Ed Cotton: Buying A Cool Brand?- Don’t Nuke Its DNA
It must be something of a relief that you've found a way to scale your business by riding on the back of one of the world's largest corporations, but despite all the good news, it's when the problems really start.
Imagine you are a smart guy in your mid-30s and you’ve come up with a brilliant concept for a beverage that’s the antithesis of giant soda corp? You call that company Honest Tea and you nurture it for years until it blossoms into something amazing, generating some serious revenue and growing beyond your wildest dreams. You end up putting ten years of hard work and sweat into your “kid” and then it happens, the call you’ve been waiting for, it’s Coca-Cola and they want to buy a minority share for $40 million.
It must be like winning the lottery and something of a relief that you’ve found a way to scale your business by riding on the back of one of the world’s largest corporations, but despite all the good news, it’s when the problems really start.
The New York Times has an interesting article about the challenges ahead of Honest Tea:
“In late 2008, Mr. Goldman traveled to Coke headquarters in Atlanta to seek a solution. “I met with various people in the company who explained their belief that high-fructose corn syrup is comparable to sugar in its health impact.”
Mr. Goldman decided against trying to resolve the scientific point. “Our point of view was that we were not going to get into the debate over whether high-fructose corn syrup is the same as sugar,” he said. One option Coke presented, he said, was simply to eliminate the “no high-fructose corn syrup” banner. But Mr. Goldman argued that including the notification was a key signal to buyers that there were no hidden ingredients in the drink, an important issue given the growing chorus questioning whether high-fructose corn syrup contributed to the risk of obesity in adults and children.”
There are hundreds of ice tea companies out there, some of which Coke could have brought 100% share of for less than the $40 million it took to buy the minority stake of Honest. The bean counters at Coke obviously did a lot of homework as they poured through Honest’s books and were probably impressed by the rate of revenue growth and profitability. When they ran their forecasts, they obviously thought there was considerable growth potential with the brand and then probably contemplated some ideas of how the costs in the business could be reduced leading to greater profitability, using corn syrup was an obvious cost cutting tactic.
This is the problem with classic financial analysis for businesses, despite tons of discussion over the last 20 years, there’s still no real place or discipline to measure the intangible brand value. Ad agency holding companies, who’ve had access to ample resources and had the discipline in this space seem to have failed to get this critical idea across to client CEO’s and their boards.
If there was a clear understanding of how to value the intangible elements of the Honest Tea brand, no one would even mentioned the words corn syrup.