Case 2

Honest Advice on Business Planning

Two thirsty guys walk into a supermarket. No, that's not the beginning of a joke. It was the beginning of Honest Tea, a groundbreaking maker of bottled, low-sugar organic tea. What began on a kitchen counter with a guy mixing up some drink concoctions today is a company selling bottled beverages in approximately 100,000 stores across the U.S.

Like many great start-up stories, Honest Tea began when the founders faced a problem. Seth Goldman was an active, health-oriented guy who couldn't find bottled beverages that met his needs. He wanted something healthy and refreshing. He preferred something organic. Most of all, he didn't want all the sugar that was in super-sweet store-bought beverages, like soft drinks.

Goldman shared his problem with Barry Nalebuff, his former professor at the Yale School of Management, who was also tired of super-sweet store-bought beverages. During an interview on NPR, Nalebuff said, "What we realized is that there was a whole group of people like Seth and myself who were being left out of the market."1

So, in 1998, Goldman and Nalebuff decided to create a nonalcoholic beverage businessmaking and selling low-sugar alternative drinks for people like them, using real ingredients. They had evidently hit on an unmet need because soon after Goldman created a prototype of his organic, low-sugar tea, the duo had their first order: for 15,000 bottles.

Yikes. Sometimes good news is too good. They quickly had to figure out not only how to make organic, low-sugar bottled tea in large quantities (discovering problems like the tea becoming cloudy in the bottle), but they also had to think through the issues of starting a rapidly growing business.

What did they do? Goldman got serious. He deleted the solitaire program from his computerso he wouldn't get distractedand started developing a business plan for their fledgling company. You can see and download their original business plan on their website at www.honesttea.com/about-us/our-story.

The original Honest Tea business plan covers everythingthe product, the target market, marketing and distribution, management, financials and investment opportunity (not shown online), and more. The concrete details show that Goldman and Nalebuff did their homework and asked themselves some tough questions.

They paid a lot of attention to their target market, and in researching their plan, Goldman and Nalebuff found that the market for soda alternativesready-to-drink tea and bottled waterwas undergoing explosive growth. They also profiled their target customer: 60 percent female, with a median age of 42, college educated, active, middle-class, and living in an urban area. Details like these help a company create its core marketing message, narrow down which retail stores to pursue, and determine the size of the opportunitysomething investors want to know.

Somewhat unusual at that time, Honest Tea's original business plan also included a "Statement and aspirations for social responsibility." By working with its suppliers, the young company vowed to improve the environmental and labor conditions of the tea estates from which it sourced its ingredients. After two decades in business, the company's teas are now all Fair Trade Certified, helping to ensure that workers on tea gardens receive a fair share of profits and have decent workplace standards. And, by buying huge quantities of organic ingredientsnearly 7 million pounds in 2014the company believes they've helped change an industry while improving the environment.

How big did the opportunity turn out to be? In 2015, sales reached a record $178 million. One of their customers was President Barack Obama, who stocked Honest Tea as his favorite drink while in the White House.

In 2008, Coca-Cola invested a 40 percent stake in the company, and bought it three years later, with Goldman at the helm as CEO. Today, Honest Tea is run as an independent unit of the bottling giant yet benefits from Coca-Cola's distribution power.

As with any business, there were bumps along that road to success. But bumps are easier to deal with when you have a business plan to guide you through them.

Could the company that Goldman and Nalebuff launched with humble beginnings like these have reached such impressive success without having developed a business plan? To be honest, it's doubtful. Yes, it takes a good idea, a great team, timing, and more, to launch a successful business. But without a roadmap, how do you know where you're going?

These two men already knew a lot about business, of course. Nalebuff was a Yale Management professor, after all, and Golden had earned a Yale MBA and had worked in finance. For less-seasoned entrepreneurs, business planning becomes even more important. Yet the process doesn't have to be a daunting one. The planning helps an entrepreneur work through the many facets of their business and create a roadmap to their goalsand to success.

1.How does developing a business plan help an entrepreneur when starting a business?

2.When do you think business planning is most crucial? Do you think it's necessary only when starting a business?

3.What sections of a business plan do you think are the most important? Why?

4.What risks or rewards (if any) did Honest Tea face by including social responsibility in its business plan?