customers was a major problem in the early days. Similar to Stonyfield’s Gary Hirshberg, Goldman and Nalebuff had no money for promotion. And they suspected that advertising would be counterproductive anyway because their target customers, having been fooled by products pretending to be healthy, were deeply skeptical of any such claims. As with Hirshberg’s approach at Stonyfield, their solution was to distribute truckloads of point-of-sale samples.

“Once [consumers] tasted it and understood what we were doing, they knew right away,” Nalebuff says. The typical reaction was, “Where have you been all my life? This is exactly what I’ve been looking for.” Then the freshly minted Honest Tea drinker would go off to spread the word among friends. The transparency tactic worked so well to engage customers that Goldman and Nalebuff had to budget time to answer e-mail messages from their fans.

A Test for the Truth Tellers

With truth as its credo, Honest Tea encountered its first big test when a new drink called Zero (a name meant to dramatize the calories it didn’t contain) was ready to go on sale. The labels were literally at the printer’s shop when the partners discovered that their fermented cane sugar sweetener would add 3.5 calories to each bottle. Under U.S. government regulations, anything below 5 calories can be rounded down to 0 in labeling and advertising. No one would need to know that Zero didn’t quite live up (or down) to its name. But for Honest Tea, the discrepancy was crucial. “We couldn’t call it Zero if it was 3.5,” Nalebuff says. “So we changed the name and the product, too.” Making the drink just a bit sweeter and adding some agave juice to jazz up the flavor and boost the calorie count, the partners called it Ten.

In hindsight, that was the point at which the relationship with the customer began to outweigh the product—or, as Goldman puts it, when “[we] became more about the honest and less about the tea.” Their customers wanted a product that would make them feel good about their own bodies, their ethics, and their stand against an often dishonest world. Filling that need became the company’s top priority.

Still, Goldman and Nalebuff didn’t lose their perspective. As at every company profiled in this book, hardheaded practicality is a constant at Honest Tea. However strong its dedication and whatever the purists might say, the company never lets desire to engage with customers overrule the facts of the marketplace. Two key incidents illustrate the point:

1. Early on, Honest Tea found a delicious red tea called honeybush that was grown in Haarlem, South Africa, by a community of independent farmers using a grant from the United States Agency for International Development (USAID). “This was exciting,” Goldman explains. The story seemed custom-tailored to engage Honest Tea’s customers. “It was a real model of community-based economic self-sufficiency,” he says.

2. Honest Tea introduced its Haarlem Honeybush drink and promised a share of the revenues to the growers. But the drink didn’t sell well. “It was too much about the mission and not enough about what our customers wanted to drink,” Goldman told me. So the label was scrubbed. Angry customers sent e-mails: “How could you do this? You’re just like all these other corporations!” But since then, the company has introduced its Pomegranate Red Tea with Goji Berry that uses the same honeybush leaf, and the growers in Haarlem have received more income from that drink than they ever got from the first one. “What’s the better choice for that community?” Goldman asked—to stick with the failing label or move on?

3. In 2003, Honest Tea marketed its first Fair Trade drink, a product that guarantees its Third World growers a share of the proceeds larger than that of non-Fair Trade products even when market prices drop. The arrangement seemed to be a good way to strengthen its engagement with customers, and the company set out to calculate what it would cost to make all its drinks Fair Trade. It turned out that a wholesale changeover would raise costs by 50 percent, forcing either a disastrous product-price increase or a profit margin so small that Honest Tea’s business would be unsustainable.

4. Some staffers insisted that the company do the “right thing” by sharing proceeds at the designated rate no matter what. But Goldman argued that the growers wouldn’t be helped if sales collapsed or Honest Tea went out of business. Since then, the company has added six Fair Trade labels converting more items to Fair Trade certification each year, which do indeed help the growers without endangering the company. It has delivered on in its Fair Trade promise by carefully—and fairly—negotiating with growers on their share of the profits.

If Honest Tea had been a nonprofit venture supported by donors, it might have struggled on with Haarlem Honeybush and made a ruinous wholesale switch to Fair Trade suppliers. But with investors to answer to, Nalebuff and Goldman had to gauge the marketplace. And in the end, all parties were better off.

Similarly, the partners decided early on that they wanted their entire line to be organic. Apart from its ideological appeal, the move was a natural extension of their original push for healthy products. “Most people don’t realize that tea leaves are never rinsed,” Goldman told me. “The first time any chemicals on the leaves are washed off is when hot water is poured on them to make tea, so the chemicals end up in the tea. With organic tea, there are no chemicals to drink.”

Price wasn’t a problem—even though top-quality organically grown tea costs as much as $5,000 a ton, considerably more than even the best conventional tea. The switch worked because a ton of tea stretches so far that the organic tea in a 16-ounce bottle costs only about 4¢. What blocked the conversion initially was a shortage of the product itself. The market didn’t have enough organic tea to meet Honest Tea’s bubbling demand. But a significant number of Indian and Chinese growers had switched to organic methods after a scare about pesticides in tea swept through Europe during the mid-1990s, and, eventually, enough organic tea was coming to market to enable Honest Tea to put the label on all its drinks.

Ten years after its launch in 1998, Honest Tea comes in 18 flavors, and it’s available across the country on store shelves at Whole Foods, some Target stores, regional supermarket chains, and a wide assortment of co-op markets, eateries, and convenience stores. The company, which has grown by more than 70 percent a year for two years running, sold more than 30 million bottles of tea in 2007. Revenues totaled $13.5 million that year, putting Honest Tea comfortably in the black for the first time. Sales in 2007 totaled more than $23 million, up 72 percent. Word of mouth, much of it generated by the transparent way the company does business, drives its sales; Honest Tea advertises in only a few trade journals.

Representatives of a certifying agency accredited by the U.S. Department of Agriculture inspect production at every step—from the tea gardens to the company’s bottling plants. Each tea grower’s paperwork must be verified and pest-control methods approved, and the plantations must send a copy of their certification with every shipment of tea. At the bottling plants, organic products cannot be manufactured at the same time as nonorganic goods. Before every organic batch is processed, the equipment must be flushed out and sanitized.

Clearly, Honest Tea’s engagement with its customers inspires the company. Keeping its promise of total transparency matters more than what the company sells. Decisions are made not on the basis of scientific marketing strategies, but on how the decisions fit with the brand and what it stands for. To the company’s customers, “Honest” is now synonymous with organic and healthy products sold by an enterprise that is true to its word in every way. The power of that combination in the marketplace trumps any market research—and it puts Honest Tea in marked contrast to traditional marketers that polish their brands, not their companies, to a high patina. At Honest Tea, truthfulness about all things is the one-and-only way to engage with customers.

Being totally transparent has also enabled Honest Tea to turn every facet of its operation into an opportunity to fulfill that mission. If you’re committed to an organic lifestyle, Honest products fit the bill. If you care about fair compensation for workers on faraway tea plantations, you’ve come to the right place. If healthy eating is your cause, ditto.

Venture capitalists clamored for years to invest in the privately held company, but Goldman and Nalebuff politely declined. They had seen other companies expand too fast, with no clear plan or an organization solid enough to support growth. Not until early 2007 did Honest Tea accept a new $12 million round of financing to launch a major expansion—one that underscores the point that Honest Tea is more about the first word than the second. The company already produces a line of Honest Ades—lightly sweetened fruit drinks in flavors that range from cranberry to lime that outsell Honest Teas in parts of New York City. Now the company is introducing another product: Honest Kids juice pouches meant to compete in school lunchboxes with the ultra-sweet Capri Sun line.

The Honest Tea payroll has nearly tripled to a still-lean 48 people, and the company has moved into big new offices outside Washington, DC. Tellingly, however, the new digs look and feel like the old ones, with an open layout and no private offices. And the partners still make decisions to fit the brand promise, not scientific marketing. For example, Honest Kids juice pouches have a full day’s supply of vitamin C and only 40 percent of the calories of the rival Capri Sun pouches. If the competing lines had been tested on kids in focus groups, Goldman told me, there would have been no contest: “They would have said, ‘I like Capri Sun better.’ Well, no kidding; it’s loaded with sugar. It’s like the Pepsi challenge; of course a kid will like it better.” But at every trade show and tasting, he explained, the Honest Kids product has “blown people away. Like, oh my gosh, they get it right away. They understand why it makes sense. It hits people over the head. So I’ve never been more confident about how our product will do in the market.”

Given today’s heightened environmental and healthy-lifestyle awareness, Goldman sees nearly limitless opportunity for new products that mesh with Honest Tea’s goal of engaging customers through its transparency. They could introduce new products “across the board, wherever it makes sense, wherever the mainstream alternatives don’t meet that criterion,” he adds. “It doesn’t have to be just beverages.” Only half in jest, he recalls a customer’s voice-mail saying, “I wish you did everything; I wish you did my banking; I wish you were my neighbors.”

Any new line of Honest products must be organic, healthy, and faithful to the Honest Tea promise. That last criterion, being the most subjective of the three, is hardest to define and enforce, but, luckily, Goldman and Nalebuff have a truth detector in Goldman’s wife, Julie. She recently read the earnestly green copy on a competitor’s bottle of tea and said bluntly, “That’s such a load of crap. These guys talk about saving the world, and they’re really talking all about themselves.” She was right, Goldman told me, and her truth detector is always attuned to marketing claims, both those made by rivals and those made by Honest Tea. “We’ll work on some label language and I’ll show it to her, and she’ll say, ‘No way.’” The text gets revised until Julie approves.

Goldman and Nalebuff are committed to keeping the transparent connection with their customers. By putting their signatures on every Honest Tea bottle, they personify the product. That’s why they stay up nights answering the many e-mails from customers reading, “Dear Seth and Barry.” To “Jim” who complained that his neighborhood stores didn’t carry Peach Oo-la-long, colloquially known as Opus, Goldman recently replied: “Dear Jim, Opus is very much alive and well as Peach Oo-la-long. I am not sure why you are having trouble finding it. Please let me know where you are geographically, and we will try and fix the problem. Thanks and regards, Seth.”

And, like most of the men and women I interviewed for this book, the partners agree that they are having fun. They are engaging their customers, and two reassuring events in recent months prove it. First, Jones Soda, a $500 million company and a real threat, introduced a line of bottled tea that got no traction; second, Honest Tea now outsells Tazo, the Starbucks brand that used to be the market leader. Like Honest Tea itself, life in a fast-growing company might not be totally sweet, but it’s refreshing—not to mention fulfilling and exhilarating.

Rules of Engagement