Investing in True Tea Flavor

Producing strong, flavorful tea requires an infusion of quality tea leaves at just the right time. Bethesda, Maryland-based Honest Tea – already producing a line of certified-organic bottled teas – took that simple tea-making lesson to heart earlier this year, infusing its assets (liquid and otherwise) with $12 million in equity financing to expand its business from specialty markets to mainstream retailers. Stonyfield Farm Inc. and international private equity firm Inventages Venture Capital Investment Inc. each distributed undisclosed amounts toward that total, as did several beverage distributors.

“I’m quite interested in the trend toward organic,” says Inventages chairman Gunnar Weikert, who also holds a seat on the Honest Tea board of directors. “The organic mainstream market is probably a little more advanced in Europe, but from our perspective will soon hit the United States in a new wave.”

We talked to Weikert about how innovation can make a difference in any market (even an overcrowded one) – and yet why it isn’t enough for lasting success:

BevNET IBQ: So we hear you’re not a fan of most bottled iced teas.

Gunnar Weikert: Drinking most U.S. iced teas is like drinking liquid candy. That’s the way the sugar content is. There’s actually a good story if you dig a little deeper – why does bottled tea have to be so sweet? It might have to do something with consumer suggestion, tastes and so forth. But the reality is that they brew using the leftovers from the tea, the tea dust, basically. It’s is so bitter that you have to add so much sugar to hide that. Otherwise, nobody would drink it. It’s only by brewing from fresh tea leaves, as Honest Tea is doing, that you have the opportunity to reduce the sugar content and let the tea taste come through.

Was that a factor in your decision to invest in Honest Tea?

Product quality was first and foremost. And Honest Tea has such quality. Organic can mean an awful-tasting but healthy product, and this is a product that is good for you and has an excellent taste. Another thing that led us to Honest Tea is the management. From an international perspective, quite often we see U.S. companies that are small, but are trying too hard to be like more conventional conglomerates – they only have five or 10 employees, but already have several corporate offices like they think they are GE or something. Honest Tea is the typical entrepreneurial company starting in a very small office, all the people sitting together. Management knows what they’re talking about and they believe in their product. They’re really interested in bringing it to the market, and all that hard work and slow growth is paying off.

What other elements do you consider when evaluating a company’s investment potential?

Our general philosophy is to invest in products that are beneficial for health and wellness. That’s our key demand. So people ask me quite often, “Why, if you are so health focused, go with a U.S. beverage manufacturer?” I think you can keep on dreaming that somebody is coming with a miracle drug to the market and that a twice-a-day pill will make you lose all your extra weight. The reality is this probably will not happen. You need to explore different strategies. For young adults in the United States, 40 percent of their calorie intake is in beverages. Telling everybody to drink water, again, that’s not very realistic. But it makes a big difference if they have a choice of this liquid-candy iced tea that’s already out there or something like Honest Tea, which has a very cool taste but significantly less sugar.

Where do you like to see your capital make an impact?

We need to see that this money can accelerate the growth the company is working on, can contribute additional value. Honest Tea has been very successful in the past getting to the level of nearly $20 million in sales. We see that with additional cash we’re injecting there has provided a little more focus for marketing and advertising activities. Sales can really jump to a bigger level.

How important is innovation in the beverage industry?

Very. The majority of beverages we see are copy concepts, or riding on the wave. We are here to bring something from one city to the other, from one country to another, so I would say two-thirds of the company concepts in the beverage field we think are not interesting.

But in the food and beverage industry, it takes more than just innovation to be successful in the market. If you look into real success stories, they are not miracles where the company was established two years ago and now they’re making $400 million in sales. The most solid companies have been established years ago. You can always see this kind of inflection, the curve when everything came together: they had the right marketing company, the right strategy, and they went to the right cities and had the right sales concept. Then it took off. Before that, it’s really flat, when it was very, very hard work for the founders.

Yes, you could argue that a beverage could be successful without innovation, or with very minor innovation. Take the energy drink. There’s one energy drink after another that finds its way into the market, and basically they are copies of cold coffee or Red Bull. But I think it’s also not very helpful if companies come to us and tell us, “We know Red Bull is a big success story, we will get with our new whatever, Little Bull, 5 percent of the revenues of Red Bull.” You have to have something that is differentiating, innovative.

What kind of innovation would you look for in a crowded market sector?

For example, the original fans of energy drinks are growing up now, out of the Red Bull age. I don’t know about in the United States, but in Europe it might be a little problematic if you are a banker or some other professional, and your boss is coming into your office and you have all these empty cans of energy drinks in front of you. But your need for energy is still there, so you might want to switch into another kind of drink that has a different image, a different taste and a different perception in the market.

How else can an beverage manufacturer set itself apart?

Most companies underestimate packaging. Cool new packaging with additional consumer benefits is very, very hard to find. One very new concept that is interesting for the beverage industry; a can that is re-closable. So if you do sports – you jog or cycle – or your kids open the can in the car, or if you’re outside and want to avoid the hassle of wasps or other insects flying in, this is a solution. We’re also looking into companies that bring more healthy beverages to kids, with a nice bottle design. This concept bridges kids’ and moms’ desires, avoiding a fight in the supermarket when the kids want to buy something fancy and the moms want to buy something healthy.

Packaging in particular is something where there’s a lot of room for innovation because it doesn’t necessarily require additional cost. If you have a re-closable can that costs twice the price of the normal one, then you have a problem. But if the cost of price for the can itself would be the same including the new, re-closable lid, then you have achieved something consumers will be interested in. And that’s something we would like to invest in.

“The organic mainstream market is probably a little more advanced in Europe.”

– Gunnar Weikert