Who distributes honest tea

Business Plan for 1999 December 1998

4905 Del Ray Avenue, Suite 304 Bethesda, Maryland 20814

Phone: 301-652-3556 Fax: 301-652-3557

Email: sethandbarry@honesttea.com

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TABLE OF CONTENTS

Mission Statement ..…………………………………………………………4 Executive Summary ..………………………………………………………..5 Company Story ..…………………………………………………………….6 Product.……………………………………………………………………….6 Product description ..…………………………………………..…….6-8

Flagship line of flavors and new flavors for 1999……………………..8-9 Production and manufacturing ..………………………………..……9-10 Market Opportunity …………………………………………………………10

Profile of target customer ……………………………………………12 Market research and market response ……………………………….13-16

Marketing and Distribution …………………………………………………..16 Distribution and promotion …………………………………………..16-17 Packaging and pricing …..……………………………………………17 International markets …………………..……………………….…….17-18 Product development and future products ……………………………18 Management …………………………………………………………………..18-20 Statement and aspirations for social responsibility ……………………………20-21 Financial Statements YTD and Projections ……………………………………21-23 The Investment Opportunity …………………………………………………..24 The Offering ……………………………………………………………24 Financing History ….…………………………………………………..24 Exit strategies ………………………………………………………….25 Investment risks ………………….…………………………………….25 Competitive Advantage ………………………….…………………….25-26 A Parting Thought .………………………………………………….……..…26

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Mission Statement

Honest Tea seeks to provide bottled tea that tastes like tea- a world of flavor freshly brewed and barely sweetened. We seek to

provide better-tasting, healthier teas the way nature and their cultures of origin intended them to be. We strive for relationships with our

customers, employees, suppliers and stakeholders which are as healthy and honest as the tea we brew.

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Executive Summary Honest Tea, a bottled iced tea company, has completed a strong summer of sales in the mid-Atlantic region and is now raising capital to fund the brand’s expansion across the United States as well as overseas. Since the all-natural tea first hit the mid-Atlantic market in June of 1998, Honest Tea has developed a loyal following of customers who have made the product the best-selling tea in its largest account, Fresh Fields/Whole Food Markets, significantly outselling Snapple and the Whole Foods 365 brand. In addition to success in retail channels, Honest Tea has also been warmly received in food service channels. Unlike the sweetened tea drinks made from concentrate or powder which currently dominate the $2 billion bottled tea market, Honest Tea is brewed with loose leaf tea and then barely sweetened with pure cane sugar or honey. The product is poised to take advantage of the rapid growth in the bottled tea, bottled water, and natural food markets, as well as the developing “tea culture” in the United States. It also has potential to tap into the large market of health-conscious diet soda drinkers. The target audience is an emerging subset of the population, which seeks out authentic products and is attuned to global and environmental issues. Toward the end of the summer and through the fall the company continued to penetrate large supermarket chains and is in the process of finalizing a national network of brokers and distributors for 1999. In September 1998 the company hired two sales managers, each of whom brings more than 15 years of experience and contacts to the business. Although there was an often painful and occasionally costly product development phase, the company has now perfected the brewing and production process to the point where it can produce several thousand cases in one shift with the desired consistency. In early 1999 the company will add a West Coast site to its current East Coast production site. In addition, the company will be implementing steps to consolidate its packaging operation which will widen the per case profit margin. The company has demonstrated an ability to gain free media coverage, including stories in the Washington Post, the Wall Street Journal, and Fitness Magazine. It has also cultivated a loyal customer base among some of the country’s most influential celebrities which it intends to publicize at the appropriate time. It has just entered into a contract with a well- recognized public relations firm, which has demonstrated its success with several early- stage companies. Finally, the company has finalized a partnership with a Native American tribe that will position Honest Tea to emerge as a leader in the socially responsible business movement. Honest Tea is looking to raise up to $1.2 million in equity capital to finance the national distribution of the product as well as the introduction of two new flavors and international sales.

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Company Story Honest Tea is a company brewed in the classic entrepreneurial tradition. After a parching run through Central Park in 1997, Seth Goldman teamed up with his Yale School of Management professor, Barry Nalebuff, to reignite their three-year old conversation on the beverage industry. While at Yale Goldman and Nalebuff had converged on the opportunity in the beverage market between the supersweet drinks and the flavorless waters. The energy they share around the idea of a less-sweet beverage leads to several marathon tea-brewing sessions. Their conversation is fueled in part by their extensive travels through tea-drinking cultures such as India, China and Russia. As ideas and investors for the company gather critical mass, Seth takes the dive. He leaves his marketing and sales post at Calvert Group, the nation’s largest family of socially and environmentally responsible mutual funds, and launches Honest Tea out of the guest room in his house. Using five large thermoses and label mock-ups, he sells the product to the eighteen Fresh Fields stores of the Whole Foods Market chain. Once the tea has been manufactured, the company moves into a small office and distributes tea out of U-Hauls until other distributors start carrying the product. By the end of the summer, Honest Tea has become the best-selling tea throughout the Fresh Fields chain and has been accepted by several national supermarket chains and distributors. The Product The Taste: Bottled tea that tastes like tea, freshly brewed and barely sweetened Somewhere between the pumped-up, sugar-saturated drinks and the tasteless waters, there is a need for a healthier beverage which provides genuine natural taste without the artificially concocted sweeteners and preservatives designed to compensate for lack of taste. Honest Tea allows people to enjoy the world’s second most popular drink the way hundreds of civilizations and nature intended it to be. Tea that tastes like tea -- A world of flavor freshly brewed and barely sweetened. The concept of Honest Tea is as direct and clear as the tea we brew – we start with select tea leaves from around the world, then we brew the tea in spring water and add a hint of honey or pure cane sugar. Finally, we filter the tea to produce a pure genuine taste that doesn’t need a disguise. Unlike most of the bottled teas in the marketplace, Honest Tea is not made with bricks of tea dust, tea concentrate, or other artificial sweeteners or acids. The tea has no bitter aftertaste or sugar kick, and does not leave a syrupy film on the drinker’s teeth. To make a comparison with wine, today’s leading iced teas are like jug wine and Honest Tea is like Robert Mondavi Opus One. But unlike fine wine, premium bottled tea is quite affordable, usually priced under $1.50 for 16 ounces. Although taste is the primary benefit of drinking Honest Tea, the product has three other benefits which enhance its acceptance and marketability:

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Low in calories: A 12-ounce serving of Honest Tea has 17 calories, dramatically less than other bottled teas or comparable beverages. We have found that the low-calorie profile of Honest Tea makes the drink attractive to three key audiences – 1) Disenchanted

bottled tea drinkers who think the drinks are too sweet, 2) Bottled water drinkers who long for taste and variety and 3) diet soda drinkers who are interested a low-calorie beverage that doesn’t contain artificial sweeteners such as Nutrasweet. The following table illustrates the difference between Honest Tea and the rest of the beverage market: There are three other players in the less-sweetened bottled tea market that can be considered among the competition for Honest Tea: TeJava, Malibu Teaz and The Republic of Tea. All three brands are currently based and primarily focused on the West Coast. We are heartened by their existence because it confirms our belief that there are untapped opportunities in the beverage market, particularly on the East Coast, where none of the new entrants has any significant presence. TeJava, which is enjoying a warm reception in California, is a mild-tasting, zero-calorie unsweetened tea produced by Crystal Geyser that comes in only one flavor. We believe this product, which has been described by a beverage consultant as “water with a tea aftertaste,” would be more flavorful if it were barely sweetened. While TeJava clearly competes with our product, we believe there is room for more than one product in the low-calorie tea marketplace. We also believe that Honest Tea has an edge over TeJava because our drinks are more flavorful and come in a wider variety of flavors.

Calories per 8-ounce serving

0 20 40 60 80 100 120 140 160 180

Honest Tea

Nestea

Tazo Tazoberry

Tradew inds Honey w / Ginseng

Lipton Lemon

Mistic

SoBe Oolong

AriZona

Coca-Cola

Snapple Lemon

Tropicana Pure Premium

Fruitopia Fruit Passion

Nantuckt Nectrs Pnpple Orng Guva

Starbucks Frappucino

Ocean Spray CranGrape

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Malibu Teaz is a company focused on lightly sweetened herbal tea, 35 calories for an 8 ounce serving. The products seem to have limited distribution and the label, which features a topless mermaid, seems designed to cater to a different clientele than Honest Tea. The Republic of Tea is a well-established producer of loose leaf teas which has recently begun selling unsweetened bottled tea exclusively through its catalogue and premium restaurants. The cost of a four-pack in the catalogue is $15.00, or $3.75 for a 17 ounce bottle. We believe that this price is not viable in retail channels and have spoken with several disillusioned distributors whose experience confirms that assumption. Even if the Republic of Tea changed its sales strategy, we still see room for more than one player in the low-calorie tea market. We also think the modest amount of natural sweetener in Honest Tea helps create a superior flavor. One other brand that can be considered competition is Tazo, which presents itself as “The reincarnation of Tea." While Tazo is enjoying some success in natural foods channels, we feel that Honest Tea is different from Tazo in three important ways: first Honest Tea is genuine tea whereas Tazo is usually tea mixed with juice or other sweeteners, (usually 80 calories for an 8-ounce serving). Secondly, Tazo’s packaging, with its mysterious symbols and discussion of “the mumbled chantings of a certified tea shaman” is designed to reach a New Age audience. In contrast, the colorful art on the Honest Tea labels are accessible to a wider audience, offering a more genuine tea experience. Finally, Tazo’s price point is significantly higher than Honest Tea in supermarket channels, selling for $1.69 versus Honest Tea’s price of $1.19. Where the two brands have competed head-to- head, Honest Tea has significantly outsold, and in many cases, eliminated Tazo from the shelf. Our response to Tazo’s “reincarnation of tea” is that tea doesn’t need to be reincarnated if it is made right the first time. Health benefits of brewed tea: The curative properties of tea have been known for thousands of years. Because Honest Tea is brewed from genuine tea leaves it imparts many health benefits not found in tea-flavored drinks. In addition to serving as a digestive aid, tea has powerful antioxidants, which impair the development of free radicals which contribute to cancer and heart disease. The antioxidants in green tea are believed to be at least 100 times more effective than Vitamin C and twenty-five times better than Vitamin E at protecting cells and DNA from damage believed to be linked to cancer, heart disease and other potentially life-threatening illnesses. Cultural experience of tea: Each Honest Tea flavor is brewed based on a recipe perfected over generations in a specific region of the world. As a result, drinking Honest Tea becomes a cultural experience, from the genuine tastes to the distinctive international art and information on the label. While some bottled teas seek to cloak themselves in a cosmopolitan mantle by including exotic-looking drawings on the label, the front of each Honest Tea label features authentic art from the culture of origin. Flagship line of flavors – Our flagship line of teas come from four different continents:

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Kashmiri Chai – The people of Kashmir have mixed spices into their chai for generations. Our recipe is made with spring water, premium tea leaves, crushed cardamom, cinnamon, orange peel, cloves, pepper, ginger, malic acid and a touch of sucanat evaporated sugar cane juice. Approximately one third the caffeine of coffee. Black Forest Berry -- Our Black Forest Berry tea is a fruit infusion made with spring water, hibiscus, currants, strawberries, raspberries, brambleberries, elderberries, and a touch of unrefined organic cane sugar. Caffeine-free. Moroccan Mint -- Our Moroccan Mint is a tightly rolled green tea from China blended with a generous amount of peppermint, brewed in spring water with citric acid and a touch of white clover honey. Approximately one fourth the caffeine of coffee. Gold Rush -- Our Gold Rush tea is an herbal infusion made with spring water, rooibush, rosehips, chamomile, cinnamon, peppermint, ginger, orange peel, malic acid, and a touch of raw cane sugar, and a natural flavors. Caffeine-free. Assam – These golden-tipped flowery leaves from the Sonarie Estate gain their distinctive taste from being picked as tender leaf buds at the height of the season. Brewed in spring water with Vitamin C, malic acid, unrefined organic cane sugar, and a hint of maple syrup. Approximately one half the caffeine of coffee. In early 1999 we will be introducing two new teas: Decaf Ceylon -- In response to feedback from more than 500 sampling events where we continually heard requests for a decaffeinated black tea, we will be introducing a Decaf Ceylon with lemon grass. The label for this tea features original art which captures the cultural and relaxing attributes of the tea. First Nation’s Peppermint – After months of negotiation and a consultation with the tribal elders, we have developed an organic herbal tea in conjunction with a woman-owned company based on the Crow Reservation in Montana. This tea is exciting not only for its flavor but also for the partnership we have developed with the tribe. In addition to licensing the flavor and artwork from the tribe, we are also buying the tea from our partner on the reservation with the understanding that over time the community will develop the capacity to grow all the ingredients on the reservation. This unprecedented relationship should prove to be a valuable public relations tool. Production and Manufacturing Though we had our share of “learning experiences” along the way, we have developed several proprietary brewing tools and techniques which enable us to manufacture several thousand cases of tea a day on both coasts with the desired consistency. In addition, since we have a full-time brewmaster on staff, the company retains the knowledge of manufacturing the product, instead of relying on a co-packer for that information.

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The tea is brewed at a brewing and bottling facility located within driving range of the target market. The site was selected based on numerous criteria including capacity, reputation, quality control, production efficiency and willingness to invest in a long-term partnership with Honest Tea. All partners involved in the production process meet United States Department of Agriculture Hazard Analysis Critical Control Plant (HACCP) standards. We are in the process of obtaining Kosher certification from the Orthodox Union (“Circle U”). In early 1999 we will be making a change in our manufacturing process that will not affect the quality of the product but will have important ramifications for our profitability. Instead of a two-step packaging process, we will consolidate the brewing and labeling under one roof. This consolidation will save Honest Tea more than two dollars a case. Our tea leaves are provided by internationally known companies that specialize in tea buying, blending and importation. Our primary source is Hälssen & Lyon of Germany, the largest specialty tea company in the world. Another, Assam Tea Traders, has direct ties to tea estates in the Assam District of Northern India. The other ingredients are commodities which are in plentiful supply. As the Company grows in size, we anticipate dealing more directly with the tea growers. We intend to visit the tea estates so that we can verify that the labor conditions of the tea workers meet international standards and International Labor Organization conventions. We also aspire to ensure that the tea is grown organically. Market Opportunity Beyond Snapple – The Emerging Market for Quality Bottled Tea We have identified four market trends that are fueling demand for Honest Tea within the $72 billion non-alcoholic liquid refreshment beverage market. 1. Explosive growth in Ready-to-Drink (RTD) tea and bottled water markets -- Although carbonated soft drinks still dominate the beverage market, in the past ten years