Coca-Cola Gets Honest in the US

In March 2011, The Coca-Cola Co (TCCC) exercised an option to buy Honest Tea, a leading producer of organic RTD teas in the US. The move followed a February 2008 deal in which TCCC took a 40% stake in the company. Honest Tea is a small company with less than US$100 million in sales, but has built a niche consumer following in the RTD tea category through its commitment to sustainable practices and higher quality ingredients, elements that have been somewhat lacking in TCCC’s RTD tea portfolio to this point.

Health and wellness message

RTD tea sales are expected to continue to grow in the next five years by 19% in constant value terms. This growth parallels the increase in health awareness among consumers in the US. As such, they are looking for alternatives to high-calorie carbonates. RTD teas offer a unique refreshment beverage with lots of natural antioxidant health benefits but very few calories. Although RTD tea is becoming increasingly saturated as a category, new flavours and varieties continue to be introduced. The primary source of growth in the category will come from antioxidant-rich green, white, and red teas combined with fruit flavours to maintain the natural positioning.

As one of the only brands in the US to be USDA certified organic, Honest Tea is better positioned than most to take advantage of the consumer desire for authenticity behind the health positioning of brands in the category. The company also has just moved all of its products to Fair-Trade certification, and sweetens only with organic cane sugar. These elements all lead Honest Tea to have a more premium image and price point, but one the company works hard to justify through educating consumers about tea quality and production.

A strong strategic fit

From TCCC’s perspective, the acquisition will immediately help in a category where they have been lagging. TCCC ranked 4th in US off-trade volume and value sales of RTD tea in 2010 when one factors in their licensed Nestea sales along with their Fuze and Gold Peak brands. For many years TCCC relied solely upon Nestea in the US even as competitors like Arizona rose to the top with new variants and pack sizes. Gold Peak and Fuze both inhabit the premium RTD tea space where Honest Tea competes, but do not have the same organic health credentials. Honest Tea is therefore likely to be complimentary to TCCC’s existing brands, giving the company another higher margin RTD tea to add to its market leading scale and national distribution strengths.

By the end of 2011 this acquisition will also likely push the combined Nestea and TCCC portfolio into 3rd place in US RTD tea sales, passing a declining Snapple brand. Snapple, owned by Dr Pepper Snapple Group, was a pioneer in RTD tea, but has seen its share decline for seven consecutive years since 2003 due to a lack of innovation. In March 2009 the company announced that it was reformulating its beverages to reduce calories and packaging. The new formula uses sugar, rather than high-fructose corn syrup, as the sweetener for its RTD tea products, as well as for other drinks in its portfolio. With the change the company was hoping to put more emphasis on its “all-natural” label claims. Snapple’s continued struggles highlight the difficulty of changing consumer perceptions about brands in this category. Rather than trying a similar strategy with Nestea, acquiring a newer brand like Honest Tea that has established credibility is likely to be a more successful long term strategy.

Risk of losing brand identity

Much of the appeal of Honest Tea has been through its positioning as a contrast to major market manufacturers. There is an implication in the name of Honest Tea itself that other teas not only don’t use high quality ingredients and sustainable practices, but try to deceive consumers into thinking they do. The brand does have an existing fan base, but runs the risk of alienating them by being acquired by one of the very manufacturers that has been portrayed as disingenuous. Founder Seth Goldman is expected to stay on to run the company as an independent unit within TCCC, but if the lure of production cost synergies proves too much for TCCC over time and Honest Tea begins to compromise on the elements of higher quality (and higher cost) ingredients and packaging that set the brand apart, it may find itself without much of an audience.