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The Big Green Buyout

When the founders of small, natural, trusted brands sell out to large corporations, can their ideals of social responsibility be far behind?

by Christine MacDonald on August 24, 2011

Source: E/The Environmental Magazine

When the Coca-Cola company made a move to acquire a little brand of organic beverages called Honest Tea in 2008, they had a handy chart at the ready that executives used to explain the case for the deal to Coke’s board members.

“The chart had three circles that they called the megatrends of health, environmental consciousness and corporate responsibility,” recalls Honest Tea CEO Seth Goldman. “Honest Tea stands sort of in the intersection of all those different trends that are going to be the standard of doing business–that’s why they wanted to invest in us.”

Ironically, when Goldman started Honest out of his kitchen in 1998, it was in rather pointed rebuke to Coke and other big beverage makers whose sugary soft drinks have been implicated in everything from tooth decay to the obesity epidemic. Goldman, along with one of his former Yale professors, set out to brew a less sweet, healthier alternative that quickly gained a following among shoppers at Whole Foods and other natural grocery stores and cooperatives.

For many Honest Tea customers, selling to Coke was just plain selling out. Of course, the backlash from loyal buyers was nothing new. From Ben Cohen and Jerry Greenfield of Ben & Jerry’s ice cream to Roxanne Quimby of Burt’s Bees personal-care products, the founders of trusted companies have endured withering criticism for making big money deals with corporate behemoths widely seen as the very antitheses of their eco-friendly and socially responsible brands.

Three years after joining Coke, however, Goldman says his company remains true to its name and its mission to “democratize organics,” or take organics mainstream. Goldman says he “can look anyone in the eye” today and argue the logic of teaming up with the beverage giant–a relationship that has put him on track to stock Honest Tea beverages in more than 75,000 retail outlets this year, up from 15,000 in 2007. But he also acknowledges the risks. By signing on with Coke, he took his little company down a problematic path; a path where many a founder of a small, trusted company has seen his hard-fought values fall by the wayside.

“As one of my friends told me, ‘[After the sale] they’ll want to know your opinion for a few weeks. Then, they may want to know your phone number for the next few weeks. And then they just don’t want to know ya,’ Goldman says with a self-deprecating chuckle.

The corporate appetite for organic and natural brands in recent years has prompted some hard questions about what happens when a small eco-company sells to the likes of Coke, ConAgra or Clorox. Can the new corporate parent be trusted to continue the ethical and environmentally sustainable practices that earned its new subsidiary a loyal following in the first place? While corporations generally preserve brand names and folksy advertising styles, what’s to guarantee that the stuff inside the box, bag or carton hasn’t changed?

The world’s largest consumer-goods companies first set their sights on organic and natural product brands more than a decade ago. Keen observers trace the trend back to the late 1990s, as federal regulators at the U.S. Department of Agriculture were drafting the organic standards that became law in 2002. Besides Honest Tea, Burt’s Bees (which sold to Clorox) and Ben & Jerry’s (now part of Unilever), the list includes such brands as Cascadian Farms (General Mills), Kashi (Kellogg), Stonyfield Farm (Groupe Danone), Tom’s of Maine (Colgate-Palmolive), Naked Juice (PepsiCo), Dagoba Chocolate (Hershey’s), Green & Black’s (Kraft Foods), The Body Shop (L’Or al) and Silk soymilk (Dean Foods).

Jeffrey Hollender, former CEO of natural household products maker Seventh Generation, Inc., a company that so far has resisted the trend, has charted more than 60 buyouts on a spreadsheet that dates to 1998. Most of those transactions have failed to garner much public notice. Keeping these acquisitions low-profile suits corporate buyers who pay top dollar for small, trusted companies and don’t want to alienate loyal customers by letting on that beloved brands are now under a ubiquitous corporate umbrella.

“You think you are buying an Odwalla drink and you don’t know you are buying a Coca-Cola product,” says Hollender, who adds that lack of transparency is his number-one problem with the consolidation trend.

Even for those transactions that make the news, few details ever emerge about changes to the workforce, supply chains and manufacturing operations that might clash with consumer perceptions. Corporations take special care managing the news of these acquisitions because they generally pay more for “green” and “good” companies than for the average startup. When Clorox bought Burt’s Bees in 2008, it paid $913 million, more than 5.5 times Burt’s annual sales at the time. L’Or al paid $1.4 billion, about 1.5 times annual sales, for the Body Shop in 2006. Financial details of Coke’s 2011 acquisition of Honest Tea were not disclosed, but it paid $43 million for its initial 40-percent stake in the tea company three years ago. Since 2007, Honest Tea’s gross sales reportedly tripled, reaching $71 million last year, which means Coke paid more than 1.5% of 2007 sales for its initial 2008 foothold in the company.

Organic and natural products have generally posted faster and more consistent sales growth and higher profit margins than traditional products, but experts say that’s not the only reason for the price premiums. Beyond offering insta-traction in rapidly trending markets, corporations are looking for insights into changing consumer views and how to inspire diehard customer loyalty–arenas in which they are regularly trounced by the little guys.

David J. Urban, a professor of marketing at Virginia Commonwealth University, says the emerging public consensus that “companies are part of a broader environmental and social context, not just profit-making engines” is propelling corporations to purchase smaller companies that have made sustainability central to their business models.

“If it were not being felt by the individual consumer and not showing up repeatedly in market research results as a key criterion in consumer purchase patterns, then you probably wouldn’t be seeing it,” Urban says. He calls the sustainability trend “a growing wave.”

But opinion polls and plenty of market research show that consumers are deeply skeptical about corporate claims of good citizenship. And consumer watchdog groups like the Washington-based nonprofit Food & Water Watch say there is good reason to doubt.

“This kind of consolidation eventually has a cost impact for consumers, as well as a quality impact,” says Wenonah Hauter, the nonprofit’s executive director.

Organic and natural products are particularly prone to declining quality as these once-independent brands are consumed by a handful of bottom-line-driven corporations that dominate consumer goods industries, she says. Food & Water Watch is also concerned that these deals bolster corporations that lobby to weaken federal regulations, while depleting the ranks of independent, socially minded companies that have fought against deregulation of genetically modified (GMO) crops or for maintaining tough organic standards.

Controversies involving ingredients, quality and price have already begun piling up.

Kashi, a company founded in 1984 by a La Jolla, Calif., couple seeking to develop a nutritionally balanced breakfast cereal, has faced consumer backlash over GMO ingredients since its 2000 acquisition by the Kellogg Company. Customers have also bristled at the pains Kellogg has taken to preserve Kashi’s image as a little natural-foods brand even as it used its market clout to push Kashi cereals onto grocery store shelves across the country. Another Kellogg acquisition, Morningstar Farms, which makes vegetarian and vegan processed food like veggie corn dogs, tenders and patties, has drawn criticism for switching to genetically modified soybeans and beets post-sale.

Silk, a brand of soymilk that “right living” proponent Steve Demos and his company White Wave, Inc., turned into a supermarket dairy shelf staple a decade ago, was dropped by Whole Foods Markets last year. The move came after White Wave, now a division of Dean Foods, Inc., tried to quietly shift away from organic soybeans. The food industry watchdog Cornucopia Institute blew the whistle. Once word spread that Silk had changed the wording on its label from “organic” to “natural,” consumers balked. The brand suffered serious “reputational damage,” not just for dumping its organic pledge but also for the public perception that it had tried to sneak the decision past consumers. Causing further outrage, Silk has continued charging premium “organic” prices.

Last year, Ben & Jerry’s dropped the “all natural” claim on its ice cream labels after the Center for Science in the Public Interest pointed out that 48 of its 53 flavors had chemically modified and otherwise “unnatural” ingredients and accused the company of deceiving customers.

In a backhanded way, scandals ricocheting around corporate buyouts allude to a paradigm shift set in motion a few decades ago by a small group of socially minded entrepreneurs. These maverick business people, driven by a desire to incorporate their altruistic impulses into their day jobs, challenged the prevailing business culture and ushered in a new era of “the good corporate citizen.”

“We separate our lives into making money and doing good work. From my perspective that didn’t make sense,” says Hollender of his inspiration to start Seventh Generation in 1988.

Jerry Greenfield of Ben & Jerry’s says that a desire to use business as a tool for improving society powered the ice cream maker’s early days. “We didn’t want it to be something that was ancillary to what we did,” he says of the company’s social mission. “So we looked at all the activities that our business did, ranging from sourcing ingredients or marketing or finance, and tried to see if there were ways that we could factor in social concerns.”

Social Venture Network, a business organization for the sustainable-minded, was instrumental in bringing them together and capturing mainstream attention for a burgeoning movement.

“I think each one of the companies was outside of the mainstream and kind of ridiculed by the mainstream business community,” adds partner Cohen. “So we were happy to find other companies that were like us.”

He and Greenfield, Hollender, Gary Hirshberg of Stonyfield Farm and Anita and Gordon Roddick of The Body Shop (Anita passed away in 2007) were regulars at gatherings that offered insights and solidarity at a time when few books or business consultants existed to help companies chart a socially responsible course.

It’s hard to underestimate how different things were a few decades ago, says Hirshberg, adding that when he cofounded the Stonyfield yogurt company in 1983, “you couldn’t even use the words ‘organic’ and ‘business’ in the same sentence.”

“I often joke that we had a great company back then. We just had no supply and no demand,” he says. ‘Literally, nobody understood what we were doing. Today we are very proud that the organic world is a $25 billion segment.”

Not only are corporations snapping up natural and organic brands, but they have also started to mimic them in other ways. After Unilever launched a sweeping plan to reduce its negative impact on the planet by “decoupling” its growth from its ecological footprint, the company’s CEO Paul Polman told U.K. newspaper The Telegraph: “It is time to change. That is why I am here. I want to live in a better world.”

Even major oil companies have jumped on the sustainability bandwagon. Shell’s top executive, Peter Voser, in Abu Dhabi for a renewable energy conference in January, told investors: “It will take a while for international standards to be implemented, but we are of the opinion that we have to move now.” Dwindling resources, such as fossil fuels and minerals, as well as climate-change impacts on water and crops are also driving corporate policies, says Andrea Moffat, vice president of corporate programs at Ceres, an activist shareholder organization. Resource scarcity “is a real economic business issue for companies like Unilever,” she says. “So they are going to act to decrease their impact and try to get the rest of the economy to do the same.”

Urban, of Virginia Commonwealth, says that we are witnessing a real change–not just a superficial one–in the way companies do business. “It goes much deeper than most people are aware of,” he says. “I don’t think this is a passing thing or something companies are paying lip service to. There is an understanding that this whole issue of social responsibility and sustainability gives companies an entirely new way to look at how they run their companies.”

The changes underway in the business world provide some hope that reform can come from within. By teaming up with multinational giants, Goldman and Hirshburg argue that they have not abandoned their values but have found a bigger platform from which to change the world, though they acknowledge more pedestrian motives as well.

Several company founders interviewed for this story mentioned the need to find “an exit” for investors who supported their companies through the lean startup period that stretches on for years (after 13 years in business, Honest Tea, for example, is still not profitable, Goldman says). But they also argue that joining the corporate fold can further a company’s mission–whether it be democratizing organics, folding social and environmental concerns into the cost of doing business or transforming the way the country’s farm system works.

In response to his critics, Goldman says, “How do you make change happen? I’ve been that small company. And we had a nice model that was meaningful to anyone who had access to a natural foods co-op or a Whole Foods store but was irrelevant to most of the American population. As much as I’m proud of the model we developed, my ambition is much bolder than to just be a model. Why should we be the ones modeling it and then have someone else do it in a half-assed or a wrong way? Let’s be the ones driving the real change here.”

Hirshberg’s company is celebrating 10 years with Groupe Danone. Today, the French food giant owns 85 percent of Stonyfield, but Hirshberg says being part of a multinational conglomerate has only advanced his career-long effort to support family farmers and challenge giant agribusiness.

“Small is not always beautiful,” Hirshberg says. “There are advantages to getting to scale. The problem (of global warming) is so severe. We really need to harness the power of capitalism at a very big scale.”

Both Hirshberg and Goldman have engineered agreements that they say could keep them at the helm of their companies for as long as they continue to hit sales and profit targets. Last March, when Coke exercised its option to purchase the outstanding stake in Honest Tea, Goldman convinced the beverage giant to allow him to keep most of his equity in the company, an unusual move that he thinks will keep him focused and give him more credibility to lead Honest and maintain its mission. Both men say having their control linked to company performance is the best way to prove that changing the way big business does business is not only possible but profitable.

“For me, a really big part of my motivation is showing a large company that they can make more money this way,” Hirshberg says. “What we need to do now is build substantial economic power. Many of these technologies are being advanced because companies like [chemical giant] Dow and [genetically modified seed maker] Monsanto have made a lot of money in the 20th century. The only way that we win in the long run and start to reverse some of these really pernicious trends is by obstructing these large companies.”

Hauter of Food & Water Watch is skeptical of Hirshberg’s premise that big corporations can be challenged with more big corporations. “I think that’s a rationalization and probably has some self-interest involved in it,” she says. Rather than building a new sustainable and equitable economy, she says that corporate buyouts–even ones involving socially responsible companies–transfer profits earned in struggling local communities into “the pockets of big companies and their shareholders.”

Hollender also doubts conventional companies can address society’s pressing problems. He is preparing to launch a new venture next year that will offer financing to enterprises run by workers via employee stock ownership plans, co-ops, credit unions and other establishments organized to serve communities, employees and customers–not outside investors.

“If you have a business that is owned by investors whose primary goal is to make money, how good can the business ever be?” he asks. “The business will forever make compromises, balancing profitability with doing the right thing. And after being a staunch advocate for corporate responsibility for two decades, I have deep concerns about the limits to corporate responsibility.”

For Mark Kastel, co-founder of the Cornucopia Institute, who directs its Organic Integrity Project, the corporate buyout is simply “the model for American business. You don’t make money selling milk or selling peanuts–you make money by selling equity in the company.”

Kastel says Cornucopia isn’t against corporations going organic. “It’s not a matter of corporate scale,” he says. “It’s a matter of corporate ethics.” He says the vast majority of organic manufacturers, both large and small, make their products “with a high degree of integrity.” Stonyfield, for example, apparently has remained true to its support for family farms even after its acquisition, Kastel says, though he remains wary about the future. “If Stonyfield ever runs into financial stress, that will be where the rubber meets the road,” he adds.

The experiment underway at Stonyfield is not only unusual in the degree of control Hirshberg has retained over operations, but the “CE-Yo,” as he’s known (i.e., the CEO of yogurt), also has been extraordinarily open about his company’s arrangement with Danone. That’s in stark contrast to the way most founders and CEOs behave after a corporate buyout. As Kastel explains it, confidentiality clauses are often part of the terms of the sale, and/or the CEOs become employees or consultants post-sale. Either way, “they have a strong incentive to be secretive,” he says.

One founder who has not shied away from the discussion is Greg Steltenpohl. He and a couple friends started the super-premium juice brand Odwalla in a shed in his backyard two decades ago, and first sold their fresh-squeeze fare from a Volkswagen bus. By 1996, they had received venture capital funds and become a publicly traded company. But that year, a fatal outbreak of E. coli 0157:H7 bacteria linked to contamination in Odwalla’s apple juice almost put the company out of business. Sales reportedly dropped by 90 percent. To survive, the company needed more cash and, Steltenpohl says, was forced yield controlling interest along with a substantial investment from venture capitalists. “We really lost control of the company after that,” Steltenpohl says. Five years later, Coke bought Odwalla for $181 million.

Since then, Steltenpohl says he’s learned to step back and see the “patterns” that lead to corporate buyouts, concluding that once investment bankers, venture capitalists and business consultants come on board, the founders usually lose control as the focus shifts to reaching a return on investment within five years.

For venture capitalists and corporate executives, startups are valuable commodities. The buyout is usually the most viable way to deliver on these five-year investment cycles, he says. Corporations, meanwhile, fail at what startups do best: “the cost-effective execution of innovation.”

The transactions go wrong when corporate executives consolidate and standardize the upstart business, stamping out what was unique and attractive about it as an acquisition. Once the entrepreneurial spark is gone, consumers follow, he says. Conversely, company founders often focus too much on their product and not enough on the mechanics of growing the business; or let ego-driven desires for fast growth and big profits prompt them to take money from investors whose values diverge from the company’s mission.

But Steltenpohl also thinks critics of the formerly “trusted” founders should cut them some slack. These driven personalities often experience burnout and may just want to move on after selling their companies. And, he points out, the businesses are sort of like their babies; founders may be reluctant to speak out against even the most wayward of corporate children.

How has Odwalla developed under Coke’s management? Showing a degree of parental caution, Steltenpohl says the acquisition is still in its “adolescent stage”–too early to say how it will turn out.

Still, Steltenpol is the rare ex-CEO willing to discuss his former business. Quimby of Burt’s Bees did not return an e-mail seeking an interview. Cohen and Greenfield no longer want to talk about Unilever’s management of Ben & Jerry’s and would only discuss the early days of the corporate social responsibility movement. Demos has also remained mum since leaving Dean Foods in 2006, four years after Dean acquired his company. He spent those four years helping to expand White Wave into the conglomerate’s natural products division. But in 2007, as soon as his non-compete agreement with Dean expired, he launched another startup called NextFoods, makers of an organic probiotic drink called GoodBelly, bringing many of White Wave’s executives with him.

If those developments hint that he was unhappy with the direction Dean was headed, Demos hasn’t said.

Over at Honest Tea’s Bethesda, Maryland, headquarters, however, Goldman promises to continue his company’s honesty policy. The Coke deal was a deliberately public affair, says Goldman, who shot down a suggestion that perhaps it would be better to disguise Coke’s initial 2008 stake as coming from an anonymous source.

“I said ‘no.’ If we don’t believe in it, then we shouldn’t do it. But if we believe in it then we’ve got to be transparent about it,” he recalls.

Goldman showed his commitment to candor again last year, telling a New York Times reporter about a confrontation with Coke executives who asked Honest Tea to remove the words “no high fructose corn syrup” from juice pouches. Coke evidently felt the statement was an indirect criticism of the company’s beverages that use the sweetener. It appears that the Times article caused more ruffled feathers than Goldman’s refusal to change the labels.

From Goldman’s perspective, Coke needs his company, which gives him some breathing room. He sees Coke’s acquisition of Honest as part of “Coke’s efforts to be competitive.”

“They see the future,” he adds. “Certainly the trends are that carbonated soft drink sales are not expanding as they once were. Consumers are seeking out alternatives. So this is a great opportunity for them to continue to be on the leading edge of where beverage sales are headed.”

When pressed on the question of whether he would speak up if he thought Coke were to jeopardize Honest’s integrity, Goldman says: “I can’t imagine any situation in which I wouldn’t speak what I believe.”

 

Christine MacDonald is an environmental journalist and the author of Green Inc., An Environmental Insider Reveals How a Good Cause Has Gone Bad (The Lyons Press).