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Honest tea

Exploring a hole in the iced-tea Hotelling line

"It hardly seems the stuff consumer thrills are made of: a weak watery tea, brewed the old-fashion way, with hardly any sugar and even less caffeine. Marketing? There is almost none. Edgy television ads and celebrity endorsements? Zero.

Still, when Seth Goldman and Barry Nalebuff started Honest Tea two years ago, in part to fill what they saw as a neglected market niche and in part to make a point, they were well aware that they would be competing against mass-marketed sweetened iced teas made by the Coca-Colas, PepsiCos and Snapples of the world.

Beverages mixed up to address a specific target market are nothing new; microbreweries making specialty beers ran long and hard with the concept. But the beverage industry is especially tough on new brands; even Coke and Pepsi have stumbled over the years while trying to induce consumers to try something new.

'There are probably hundreds of beverages introduced around the country every year, and most do not succeed' ... As luck, or insight, would have it, when Honest Tea started landing on store shelves, consumers were showing a distinct preference for bottled water and other beverages perceived to be more healthful. And for all it did not have, the founders saw their product as distinct enough from established brands to attract a different customer. 'If we were to compete against the big companies on their terms, unless we won the lottery, we would be finished,' said Mr Nalebuff, a professor of game theory at the Yale School of Management.

Instead, he and Mr Goodman, a former pupil of his and an alumnus of the Calvert Group, the largest sponsor of 'socially responsible' mutual funds, decided to set their own terms. They would make an iced tea that promoted the tea flavor and would be naturally low in calories. 'The funniest thing was, why had't anyone else done this?' Mr Nalebuff (pronounced NAIL-buff) said. 'It wasn't rocket science.'

Honest Tea had its origins in a question Mr Nalebuff posed to a class one day in 1995, when Mr Goldmand was among the students sitting in the lecture hall. 'I asked, "Why isn't there a normal product for the rest of us?"' recalled Mr Nalebuff, a longtime drinker of iced tea. "You can have 200 calories, or you can have zero calories with NutraSweet. But if you believe in declining marginal utility, why isn't there a product out there with 10 to 20 calories? Anyone can handle that. It's fewer calories than a carrot.' A teaspoon of sugar enhances the flavor of tea, he believes, 'but by the time you put 16 spoonfuls of sugar in, it's worthless' ...

Honest Tea is expensive -- $2.50 for 16 fluid ounces in one Manhattan deli, compared with $1.50 for the same size Snapple iced tea -- but the founders' efforts to sell it through health food stores, gourmet food shops and restaurants seem to be catching on."

Source: Constance L Hays, "Tea by Two: Out of Academia, a Discriminating Partnership," The New York Times, August 2, 2000

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