Coca-Cola invests in Eli-headed company

Armed with five borrowed thermoses and tea brewed in his kitchen, Seth Goldman SOM ’95 along with School of Management Professor Barry Nalebuff set out ten years ago to bring social responsibility to the beverage industry. Now, with the backing of a soft drink superpower, their operation has morphed into Honest Tea, a multimillion dollar corporation.

Earlier this month, Honest Tea announced that Coca-Cola had purchased a 40 percent stake in its business for nearly $43 million.

Honest Tea, touts its fair-trade, organic ingredients and a low-sugar recipe in advertisements and on labels. Goldman, the company’s president and “TeaEO,” first got the idea for Honest Tea while a student in Nalebuff’s class.

At the time, when the class was examining a case study of Coca-Cola and Pepsi, Goldman and his professor began to ask questions about why the beverage industry was essentially divided between sugary drinks and water — with few intermediary options.

Several years later, Goldman contacted his former professor, who had just returned form a trip to India studying the tea industry, with a vision for a company that would fill that divide. The pair decided to produce moderately-sweetened tea — and Honest Tea was born.

Within a year of launching the business, Goldman and Nalebuff offered the first bottled organic tea and, soon, they began selling fair-trade tea, as well.

When Coca-Cola purchased its stake in the company, many loyal drinkers expressed concern that the company was “selling out,” Goldman said. But both Goldman and Nalebuff stress the company will maintain the same leadership and standards. They said they will use the new infusion of cash to expand their business, and will not compromise the company’s commitment to social responsibility.

Goldman credits his SOM experience with opening his eyes to socially-responsible business. Before enrolling at Yale, he worked for nonprofit organizations, and had intended to return. But by the time he received his MBA, he had changed his mind about his future career path, he said.

“SOM awakened me to social responsibility in the for-profit sector,” Goldman said.

SOM Dean Joel Podolny said the school prides itself on the academic and professional relationships fostered in the school, relationships that he says leads to successes like Honest Tea.

“Honest Tea is a great Yale SOM story,” he said in an e-mail. “It reflects how close the faculty work in partnership with the students, and it shows how ideas and insights from the classroom can yield innovations and organizations with a real-world impact.”

Goldman and Nalebuff have donated two percent of the company to the School of Management.

In designing Honest Tea, Goldman and Nalebuff were looking to find a middle ground between drinks like Snapple, which Nalebuff calls “liquid sugar,” and water. Their approach enabled them to produce drinks that are sweet but not overly so, with a caloric content ranging from 0 to 50 calories per serving, half that of other bottled teas on the market.

“We found we could increase taste by decreasing the amount of sugar,” Nalebuff said. “It was a case of diminishing marginal returns. We ended up with something that was healthier and better-tasting than other drinks.”

Initially available only in specialty stores such as Whole Foods, with the recent investment, the company plans on increasing its presence in mainstream retail locations. In New Haven, Honest Tea is currently available in locations such as Durfee’s, Gourmet Heaven and Edge of the Woods.

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