NFTE Entrepreneurial Case Study
Honest Tea
Mission Statement:
Honest Tea creates and promotes delicious, truly healthy, organic beverages. We strive to grow with the same
honesty we use to craft our products, with sustainability and great taste for all.
Seth Goldman likes to say that his business got started because he was thirsty. A natural-born athlete, Seth
was always searching for a satisfying drink to quench his thirst after a tough workout. While there were plenty
of sports drinks and sodas he could buy, not to mention water, none of these options ever appealed to him. So
he started to experiment.
A Hobby Evolves Into a Business Idea
After he graduated with his MBA from Yale, Seth began concocting fruity beverages in his kitchen as a hobby.
But he still was not satisfied. One day he decided to call his old business school professors to discuss the
problem. Seth‟s professor Barry Nalebuff, had just returned from India where he had been studying the
country‟s tea industry. Barry explained that beverage companies who purchased their raw materials from
Indian tea plantations did not use whole tea leaves in their manufacturing. Instead they took whatever tea
leaves were left over after the quality leaves had been packaged and used for other products, such as tea
bags. Seth and Barry had a hunch that they were circling in on an opportunity. Even better, Barry had already
come up with a name for a company that would make beverages using top of the line tea leaves. The
company would be called Honest Tea. Seth loved the name and what it represented. He hung up the phone
and resolved to continue his liquid experiments by brewing tea leaves in his kitchen until he came up with the
perfect product.
That was more than ten years ago, today Honest Tea sells over 35 different kinds beverages including glass
and plastic bottled iced teas, Honest Ade and juice pouches for students. In 2001 the company generated 1.9
million dollars in sales; in 2002 this increased to 3.2 million. Seth is aiming for a 75% growth rate each year
and at this point, the company seems to be on track with achieving this goal. So how did Seth do it? How did
this drink hobbyist succeed in competing with big time beverage companies?
Honest Tea’s Competitive Advantages
The Honest Tea team has worked hard to define the company around the features that make Honest Tea
stand out from its competitors. In Seth‟s own words “given that this is a highly competitive market, the most
important factor in our favor is that we offer a differentiated product.” A company like Coca-Cola is 1000 times
our size. What we are offering is a very strong brand that is consistent with what is in the package and very
meaningful to customers.”
For example, Honest Tea was the first brand to make a certified-organic bottled tea. What does this mean and
why does it matter? Well when a product is labeled “USDA organic” it confirms that harmful pesticides and
other toxic chemicals have not been used in growing or producing the product. Increasingly, consumers,
particularly the health-conscious, are seeking out organic goods in the marketplace.
4
Copyrighted for The Network for Teaching Entrepreneurship, 2012
Honest Tea also uses up to two/thirds less sugar in its teas compared to its competitors such as Snapple and
Arizona iced teas. Seth likes to say that his teas are “lightly sweetened.” This feature appeals to consumers
who care about their health and diet.
Socially Responsible Business
The „honest‟ part of Honest Tea extends beyond using organic ingredients. Seth goes to great lengths to
educate customers about the company‟s ethical and socially responsible business practices. For example,
Honest Tea purchases peppermint leaves for its “First Nation Peppermint” ice tea from a woman-owned herb
company on the Crow Indian reservation in Montana where the unemployment rate is a staggering 67%. By
purchasing his peppermint leaves from this Crow supplier, Honest Tea is promoting economic activity in a
place where many people suffer from poverty and joblessness. A percentage of the revenue from the sale of
this product is donated to non-profit organizations that help at-risk Native American youth.
Seth wants customers to know that when they buy an Honest Tea beverage, they are also doing something
good for the community. As Seth puts it “A commitment to social responsibility is central to Honest Tea‟s
identity and purpose. The company strives for authenticity, integrity, and purity in our products and in the way
we do business.”
Staying in the Game
The beverage market is highly competitive but Honest Tea appears to be thriving because it is delivering a
differentiated product that customers feel good about buying and uses organic ingredients. Comparable
brands like Snapple, Lipton, and Arizona Iced Teas may be 25 – 50 cents less expensive per bottle but do not
offer the same quality and health benefits. However some high end tea purveyors such as Tazo iced and
loose teas, sold exclusively at Starbucks and other retail locations, may pose a threat to Honest Tea in the long
run. In order to stay in the game, Seth needs to continue to enhance and market the features that make
Honest Tea a specialty product. In February 2008, Honest Tea celebrated its tenth anniversary and accepted
an investment from Coca-Cola to expand their production and distribution.
5
Copyrighted for The Network for Teaching Entrepreneurship, 2012
Honest Tea Case Analysis Worksheet
1.
Complete the competitive matrix below for Honest Tea and two competitors. Think about direct
competitors and indirect competitors. Are there any other factors to consider? In each color oval write in
Honest Tea and two main competitors.
6
Copyrighted for The Network for Teaching Entrepreneurship, 2012
2. Look at the competitive matrix, what are the competitive advantages for each company? Which advantage
is most important to you as a consumer and why?
Honest Tea:
Competitor A:
Competitor B:
7
Copyrighted for The Network for Teaching Entrepreneurship, 2012
3. Given what you already know about Honest Tea‟s business philosophy and practices, if you were Seth‟s
business advisor, what additional competitive advantages would you encourage him to develop?
4. In your opinion, what does it mean for a company to engage in „socially responsible business practices‟?
8
Copyrighted for The Network for Teaching Entrepreneurship, 2012
5. Assume the following. An 8 oz bottle of the following iced tea products costs:
Snapple: $1.25
Arizona Iced Tea: $1.50
Honest Tea: $1.75
Would you be willing to pay between .25 - .50 cents more to purchase an Honest Tea beverage because you
know that the company engages in socially responsible business practices and uses organic ingredients? How
much are these features worth to you and why?
9
Copyrighted for The Network for Teaching Entrepreneurship, 2012