Case Study: Honest Tea Case 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 seven years ago. Today Honest Tea sells twelve different kinds of bottled iced teas as well as a growing line of bagged and loose teas. 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. 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. Case Analysis 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? 2. Look at the competitive matrix, what are the competitive advantages? Which advantage is most important to you as a consumer and why? 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’? 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? 6. What are Honest Tea’s competitive advantages?
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