Strike Gold in a Crowded Category

Learn how it happened for Honest Tea’s Co-Founder Barry Nalebuff

Introducing a new product to market, especially in a crowded category, takes resilience, a solid mission, and trusted partners (with perhaps a bit of serendipity). CPG brands who have a shot at becoming household names can execute on these three things: analyzing the current market data, identifying where their product will fit, and seizing every opportunity to market the brand. Join this episode of the Conception to Consumption (C to C) Podcast to hear from the co-founder of Honest Tea, Barry Nalebuff, on how he successfully brought his beverage brand to life.

With an extensive teaching background, including stints at Harvard, Princeton, and Yale, Nalebuff has shared his entrepreneurial spirit for more than 30 years . When coupled with his knowledge and educational nature, that ultimately led him to launch Honest Tea, despite the level of competition in the beverage category. From chance meetings to mile-high sales pitches, to negotiation strategies and a passion for health, Nalebuff lets us in on the why and how a company can compete within a saturated market if it’s truly reaching an untapped and hungry customer base.

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Gary Nowacki: Welcome to the podcast everyone. Today I’m excited to have as our guest Barry Nalebuff. Barry is co-founder of Honest Tea, a product, and a brand you’re all familiar with. He’s also co-author of a fantastic book Mission in a Bottle. If you haven’t read it, I strongly suggest you do, because it’s a great background story on all the success at Honest Tea and what it took to launch that company. Barry, welcome to the program.

Barry Nalebuff: Thank you. And all of our failures too, you learn more from your failures than your success.

Gary Nowacki: Exactly. And we’re going to get into that. So, Barry, maybe you can start for our listeners. Just bring them up to speed on your background. You’ve got some impressive academic credentials. You’re a professor at Yale but you’re also an entrepreneur. So, tell our listeners about yourself.

Barry Nalebuff: It is an unusual background. I’ve taught at Harvard and then Princeton and now Yale. So, like many entrepreneurs, I have trouble holding a job. I’ve been here teaching strategy, entrepreneurship, innovation, and negotiation at Yale for the last 30 years. During that time, I had a chance to meet some remarkable students and do ventures with a few of them along the way.

Gary Nowacki: Speaking of students, that was really the story of how you got together with your co-founder Seth Goldman, and the two of you launched this tea together. Is that correct? You met him when he was a student at Yale?

Barry Nalebuff: I did indeed. I was super impressed with him at the time. I remember advising him when we had the first business plan competition at Yale and he ended up winning it with a product to put test trips in diapers for urinary tract infections, for senior citizen diapers. It was a great idea and might still be a great idea. Seth won lots of money for doing it but decided that isn’t whom he saw himself as and isn’t what he wanted to devote his life to. And I applauded that decision as well. A few years later when he was ready to move on from his work at Calvert and social responsibility, I thought this is the kind of person whom I would like to be partnered with. I got the advantage of seeing him first before anybody else, and I like to take advantage of that advantage.

Gary Nowacki: So, take us back to those very first days of Honest Tea take us back to your original discussions with Seth and how you two hit on the idea of Honest Tea, and how you began the very early days of launch.

Barry Nalebuff: Sure. Well, let me take you even before that. One of the things that I tell my students is to go back to when they were a kid and their parents read them the story of “Princess and the Pea.” The story is about how the mother of a prince wants to discover if the potential dates or spouse of her son are a true princess rather than a fake princess. So, what she does is put a pea under eight mattresses, and most of the princesses don’t seem to notice, but the true princess wakes up the next morning with welts and black and blues all over her body and talks about how it was just the worst night’s sleep she’d ever had. That of course is the sign of the true princess that they can tell.

When my mother read me the story, her moral was, you’re not a princess. So, get over it and just roll over. I think that’s what most of us end up doing. We see a problem out there in the market and we kind of figure out how to adapt and go around it, as opposed to saying, maybe I’m not the only one out there who is being bothered by this. In the case of Seth and myself, we were both frustrated by the fact that in spite of all the beverages that existed in the world, we couldn’t find anything we wanted to drink.

Water’s great but boring. Diet, many people think it’s dangerous and most sodas were like liquid candy. So, how could it be that we were in this, desert in spite of all of the options? we shared this frustration and thought that maybe we could do something about it. The challenge was there should be a more normal beverage, but what should it be? And for years, I have been fixated on the idea of mixing orange juice and club soda, which by the way is pretty much what Spindrift is doing and they’re doing a great job with it. I love it.

I think it’s a great company, but I wasn’t sure that doing that was really the way to build a brand. I was a little worried that Tropicana might just use this as test marketing. So, I was fortunate that I had gone to India for other reasons and discovered that tea is completely different around the rest of the world from what we do in the United States. We had been drinking fanning’s and dust and just really terrible quality. Whereas, if you have high-quality tea, you don’t have to cover the flavor with all sorts of high fructose corn syrup and other additives.

Could we do it for tea, which Starbucks had done for coffee? That was the genesis of taking this idea of a less sweet beverage and saying let’s make it real.

Continue reading the transcript:

Gary Nowacki: So, now you guys have an interesting idea, but you refer to this problem in the book if it’s a niche that’s not yet been filled, you have a lot of skeptics who are saying, no, people don’t want that. Or how can you project revenue for something that doesn’t exist? I’m reminded of other books. You may be familiar with, The Innovators Dilemma, The Blue Ocean [Strategy], and those books talk about the same problem, which is if you are an entrepreneur with a really dynamite, disruptive idea, one of your frustrations is convincing investors and other people in the supply chain to go along with it because you’ve got no evidence that this new innovative idea is going to work. So, tell us about your struggles with that.

Barry Nalebuff: Oh, absolutely. So first off, let’s be clear when we did taste tests, we would lose to Snapple, 80-20. And for a lot of people, that was an argument against proceeding because, 20% of the market, you are a small niche. And my response is if you like Snapple, it turns out there was Snapple, SoBe, Arizona, Nestlé Tea. There were 10 products out there for you. But if you are the 20% who preferred Honest Tea, there was nothing else out there for you.

So, I’d rather own 20% of the market to myself than be one of 10 firms competing for the 80%. And so, I just reject this idea that it’s a niche because nobody out there has 20% market share. So, one thing that I look for is where are customers essentially being unserved. And the trick is to look not to survey your existing customers but to try and find ways of surveying customers who are not currently in the market.

The next thing I think is important is, are you trying to change customers’ choices? or try and change their preferences? If you go to restaurants around the country, the second most popular beverage served after water is ice. And when they bring people iced tea at a restaurant, they don’t go and add 10 teaspoons of sugar to it. And so, we already had people who were very familiar with drinking iced tea with zero, one, or two teaspoons of sugar. So, we didn’t have to change what they like. We just had to let them know that what they already like is now actually available.

Having said that, you’re absolutely right about this notion of when you see a hole in the market. Is that a hole you’re going to fall into and never come out? Or is that hole an opportunity? And being an economist, I like to use economic theory to try and answer those kinds of questions. The first lesson we try and teach our students is this notion of declining marginal utility. The first teaspoon of sugar takes away the bitterness. The second teaspoon of sugar adds a little bit of sweetness. Each additional bit of sugar is less and less valuable in terms of flavor. And indeed, if you add too much, you can ruin the product, but it adds the same amount of calories. And so, it strikes me that the right amount of sweetness is something in the 0, 1, 2 range, not in the 10, 11, or 12 range. So, when I see products in the market that are violating fundamental rules or laws of economics, which gives me confidence that this is a good opportunity, not a hole, that you’ll never escape from.

Gary Nowacki: So that makes total sense. And of course, we’ve got 20 years of hindsight to say, “Wow, Honest Tea, a fantastic product, incredibly successful.” But when you’re sitting there in the early days as an entrepreneur, trying to make payroll or drum up investors, you still can’t do market research. There is no market research. Right? One of my favorite sayings is, “all data lives in the past.” So, what does it boil down to Barry? Just courage and conviction?

Barry Nalebuff: No, you can do market research because this is not a new product to people. You can see what people are currently drinking, and then you can bring them this product, and their reaction to it when you find the right customer, isn’t just, “Oh, this is good.” It’s, “Where have you been all my life?” We had customers who were tattooing our logo on their arm, and it was just insane how passionate people were about us. We were getting emails on a regular basis.

Now, let’s be clear. There was one group of people who were huge skeptics, which were all the distributors because the fact is the type of people who work for Snapple distributors tend to be Snapple drinkers, and the type of people who worked at the bodega stocking the shelves also tend to be Arizona and Snapple fans. So, it was really a challenge to try and get the distributors and the store folks to take the product when that product was designed for them. The good news is that Whole Foods was exactly the reverse. They were in a situation where they didn’t have any products designed for their customers. We were early on in the organic days, and they were very welcoming to.

Gary Nowacki: That’s interesting. It sounds a little bit like the RXBAR story, which if you’re familiar with that, their first outlet was at exercise studios. Where those folks were looking for a quick snack before or after a workout and they couldn’t find anything that wasn’t junk food.

Barry Nalebuff: In fact, the RXBAR story, it’s something we may come to later, is one of the label designs we thought about was putting our nutritional ingredients on the front label because we were sufficiently proud of what it was that was in the product and what wasn’t, that we wanted to advertise it to the world and RXBAR did that just brilliantly.

Gary Nowacki: Yeah, they really did. The label was the product, so to speak.  Barry, if you look at the early days when you’re working with Seth on launching this company, and one of the things you talk about in the book is how you’re very different people. And I think aspiring entrepreneurs are going to want to hear about this. You talk about how you’ve got very different skills and complementary skills. Tell our listeners about that.

Barry Nalebuff: Yeah, well, one of the challenges of being an entrepreneur, unlike a student at Yale, is if you’re at Yale and you get six out of 10, right, we still give you an ‘A’, but if you’re an entrepreneur and you get nine out of 10, right and you fail the tenth thing, you’re out of business. So, you could mess up in terms of your capital structure, in terms of your marketing, in terms of your sales, in terms of your production.

There are so many things that can go wrong and the chance that one person is able to have all of the different skills is incredibly small. And so instead of trying to clone yourself and have somebody just like you, having somebody who can fill in your holes and delegate so that I do what’s best for me and you do what’s best for you, is something that allows both of us to be more successful. My job was very easy at Honest Tea. I was chairman and my job was to help Seth be successful because if he succeeded, I would succeed.

And so, early on, I was able to help him in terms of focusing on fundraising while he could be focusing on running the business. One of us might be more of an optimist, which is essential because a startup is a marathon and one of us can be more of a pessimist or realist and make sure that our suppliers really are giving us what they’re supposed to be giving us, or aren’t double billing us or are in fact going to deliver by when they say they’re in deliver, or they’ve actually signed the contract that they promised to sign.

Having a person who’s always upbeat, but also having a person who has a reality check, can be quite helpful. The set of skills that are needed is absolutely beyond what you would normally expect. I think as we look at companies today, and they’ve got people so specialized and what we really need is more Jack of all trade types, masters of many.

Gary Nowacki: Yeah. You talk in the book about one of the lessons learned is the importance of my words—not yours—is getting your fingernails dirty and really getting down into the business, all the details of the business. Expand on that a little bit, if you would.

Barry Nalebuff: I think that it’s fine to outsource as much activity, whether it be warehousing or possibly, transportation, and we outsource product. But at the same time when we’re doing that, we’re also going to the firm and watching them and making sure that what they’re doing is what they’re supposed to be doing. We worked on developing recipes. We worked on doing our own market research so that we weren’t just relying on a report of somebody else. We saw the data firsthand.

Seth and I answered every single email from customers early on so we could truly understand their feedback. We did demos and sampling. We created recipes in our kitchen. That’s one of the great things about food companies is that before you must go to high tech, you can go and experiment. A nice thing about tea compared to kombucha and other things are that if the recipe doesn’t work in five minutes, you can make a new one.

Gary Nowacki: We’ve talked a little bit about what’s in the bottle, the product itself, and what differentiated it in the book. There’s quite a bit of discussion about the packaging and there was a lot of thought that you guys went into with the packaging, multiple versions that you went through. Why did you find that the package itself was so important?

Barry Nalebuff: Our advertising budget was roughly zero. And, therefore, the best advertising we could do was what we told people about the product on the bottle. And our goal was that not only would they like the taste, but in some sense, we were going to sell them on the taste before they even started drinking. And that they would know enough about the product so they could explain to their friends, their colleagues, and their family, why this made sense and why the other person should also be drinking Honest Tea.

And what strikes me, it actually drives me to distraction, is how many companies waste valuable words, congratulating themselves. “That’s amazing,” “Energizing,” “Changes the world,” This, that, and the other. As opposed to giving them the information in a way that’s much more objective. Our original text was something in the form of, “We were thirsty.” We looked for bottled tea that truly tasted like tea but couldn’t find any. So, we made our own Honest Teas, at 1/6th the sugar of those other sugar-laden drinks. It’s a simple message of what’s the problem. So, if you were like us and you couldn’t find the drinks you wanted, we’re telling you now you can.

It’s a subtle flavor. It’s not going to hit you over the head. It’s a tea that tastes like tea. And we were the anti-Snapple. So, you gave the customers the information to understand who you are and who you weren’t. That to me is anti-marketing. Being honest about who you are, is incredibly effective. We see a lot of companies now, taking that approach. Whether it be the transparency of what each ingredient costs, in terms of a shirt, as opposed to just patting yourself on the back. The challenge, if you’d like, is when you think you have a hundred words to play. Every single word counts, and we must have done 30, 40, and 50 drafts to get it just right.

Gary Nowacki: It’s a clever concept. And I think you’re right. A lot of companies don’t use this concept of, “make the package really promote the product.” We talked about RXBAR being a great example of that. In terms of zero advertising budget, that’s fascinating. A lot of our listeners are going to want to hear more about that because we had a prior guest on the podcast, GT Dave of GT’s Living Foods, and he built a tremendous kombucha business with synergy and other product lines. I believe to this day; he’s not spent a single penny on advertising. But there’s easier said than done. Right? What do you think the secret sauce is so that you could launch and not spend money on advertising?

Barry Nalebuff: Well, it varies on your product. One great thing about Honest Tea is that the cost of the trial was pretty low. It’s kind of a buck. And so, you don’t have to make a big investment to see if you like it, or you don’t like it. The other is that we did a huge amount of sampling. And so that when we could find opportunities where we thought our customers were, whether it be, a music event, a yoga event, or a political event, we would be out there handing out samples. And once you tried it, if you liked it, you got right away what we were up to. And if you didn’t like it, great, you had other products that were available.

We could truly depend on a combination of word of mouth and sampling, as we thought the most effective way to get the message out there. Eventually, you can imagine, that now there is advertising that’s being done. But as an early startup, your distribution is sufficiently bad that you want to be targeting customers where they can buy the product. And so that’s why sampling was just such an effective strategy.

Gary Nowacki: You talked about the free promotion that comes from, perhaps celebrities and, and other venues. Why don’t you tell our listeners the story that you shared in the book about the earlier days and the 2008 presidential campaign?

Barry Nalebuff: Well before that, we had very great luck with people whose name begins with O from Chicago. So, I happened to be at a yoga retreat and two mats down for me was Oprah Winfrey. After yoga, I had some of our Jakarta Ginger and sampled it on her. She loved it. And next thing you know, we are one of O’s picks in O Magazine.

Seth said to me afterward, “Well, you know Barry, that’s great. It’s amazing. But how did you know Oprah was going to be there at this yoga place?” And I said I had no idea. So, Barry said, “Then how’d you know to have Honest Tea with you?” And my answer was, “I always have samples with me.”

For years, my colleagues, my students, and my friends would sort of joke and laugh at me because I always had a backpack or in one of my jacket pockets, a bottle of Honest Tea. Sometimes cold, sometimes not. I basically had samples so that when the right opportunity arises, you are ready for it. I can’t tell you how many entrepreneurs I’ve met who’ve said, “Great, can I try the product? I’ll have to get back to you on that.” I say a huge lesson is, if it’s small enough to fit in a breadbox, you should be carrying it with you at all times.

Gary Nowacki: Tell the story of Seth and his airplane encounter during the presidential campaign.

Barry Nalebuff: We did have one of our salespeople on either People’s Express or Southwest who convinced the flight attendant to let him practice his sales pitch over the intercom while on a flight and then actually sampled the entire plane. That was in days when you could actually bring beverages on planes. So, we had a captive audience.

Seth, at one point, did run into then-candidate Obama, who turns out, without our help, had discovered the product and was a huge fan. In fact, it even became a bit of an issue in the 2008 election, where he was tagged as being an elitist, for drinking Black Forest Berry [Honest Tea] and it’s like, well wait a second. This is an American company. We’re not doing some imports here, and when he was elected, it was in Marine One, Air Force One, and all throughout the White House mess.  

So that was another, O from Chicago in our favor, but of course, I don’t want to be a partisan. If you look at Andrew Yang’s hour-long podcast, he’s got a bottle of Honest Tea next to him. And Ivanka [Trump] is an Honest Tea fan. So, we’re happy to quench everyone’s thirst.

Gary Nowacki: That’s great. I’m here with Barry Nalebuff, who is the co-founder of Honest Tea. Barry let’s turn to some more practical issues. Once your mission was established, you had some recipes, you started to get some fans, and you had to deal with the logistics and supply chain issues. One of the problems we see for startups and new brands is finding suitable co-packers to make the product. That seems to be a very, very common product. Tell us about your experiences and the lessons learned from that.

Barry Nalebuff: Yeah. It is a challenge. Sometimes people call it a nightmare and it’s true. The fact is that when you’re small, the co-packer is worried about whether you’ll pay the bills. So, you should try and pay in advance. They’re worried about whether you’re going to be there, and should they be reserving time for you in the long run? You’re probably going to be doing runs that are below the minimum size for them.

One of the mistakes that we made that cost us over a million dollars was that we ended up buying a plant because we couldn’t get the time that we needed and the attention we needed from the plant we were originally working with. But what we should have done is gone to that plant and said, “Look, if we were to give you $50,000, would you please treat us like somebody who was 10 times our size?” Essentially make it financially rewarding for this co-packer to give you the attention that you deserve and that you need.

So, the challenge is paying the co-packer a large amount of money doesn’t seem like it’s cost-effective, but the alternative of not working with a great co-packer and having variable costs that don’t make any sense, quality control that isn’t great, it can be even worse. The truth is we needed to experiment in terms of different production, and ways of doing things. Those are all costs and the challenge, if you’d like, is sometimes the startups are trying to get things on the cheap, but they are more of a problem and more costly to work with. And so, accept it, bring it out, and make it worthwhile to the co-packers to work with you.

Gary Nowacki: It’s a great tip. Incentives for co-packers. Looking back, easy to see it in the rearview mirror, but at the time it probably never crossed your mind.

Barry Nalebuff: Yep, in fact, the opposite did. So, this is learning from your mistakes is that we’d be happy if our co-packer was willing to invest in us and I think that was the farthest thing on their mind. And of course, you’re a little cash strap, so maybe you don’t really want to think about paying in advance.

It’s one of the lessons I try and teach in strategy and negotiation; to be allocentric rather than egocentric to be sent on others. And to think about their incentives to work with you rather than your incentives to work with them. I know why I want to work with this co-packer, why is it they want to work with me? And that’s the real challenge, and it’s the obvious question that they’re going to be asking.

Gary Nowacki: It’s great advice. So, let’s turn to raising funds. When at a certain point in time, when you were moving to scale up, you had to get investors to get the right capital in and you took a counterintuitive approach. You and Seth said, “Well, we’re not going to take any equity on day one. We’ll earn our equity.” Which is generally the reverse of generally how it’s done. Tell our listeners about that.

Barry Nalebuff: The classic entrepreneurial startup comes and says, “Here’s my business plan, why I’m going to have $50 million in sales by year five so that the business is going to be worth $250 million, and that’s why you should invest today at a value of $5 million.” Which is kind of funny because if I really believed that this business is going to be worth 50 times what I say it’s worth, then why am I willing to sell it so cheaply?

At the same time, if I say, “Look, I have no experience in this business, no experience in consumer products, and yet I want you to invest at a hundred million valuation.” They’d laugh at you. So, what we did is we said, “Well, we’re so confident that this business is going to be worth a lot. We’ll let you, the investors get all the upside until we’ve hit some performance targets, and then we’ll dilute you some. If we do even better, we’ll dilute you a little bit.” So essentially, we said to the investors, “We’re going to use a zero-pre-money valuation so when you put in the first, there are a million shares at a dollar a share. When you put in the million dollars, you own a hundred percent of the company.”

Nobody can argue with that because you can’t have everything better than a hundred percent ownership. There’s no dilution, but once we get to $2 a share, we’ll get some ability to buy shares at $2 and more shares at $3 and more shares at $5 more at $10, and more at $15. So essentially, if we can make this company worth, as much as we think it’s worth, then we really should be getting some of that high-end upside. It’s hard for the investors to say, “Well, I don’t think your company’s going to be worth $200 million but I’m also not willing to give you the upside when we’ve gotten a 10x return.”

So, in the end, Seth and I went from having no equity to about 40% of the equity as we ended up taking the share price from $1 to about $23. And so that sense of anti-dilution, and normally the founders, start with a lot and end up with a little, we went from starting with a little and ending up with a lot, which works out well. In the end, if you are able to have the type of success that many entrepreneurs believe that they’re going to know, it’s complicated to explain to people and we probably overdid it with having five different levels.

I would say the general lesson here is that when the entrepreneur and the investor get into an argument about valuation, the entrepreneur should say, “Okay, I’ll let you have a lower valuation today, but I want to have options at evaluation 10x of what we’re talking because if I’m really able to help you get the 10x return, shouldn’t I then share more in this because, in fact, my original valuation was more appropriate than what you’re agreeing to today?” It’s hard for the investor to say, no. It has to be a low valuation today, and I’m not willing to share some of the 10x plus returns that you may make possible.

Gary Nowacki: I think it’s brilliant. It’s a reverse dilution, but I don’t know if you have any idea, Barry, but I’m guessing still it’s not done very often.

Barry Nalebuff: It isn’t, I mean, it’s a variation of what might be thought of as preferred returns in the sense that the existing investors get their money back before anybody else gets their money back. So, in that sense, that’s one way of thinking about it. Another is that you could think about what a conditional valuation is. Look, I think the valuation should be $20 million today. Do you think it should be $5 [million]? Well, if I only make the company worth $10 million, then you’re right. It’s a $5 million valuation, but if I make it worth $200, then it’s a $20 million valuation. And so essentially, we’re disagreeing today about what the valuation is, but we can agree on what today’s valuation is based on what happens in the future.

Gary Nowacki: So, let’s pivot to the beverage category. It’s an intense—I don’t have to tell you this—intensely competitive category. You drop a statistic in the book that every year, 300 new brands and a thousand new products are launched into this category. Two-part question for you, Barry, given that red ocean of difficult competition. Number one, how did Honest Tea succeed initially in your view? And number two, why didn’t the competitors all gang up on it and drive it out eventually?

But these are the two questions that I think all entrepreneurs should be asking in the sense of not only why will you succeed, which is hard enough, but why will you succeed when you get copied?

Barry Nalebuff: Or why won’t you be copied? And that second question is probably the harder one to answer than the. In terms of why we’d succeed. Well, we thought, and we recognized this hole in the market. This idea that declining margin utility was being violated by making tea, does not taste like tea.  there’s another theory of economics that was being violated.

It is sometimes called the babysitter theorem, which is nobody goes out and hires a babysitter and then eats at a McDonald’s because you’re going to spend $50 or $60 on the babysitter. You’re going to go out and have a nice dinner, in the context of bottled tea. It didn’t make any sense that people were spending more money on the bottle, the cap, and the label than on the ingredients.

And so, if we could spend an extra nickel on the quality of the tea and people could taste the difference, then it makes sense to increase the price of the tee by a nickel, from a buck to a buck five or a buck 10, and the product is radically better. Then it doesn’t make sense to essentially fill up an expensive bottle label and cap with low-quality ingredients.

So, all of those backgrounds led us to believe that we’d initially be successful. And we had 20% of the market that was being unserved. The harder question is why weren’t we going to be copied? And there, I think there’s this issue of cognitive dissonance, which is it’s hard to sell X and not X at the same.

If you really liked the way Snapple tasted, then you actually disliked the way Honest Tea tasted. And so somehow Snapple would have to say to its customers, if you are a Snapple customer, don’t try this other unsweetened or lightly sweetened product because you’re going to hate it. And that’s difficult for that company to have a product that most of their customers are going to dislike.

You can do a different brand. And eventually, when this category gets known, Snapple has in fact entered into it with their lightly sweetened, but you almost have to have that warning sign for them upfront. The other is that, of course, you also have to change the whole way in which you’re doing things, which is if you’re using really a stringent tea.

So as to stand up to the sugar, if you get rid of the sugar, the tea that’s in there tastes terrible when it is not, sweetened. So, you must find high-quality tea as opposed to what you’re currently using and therefore you can’t just change one part of the recipe. You must change the whole ecosystem.

It’s connected to it. That doesn’t mean that eventually, other people won’t copy you. It just will take them some time. And hopefully, during that time, you can get enough running room to establish a brand, to establish a reputation; and to have a customer base, and that’s what we were counting on. And we were lucky that we did.

Gary Nowacki: So, let me throw a slight pivot at you. Your point is, this is why Snapple or others, like Snapple, couldn’t or wouldn’t drive Honest Tea out of business, but eventually you and Seth did sell the company to Coca-Cola and that worked out pretty well. And Honest Tea is still on the shelf. So why did that work well?

Barry Nalebuff: As you said, at some point people will copy you. And the only question is how long, and we had 10 years before we had to really start worrying about that. But at that point, we had proven this category really was not just a niche, but a larger opportunity. And so, as a result, everyone was now looking for ways to enter into that space.

And for years Coca-Cola and Nestlé had a partnership called Nesti that prevented either of them from doing anything in the tea space, other than through that partnership. Well, that partnership ended in the US and created a situation where both Nestlé, and Coca-Cola were looking to purchase a tea company. And they both made it clear to us that Honest Tea was their first choice, but if they didn’t succeed in buying us, they were going to buy somebody else.

And so, the question is did we want to be in a position whereby we were not just going to be competing against the smaller players? The Grandma’s Tea, Tradewinds, Tazo, but we are going to be competing against both Coca-Cola and Nestlé, who is going to be buying one of our other smaller rivals.

So that was a challenge. And then of course the other is that so much of our mission is inside the bottle itself. That is, we’re using organic tea leaves, fair trade ingredients. And if we could scale from $50 million in sales to $500 million in sales. And if we could reduce the cost of our bottles from 19 cents to 11 cents and thereby bring down the cost of the product, we could expand the access to better health, to a much broader community.

We could promote organic farming and fair-trade farming. And so, the ability to work with a partner like Coca-Cola is really just unparalleled in terms of your ability to have a bigger impact. One of the things that Mutar Kent, then CEO, said to us was that he didn’t want Coca-Cola to change Honest Tea. He wanted Honest Tea to change Coca-Cola. And if you can show that the market can be successful for a healthy, delicious product and Coca-Cola gets that message, think about what they can do.

Gary Nowacki: So, is one of your tips to entrepreneurs or even mid-range companies to be mission-driven? Is mission-driven part of the secret sauce?

I want to go more than mission-driven. I want the mission to be in the product.

Barry Nalebuff: So let me use, a slight beating up on our friends, Ben and Jerry. They have a fantastic mission. They’ve done all sorts of great things around the world, but their product itself is kind of high fat, high sugar, yummy but doesn’t necessarily improve happiness, whether it improves health is another question.

Whereas if I contrast that with, let’s say Seth’s newest venture, Beyond Meat. Here it is, we’re helping save the planet from issues of cows over-grazing, methane, and global warming. The more people who eat Beyond Meat, the better it is for our planet. The more people who drink Honest Tea, the better it is for our health. And so, when your product itself is part of the social mission, that is to me, the trifecta. It’s not just that you, in terms of the way you treat your customers, your focus on what type of charities that you do, or good work that you do, but that the product itself is making the world a better place.

Gary Nowacki: So, Barry, I understand your message that it’s important to not just have a mission-driven company, but to really deeply connect that with the product. But if I’m an aspiring entrepreneur, isn’t that easier said than done, isn’t that really, really tough to figure that out?

Barry Nalebuff: No, it’s bloody obvious. You can’t have a mission-driven company that’s involved with gambling or a cigarette. But you can have a mission-driven company. So, one of our famous at the Yale School of Management is Austin Ligon and he started CarMax. And you might think, well, how is selling used cars mission-driven? But it turns out that car dealerships discriminated against women and minorities.

And at CarMax, everybody pays the same. Car dealers weren’t famous for being great places to work. And CarMax regularly makes the Top 100, Top 10 Places to Work. If you take an industry that is messed up and you make it better for both the customers and the employees, it seems that works. It should be clear why your products are making the world a better place. Why are they helping to repair the Earth? And if you can’t say that, then you don’t have a mission-driven company.

Gary Nowacki: Good advice. So, let’s go back to some practical challenges you faced earlier in the business at Honest Tea.

The book gets quite a bit deeper into this: distribution challenges. Why is distribution in the beverage space so complicated and what were your lessons and takeaways from that?

Barry Nalebuff: The challenge is that many products can’t just be sold over the internet. Particularly glass bottles with liquid in them are hard to transport.

The fact is that the people who are running these distribution businesses, tend to be very cynical. They quote, “seen it all before,” and it’s not as if they are your target customers or they’re excited about it. So, they’re going to get excited about making money, but it’s a little bit of a chicken and egg because until they see the product move, they’re not going to want it, but it’s not going to move until they’re helping make it accessible.

Trying to find a distributor who believes in you, is wildly difficult. So, it may be trying to find the store that believes in you. And I’d say we spent, early on, too much effort trying to get the distributors and not enough trying to get the stores because it turns out the distributors care a lot more about what the stores have to say than what you have to say.

And when the store says jump, they say how high. And so, if you convince the store to really go after you, then the distributor will come on board. And so rather than try and bribe a distributor to carry you, go and bribe a store, your right store. Get them, pay them, offer them free fills, offer them sampling, coupons, advertising, whatever, to get it into the store and have them help you get the right distributor.

Gary Nowacki: When you think back on the early days of Honest Tea, Barry, what were some of the scariest moments, that you and Seth had, where you guys thought, boy, we could just lose it all?

Barry Nalebuff: We had cases where we had glass in bottles because it turns out we were filling our product with what’s called a pop filler, which filled them under pressure. When the glass broke, glass went flying everywhere rather than a gravity filler. We didn’t know the difference between those things. We had a recall over the summers. So, we lost almost a full year’s worth of sales. That was a disaster. We had a car accident where Seth, rolled his car and that could have been curtained.

There were so many things that go wrong. And in fact, that’s one of my warning signs to most young entrepreneurs, which is essentially even if they get things right up front, they won’t have the resilience to rebound when things go wrong, that they eventually will go wrong. You’ll end up having some recall because somebody will go and end up making a mistake.

In one business I was associated with, we thought everything we were getting was organic, but it turned out there was a farmer somewhere in Spain who lied about whether his product was organic. And so, then what do you do when you have things that are being sold organic? You do a recall, or you don’t do a recall and you have the resources to actually take care of problems that somebody else creates, but you end up being on the hook because, in the end, you don’t have the ability or the time to sue somebody in these things.

You just have to have the extra resources, have the investors who believe in you, have the customers who believe in you, who will give you a second chance because you’re going to certainly need one.

Gary Nowacki: On the flip side, was there one singular moment where you and Seth looked at each other and gave each other a high five and said we made it, this is, this is all going to work!

Barry Nalebuff: Yeah. When the check cleared from Coca-Cola.

Gary Nowacki: There wasn’t a single moment until then that you guys could put your feet up on the table?

Barry Nalebuff: There were times when we were negotiating, where the partner on the other side, you know, calls Seth and says, “Barry is trying to ruin your family’s future and he is going to destroy it all for you.”

So, these were some challenging periods, and let’s be clear, we were doing great. In 2008, our sales were doubling, everything was fantastic. If we hadn’t done the deal with Coca-Cola, I’m not sure we would’ve survived the financial crisis. We had a $5 million bank line that we needed because we were doubling sales.

We were growing from $23 million to $75 million. Ultimately, we needed a $12 million line to cover receivables in inventory, but when the financial crisis hit, our bank line went away and went to zero. And if we didn’t have a relationship with Coca-Cola, so our investors were willing to lend us some money to do this, I’m not sure we would’ve made it or been able to grow. And so, everything could be going right, but the financial crisis gets in the way. And we were fortunate for other reasons that we actually had the extra resources, and we had done the deal with Coke. We weren’t anticipating a financial crisis.

I don’t think there’s any security in this regard. It’s actually a lesson that I think is an important lesson for investors in startups, which is you really want to give your CEO and founders some liquidity earlier on because otherwise, they’ll end up asking, acting a little bit more risk averse than you might.

At some point, Seth and I have personal guarantees out there for all our net worth for our houses, cars, you name it. The downside is looking pretty scary, and on the upside where we are is pretty good. And so are we going to really try and grow this company from a couple hundred million to a billion or going to say, you know, we’ve done well, and this is the time now to take some chips off the.

Not every company gives its entrepreneurs the chance to have a little bit of a nest egg so that they’re willing to keep on going for an even higher price.

Gary Nowacki: Speaking of crisis management, you wrote in the book that one of your lessons was at times, you must trust your gut. Which seems like an odd thing for a business school professor to be saying. Talk to us about that.

Barry Nalebuff: First off, it’s literal in the sense of we like the flavors. We knew who our target customers were because we were.

We knew who our target customers were because we were.

So, if it felt right to us, then, we knew that we at least had two of them on board. One of the challenges you often have with companies is that they don’t have somebody there who truly represents the brand. They may have somebody who represents the larger company, but not the ambassador, not the vision of what this brand is. And so, it was everything from, what’s the right decision? Should you put calories per serving or calories per bottle? We’re being honest and people, we don’t think, are just going to drink eight ounces.

They’re going to drink 16 ounces. So, we should put calories per bottle on there, not calories per FDA required, eight-ounce serving. And that sense of what is our mission, who is, is something that Seth is as powerful a leader in, as anyone on this planet. He is the walking embodiment mission of a healthy, honest, forward-looking, socially responsible business.

And in that sense, if it sat right with him, it sat right with his wife, Julie, sat right with my wife, Helen, and kids. Then we knew that we were doing the right.

Gary Nowacki: So, there are a lot of lessons in the book, and I encourage all of our listeners to read it. Mission in a Bottle by Seth Goldman and Barry Nalebuff. Barry, if you had to net it out to your top two or three bits of advice for startups and aspiring entrepreneurs, what would that be?

Barry Nalebuff: One is not to try and do something which is an incremental improvement. There are so many other things that are going against you, it should really be radically different and better.

And the other, which I’d say, we’ve talked about is this notion of doing something that you really have a passion for. That makes a difference in the world because it’s hard enough to attract capital. It’s hard enough to attract employees. It’s hard enough to make this go on and make this long, for 10 years.

If there’s something that you can truly believe in and more than just about making money, then you get excited or you get disappointed when it’s Friday, because you must wait till Monday to keep on doing it again. You want this thing to be so much fun and so important, that you can’t wait for Monday to come around.

Gary Nowacki: How about at an individual professional level? If you’re an early career person joining the food and CPG space, maybe you’re going to work for Honest Tea or Coca-Cola or RXBAR or Beyond Meat, or whatever. What advice would you give them?

Barry Nalebuff: I’d say find a startup that is early on, that you can be part of, that’s growing fast because one of the great things about startups that are growing is that you will be given more responsibilities than any same person would ever give you because they’re always going to be looking to hire new people. People on the inside are easier to find than people on the outside where the job needs to be done. And until you hire somebody from the outside, you give somebody inside a chance.

It could be that you promote the executive assistant to the head of sales, or you end up in charge of production or marketing or graphic design. And so, if you really want to get experience that no sane person would give you based on your background, the early fast-growing startup is absolutely the place to make that happen. Learn on somebody else’s dime and figure out all the mistakes they’re making so you don’t have to make them yourself.

Gary Nowacki: Talk to us about what you’re up to these days. You’re onto more startup adventures with something called Real Made Foods. Tell our listeners about that Barry.

Barry Nalebuff: So, after Honest Tea, with another student, I worked on a product called Kombrewcha, which is a slightly alcoholic version of Kombucha.

And that’s now available in New York and on the west coast, it’s part of the AB InBev family and that was another little adventure. After that, I started a company to make overnight oats. The idea that’s a constant theme, as you can see with Honest Tea, is can we make a product that you buy that’s actually better and cheaper than what you would make on your own.

It’s not just convenient, but it’s better and cheaper. And so, we took oatmeal and we put it together with mulberries, chia, coconut, freeze-dried bananas, instant coffee, apples and cinnamon, and ginger, and essentially created this fantastic overnight oats recipe that would take you a while to put together.

If you had bought all of the mulberries and bananas separately, it would actually cost you more than if you buy them from us. This idea of helping customers make great products on their own is what my partner, Jessica Price, and I are doing with Real Made Foods. You can try it at Amazon, and www.realmadefoods.com.

We think it’s healthy. There’s no added sugar. It’s amazing and it solved my breakfast problem. I’m not into cereal. Granola is a little more in the sugar frontier that I’m looking for and yogurt’s nice, but sort of not every day.

So, what can people that don’t have enough time to make breakfast and to make a, really nutritious, satisfying gourmet delicious thing? And so, we have a hack, which is you might leave the kids’ clothes out the night before. Could you make breakfast the night? You just add your favorite milk, put it in the fridge and you can go to bed happy knowing there’s a great breakfast waiting for you.

Gary Nowacki: Sounds like a clever idea. I can’t wait to try it. And I wouldn’t even know where to go to buy mulberries.

Barry Nalebuff: Uzbekistan is where they’re from.

Gary Nowacki: Okay. I learned that today.

Barry Nalebuff: It’s a lot cheaper if you get them from us than buying the ticket there. The other product that I’m working on is a company called Choose Health. The idea there is also a very simple one, which is if you look at the adult formulas, whether they be Boost and Ensure, they’ve got a lot of high fructose corn syrup in them in other ingredients you might or might not want. And so could you do an Honest Tea version of adult supplements and we’re going to give it a shot and see if we can make an organic, less sweet, more delicious healthy adult supplement.

Gary Nowacki: Sounds like a really interesting concept. And I assume nobody’s tried that before.

Barry Nalebuff: People are doing it for the 20-year-olds with Soylent and Orgain, but I wouldn’t say that they’re doing it in the organic fashion for seniors. That’s what we’re going to try and do.

Gary Nowacki: Good luck with both of these ventures. They sound really exciting. Barry, before we go into wrap-up mode, is there any other advice or words of wisdom you’d like to share with our listeners?

Barry Nalebuff: Yeah, don’t do it. I joke and sort of try to talk people out of it, because in some sense, if I can talk you out of it, then you shouldn’t be doing it.  You should have sufficient passion, and sufficient confidence, that a few counterarguments shouldn’t be enough to dissuade you. You can’t just be on the fence on this thing. You must be all in.

Gary Nowacki: I’d like to thank my guest, Barry Nalebuff. Barry, thank you so much. We are excited about Overnight Oats and Choose Health. We’ll be watching those brands closely, and we really appreciate you being on the podcast today.

Barry Nalebuff: Thank you for inviting me, enjoy.

Gary Nowacki: Thanks for listening to C to C, where we cover innovation in the food and CPG business from Conception to Consumption. Just type the letters, C T O C, no spaces, to find us on iTunes, Stitcher, Podbean, and Google Play.

This podcast is produced for informational purposes and does not constitute any scientific, legal, or medical advice.

The views and opinions expressed by guests of this podcast are those of the guest alone and do not necessarily reflect the opinions and positions of the host or any other entity or organization. Listeners are encouraged to listen with an open mind and form opinions of their own.

This podcast originally aired on April 23, 2020.

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