Coke buys stake in Honest Tea

Coca-Cola has announced on Tuesday that it reached an agreement to acquire 40% of privately-held tea maker Honest Tea. The deal, worth $40 million, values the company from Bethesda, MD at $100 million and includes an option for the soft drink giant to purchase the remaining stake in the healthy beverage company after three years.

The Atlanta-based company will thereby bolster its portfolio of non-carbonated drinks, which includes Fuze and Gold Peak tea brands, Nestea and Enviga tea drinks and Glacéau’s VitaminWater, which it bought last year for $4.1 billion. The latest move is a clear indication of where Coke sees future growth: as traditional soft drink sales declined by six percent in the first nine months of 2007, bottled tea volume was up a healthy 24% in the same period compared to 2006, according to Beverage Digest.

Despite its small size, Honest Tea has recorded a noteworthy growth of 70% in 2007, grossing $23 million in sales. The company’s appeal lies in its comprehensive range of teas and other healthy beverages with a low-calorie profile, organic certification and premium brand image. However, an important obstacle for the expansion of the company, in its 10th year of existence, has been a relatively restricted presence in mainstream outlets, limited mostly to natural-food and specialty retailers like Whole Foods Market, Inc. A partnership with Coca-Cola gives Honest Tea exposure to a much wider distribution network in universities, restaurants and grocery stores, where Coke has exclusive relationships.

While the agreement clearly makes strategic sense for both parties, questions remain about its ethical aspect. Will the deal be seen as yet another case of a small company selling out to a giant or will it be viewed as a multinational’s new (and healthier) approach to doing business? The increasingly principled consumers, at the core of the hip brand, have three years to make up their minds. So does Coke.