Last week, when Tata Global Beverages joined hands with Pepsico India to set up NourishCo — a Rs 50 crore joint venture, where the two giants are equal partners — to offer healthy drinks, it was a sort of homecoming for Tata Global. And the story lies in a room predictably filled with books and curiously laden with bottles of tea, on the first floor of Hillhouse Avenue in New Haven, US.
“For years I have been teaching a case study on Coke versus Pepsi and one of the topics that comes out is: is there a hole in the beverages market,” Barry Nalebuff, a professor at Yale School of Management said. “There is every flavour of beverage you can imagine — grape, lemon, lime, fruitbeer, ginger, colas and colas, even celery sodas. And there’s every possible size — six ounces, eight ounces, 16 ounces, 24 ounces. There is every possible level of caffeine. There is every possible level of bubbles. So you would wonder how come in this market would something be missing.”
In 1995, Nalebuff undertook a case study based on an idea that “Ratan Tata passed on to sell Tata Tea in the US”. While on the study, Nalebuff went to a tea auction in Kolkata and discovered two things. “One, I could tell great tea from bad tea. And two, that tea is the world’s cheapest luxury. So, there is no excuse to drink bad tea. Now, Starbucks has done some amazing things for coffee, could someone do this for tea?”
The challenge was to convert a huge variety of tea — Darjeelings, Nilgiris, Assams; greens, reds, blacks, whites; herbal, fruit, spiced; ginger, mint — into something exotic. “So, while the potential for product lines was enormous, I found Americans did nothing about tea,” Nalebuff said. “If you think about tea like wine, in the old days people would offer you red or white; in the US, tea would be black or green.”
Tata may be a known global brand today but not 15 years ago. Nalebuff suggested that if Tata wanted to export tea, it should pick up a name that represents its values of trustworthiness and integrity. Nalebuff’s idea: ‘Honestea’, a name the Tatas promptly rejected but allowed him to retain, but which because of legal complications has morphed into Honest Tea.
As a beverage, the drink he offered me was not something I was used to — it wasn’t sweet enough, it carried a little tea residue. But when I saw the very low level of sugar content (less than half of Coke or other drinks), I thought it was something I could get used to. “People are willing to give up a bit of taste for better health,” Nalebuff said.
Armed with the idea for a product and a name, Nalebuff sold some equity interest in a company that went public and got some friends and family to put a little money. With $500,000 in place, he got his “best student” Seth Goldman to turn them into a reality. “The day Seth quit his job, we didn’t have a recipe, no label, no bottle, no business plan, no suppliers, no idea about production. And we did all of that in 24 days.”
With the $441 million acquisition of Tetley Group by Tata Tea in February 2000 behind it, the company made a pitch to buy Honest Tea, then delivering sales of $5 million, in 2002. “Tata was encouraging them to do more with tea and so they came to us with a buyout offer.” The deal fell through. A Tata Global spokesperson refused to react to the story saying, “we don’t comment on speculation.”
In 2008, Coca-Cola Company purchased 40% of Honest Tea and the balance 60% in March 2011. Goldman, now the ‘TeEO’, has taken the company to $75 million in sales. “There’s no question that Coca-Cola has recognised the way consumers and the beverage industry are changing, and by investing in Honest Tea, Coke is making sure it will be leading the change rather than trying to catch up to it,” Goldman said.
The deal could have fallen through because of scale. By joining hands with Pepsico to launch healthy drinks in India, the corporate war has now — 10 years later — moved towards that scale. In the short term, the fight is going to be about healthy water. But will healthy water take the next step to healthy drinks, including tea? Given the core competencies within the system — Tata’s strength in tea, Pepsico’s muscle in global distribution — the answer is: very possible. The challenge in India will be to market tea to a nation of tea drinkers. Unless, of course, it goes to the US and takes Honest Tea head on, in an expanding market.
“I think what Tata could bring to us is the ability to differentiate tea on a freshness basis,” Nalebuff said. “They are the only tea company to vacuum pack their tea at the garden. What we could bring to them is an understanding of the American market and a way to market and differentiate their tea. The irony of all this is that now, some 14 years later, Tata does have a brand in the US and so Tata Tea might well be the best name for them.”