HONEST TEA COMPANY

6 Pages   |   1,836 Words

TABLE OF CONTENTS

INTRODUCTION.. 3
OVERALL COMPANY’S ANALYSIS. 3
OPERATIONAL ANALYSIS. 4
FINANCIAL ANALYSIS. 5
CONCLUSION.. 6

INTRODUCTION

Honest Tea was founded through the ingenuity and creativity of Seth Goldman, who currently holds the position of president and Chief Executive Officer for the company. He along with his professor, Barry Nalebuff, first brewed their first tea and sold it from their home when they discovered through their survey, which indicated that in comparison with bottled water consumption, tea came second, which depicted that such a market potential existed for tea. Hence after experimenting a lot during the year 1997, they first hit upon their tea formula and started selling it, by first introducing the existence of this product through retail shops.

After their product got widely acknowledged they expanded their operations and launched a successful campaign through which they were able to increase their consumer base and in a matter of three years, Honest Tea saw a tremendous rise in their sales figure as their product got widely acknowledged. Although their major concern, that of the American people consuming less tea as the years slid by, was giving them trouble and worries as they anticipated that the sales figure would drop. Thus they had to come up with revitalizing ideas in order to stimulate the consumers into buying the product. Research showed that during the year 1998 and 1999 onwards tea consumption was once again on the rise bringing a warm welcome for the newly set up Honest Tea owners.

The two owners targeted into several distribution methods so as to sell their product to the consumers. They were tapping into the “Read-to-Drink” tea segment and were already making headways into the market with increased sales. This was also due to the fact that people were now becoming more aware of the health benefits that tea consumption reaped and were now altering their preferences from consuming carbonated drinks to healthy drinks. Because of this increasing awareness, newer markets started springing up around the country so as to cater to the needs of the changing consumer preferences, hence competition also sprang up for the Honest Tea company.
 

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OVERALL COMPANY’S ANALYSIS

Honest Tea company’s owners fulfilled the needs of the health-conscious consumers and provided a beverage that not only catered to such needs but also did so by providing a tea that gave the customers something to taste and appreciate. They did so by providing the consumers a taste that was natural and original and which was free of any artificial sweeteners. Their tea had certain qualities and features that set it apart from the rest by not leaving distasteful after taste or a film of syrup on the tongue for the consumers.

The acceptability of the product was such that the effort put into by the two owners paved off as they not only satisfied their customers but also induced and persuaded other dissatisfied drinkers as well as lovers of carbonated drinks that Honest tea offered them what most others did not and that was a taste that fully satisfied their taste buds and that too without disturbing their health. Therefore the target audiences for the company were the dissatisfied “bottled tea drinkers” who perceived such drinks to be very sweet, “bottled water drinkers” who desired variety and taste, diet carbonated drinkers who were on the look-out for such a beverage that was natural and original and tea drinkers who were reconciled to the situation where they had to brew tea at home because no such other tea makers could make a tea that satisfied their individual taste preferences.

Hence the targeted audience defined the characteristics that were present in their tea and that satisfied all the above mentioned people. Moreover, Goldman and Nalebuff, came up with innovative ideas to increase their market share, which consisted of them coming up with such drinks that could satisfy the consumers throughout every season, therefore they established drinks for every season for the consumers. They were also the ones who came up with the first ever biodegradable whole leaf tea bags.

OPERATIONAL ANALYSIS

Such a new taste within the industry that promised fresh and original tea had to adopt such a measure of production that would ensure the freshness of their products and as their market had considerably expanded so the owners had to develop such tools and such a system that ensured such a vast scale production facility.

Therefore the year 2000 saw an increase in the operations the company as they purchased both a beverage company and research and development company which although did help in the sales and production of the company but put a strain on the operational activities of the company due to them financing such a huge venture. Although this strain was problematic for the owners but they believed that such a venture was essential for the production of the company and for the future expansion of the company.

The operational activities of the company as of that year were such that they devoted an amount of $300,000 in acquiring the necessary buildings and equipments so as to facilitate $300 million of sales and as the rate of revenue earned was lower than the time it took to produce the goods they decided to rent their production to Arizona Iced tea and other such brands on a short-term basis.

Apart from such an activity the packaging and pricing activities and the decision making of such features were essential to the operations of the company. By focusing on such features such as colorful and creative designs, cultural artwork, “spot labels” and by keeping the design simple, the high quality and the original work of the product was portrayed to the consumers which brought about the necessary desired affect of getting the product across to the customers and inducing brand recognition amongst the customers; through increased profit levels the company was able to finance its increasing growth.

FINANCIAL ANALYSIS

The financing of the company was as such that the owners initially decided to invest $2 million and for the rest of the workings of the company in the future they estimated that the company would be able to finance its growth through the profit levels that they achieved with the increasing sales of the company. The initial investment and cash were used to cover the losses of the company that they incurred through the subsequent quarters.
In order to finance their activities and losses and in order to break even, Goldman set out to find such investors that would genuinely believe in the workings of the company and would promote them in the way that was integral for the company that is with originality and honesty. Goldman then met with an investor group that was interested in financing the activities of the company and which also met with the requirements of both the owners and the investors; as the investors believed in the goal commitments to which Goldman and Nalebuff were dedicated to. The name of that investor group was Investors’ Circle (IC), which was a non profit company comprising of a group of investors which were interested in financing those companies that were started up on their own with a sense of social responsibility to carry on their projects with dedication and passion. With the help of this group they were able to get hold of as much as $500,000 of financing.

In addition to the numerous ways of financing the Honest Tea Company, through various different means and at different stages in time when they faced difficulties in not being able to cover their losses and their operational activities, they also had to face the difficult time of the year when their sales were low.

The income statement furthermore provided the evidence that the company reported a huge loss of around $228,879 in the quarter ended on June 30th, 2000. The losses that were observed were mainly due to the huge amount of expenses incurred which came to be $460,939 as of the same quarter.
The balance sheet of the company showed a considerable increase in the number of assets that the company was acquiring throughout the years which was also one of the reasons for the loss on income that the company faced due to the fact that cash decreased for the company and were then unable to finance their operational activities because of it. The liabilities on the other hand showed a decrease for the company and the equity position of the company also increased as they inducted more investors into their company.  

CONCLUSION

The company, though it showed great potential in targeting the right audience and by tapping into a market that showed a potential sign of expanding due to increased consumer awareness, started facing difficulties in the third year of their operation as they expanded their production greatly. The huge expenditures of the company also resulted in the company incurring losses even though those expenditures were necessary for the working of the company.

To achieve success in the market in the future two scenarios were presented which reflected the increase in sales and hence would result in the increase in the profitability level of the company. For the next year, the company set a policy for to set sales targets that were aggressive in nature. The future of the company depended on the company’s ability to finance their activities by bringing in more investors and in order to bring in more investors they needed to show that the company’s value was satisfactory and would satisfy the needs and observations of the investors.

In order to bring about an increase in the value of the company the two scenarios were worked out by the company which showed that if in the first scenario, the sales were to increase by increasing the prices of the products as well as increasing the sales volume of the company, then there would be no need to bring in the investors and the company would be able to perform well on its own due to the positive valuation of the company.
The second scenario presented a case where the prices of the products were less as compared to the prices in the first scenario and the sales were also relatively low, then additional investors would need to be inducted into the company which would help strengthen the position of the company as well.
The future outlook for the company is bright as the potential exists within the market which indicates that the company has the ability of covering their losses in due time, and will then tend to show a profitable figure as a result of it. Hence the company should pursue looking for investors as the increase in the level of prices might bring sales down due to the fact that increased competition would exists as many other companies seeing the potential of the market were already trying to enter the market in order to profit by such a venture.

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