SWEET RIDE FOR SWEET LEAF

Austin, Tex. has gone through some pretty big changes in the past couple of decades. Riding the wave of the dot-com bubble, it went from laid-back college town to a good-life-seeking-Yuppie-infested new economy hub. But with the growth of Whole Foods, Hewlett Packard and Hoovers, Inc. attracting MBA-types to the area, it’s gotten pretty tough on the natives. In fact, despite the benefits that a growing economy offers an urban center, things have gotten so bad for the locals that they introduced a new slogan: Keep Austin Weird.

Similarly, another home-grown Austin enterprise is about to enter the local struggle between character and capitalism: Sweet Leaf Tea. Sweet Leaf might have started out with pillowcases for teabags and water from a garden hose, but lately the only thing the pillowcases have been good for is carrying the company’s cash. Last month, venture capital group Catterton Partners cut Sweet Leaf an $18 million check, and that means the company has reached the same crossroads as Austin. Now that Sweet Leaf founder Clayton Christopher has cashed that check – and used at least a portion of those proceeds to buy out a few early investors – the question is whether the product will be able to keep its down-home sense of fun even as it tries to move into new markets.

That’s not to say that Sweet Leaf hasn’t been good at opening new markets in the past. For years, the founders would survey new retail arenas and then wiggle into delis and convenience stores. But there’s an imperative that comes with the Catterton money, an imperative to leave the nest of Whole Foods and upper-middle class sandwich joints, and fly into new cities and mainstream supermarkets.

Shoved or not, Christopher says that the new bankroll is unlikely to clash with any hippie sensibilities at Sweet Leaf. The ex-charter boat captain and college dropout has always taken a conservative approach to his business. He kept marketing budgets tight and only moved into new places when the time was right – even going so far as to say “no” to distributors that wanted to carry his product in what he felt were the wrong markets at the wrong times.

Still, if Christopher isn’t necessarily a Texas slacker, there’s a bit of Austin’s Hill Country attitude that helped make Sweet Leaf such a success in the first place. Now Christopher will couple that attitude with a venture capital partner that, he said, brings “more strategic value than just the check.”

“We went with Catterton because they have deep industry experience,” he said. The company has a record of success that includes Kettle Foods, Odwalla, and Gold Coast Beverages Distributors, one of the largest beer and beverage distribution companies in the U.S.

Still, the money helps. In addition to buying out some existing shareholders, Christopher said Sweet Leaf will use the windfall to bolster sales and marketing across the U.S., and help the company move into mainstream channels.

As the marketing team swells, they’ll use a lot of the tactics learned in the company’s early days.

Once the company targeted a market, they committed to it. Company personnel spent their weekends at retail locations passing out samples. Christopher said the only way his brand could work is if people fell in love with it.

Early on, the brand wasn’t without its problems. The kitchen-produced product spoiled in two weeks, Christopher said, and their bottles were ugly. In 2002, he shut the company down for five months to roll out a shelf stable product. As soon as he did, he said, he landed a deal with his hometown grocery giant, Whole Foods. Within eight months, Sweet Leaf was the number one selling RTD tea in the natural food giant’s southwest region.

The company’s growth has only continued since then – especially in Austin. Brad Miller, the general manager of the Austin Beverage Company, said he’s carried Sweet Leaf since 2002, when he placed an order for two mixed pallets. Now he moves 65-70 pallets a month to convenience stores, delis and Aramark food services. Christopher said his company reaps $2 in per capita sales per year in Austin, which he considers the company’s only “mature” market, and a model for exploring new territory.

“We still probably say no more than we say yes to DSD distributors,” Christopher said. Currently, he has his sights set on Chicago and the Northeast. He also wants to intensify his company’s music tie-ins – another trick that grew out of the company’s Austin origins. The city calls itself “the live music capital of the world,” and Christopher used the area’s music festivals as guerilla sampling and sponsorship opportunities. Now, he said, he wants to sponsor bands. The company received calls from Paramore and Joss Stone – who said they’re fans of the brand – but Christopher can’t say whom he might sign a deal with.

And while most of Sweet Leaf’s current tactics can be summed up as embellishments of earlier themes, the company recently introduced plastic bottles, a departure from its long-time glass-only model. Miller greeted that change with hesitation.

“There’s an impression – a belief – that good tea only comes in glass,” Miller said. “For years the only tea you bought in plastic was crap.”

But, he said, he understands why Sweet Leaf introduced plastic. Plastic bottles can be sold in more places, like schools, which is one place the product is headed.

Some students in Texas can already buy Sweet Leaf at school, and the company is working on deals with Florida and Colorado. Christopher said Sweet Leaf in schools is a “win-win” for the company. It puts money in the till and builds the product’s future customer base – though Miller isn’t certain that he’ll be serving those Sweet Leaf converts when they get their own disposable income.

Miller said he’s been in the beverage distribution business for a while, and he’s seen this pattern before. Catterton’s $18 million investment in Sweet Leaf represents one step on the road blazed by SoBe and Izze from plucky startup to Coke or Pepsi property – which takes the product ?out of the independent distribution system. Miller noted that Coke’s Gold Peak RTD tea brand isn’t performing as well as it could, and Sweet Leaf would be a fitting replacement.

But it may turn out that nobody sells Sweet Leaf Tea in the near future. The company never filed for federal trade mark protection, and when United American Industries Inc. started selling stevia sweeteners under the Sweet Leaf brand name, they sent Christopher’s RTD tea company a cease and desist letter. Sweet Leaf Tea responded by filing a suit against United American, according to the Austin Business Journal. While Sweet Leaf never filed a trademark, they did put ten years and millions of dollars behind building the brand, which, according to Sweet Leaf attorney Craig Tyler, affords the company a common-law trademark claim.

Christopher said the two companies are already talking, but he added that he doesn’t think Sweet Leaf losing its name would be a disaster for the company. “I’ve even said ‘Sweet Leaf’ has pigeonholed us a little bit because we have non-sweet flavors and diet flavors,” Christopher told the ABJ.

Regardless of the company’s name, Sweet Leaf’s board has a little experience with the startup-to-buyout plan. Christopher recently pulled in Nantucket Nectars founder Tom First. And Christopher isn’t saying “no” to the idea of joining one of the country’s beverage empires.

“Four to five years from now, we could have the option to bring in a larger investor,” he said. He added that he liked the deal that Honest Tea brokered with Coke.

Honest sold a 40 percent stake in the company to the soda giant, but the deal left co-founders Seth Goldman and Barry Nalebuff and longtime advisor Gary Hirshfeld in control of the company’s five-member board.

But the future is far from certain, and, at the moment, Christopher said he’s currently having fun with his business.

“We have a board that is very much in agreement around the strategy we’re going to use to grow the brand,” he said. “Life is good.”