Celestial Seasonings*
In the late 1960s, the era of Woodstock and Summer of Love music festivals, Mo and Peggy Siegel and two friends be- gan picking herbs in the mountains around Aspen, Colorado. They decided to start a company that they named after one of their friends—Lucinda Ziesing, whose nickname was Celes- tial. The next year, 10,000 muslin bags of Mo’s 36 Herb Tea were sewn, filled, and sold to a health-food store in Boulder, Colorado. A year later, Sleepytime Herb Tea was created, and the business was moved to a barn in Boulder. But that didn’t last long. Mo and his friends were onto something hot! Soon they were purchasing herbs around the world and learning how to mass produce their product in a factory. Loose-pack tea was eventually replaced with single-serve tea bags, and addi- tional flavors were created—all of which fueled sales. Today, Celestial Seasonings is recognized as a leader in herbal prod- ucts, accounting for half the herbal tea market in the United States and expanding worldwide.
Celestial Seasonings’ core business is herbal teas. Along with Mo’s 36 Herb, Red Zinger, and their best-selling product, Sleepy- time, the company has created over 60 different herbal teas.
The tea market is comprised of black teas, herbal and me- dicinal teas, diet teas, iced teas, and Chai, a sweet Indian spiced blend. The U.S. tea market has an annual growth rate of about 10 percent in recent years. Herbal and medicinal teas represent two-thirds of the total tea market and are growing at about 12 percent a year. Celestial Seasonings is the leading competitor in the herbal tea category, holding 50 percent market share. Other herbal tea competitors include Republic of Tea, Tazo (Starbucks), Yogi Tea, and Oregon Chai.
Herbal teas compete with traditional black teas, dominated by Lipton Tea Company. In the 70s, Celestial revolutionized the tea industry when it introduced the idea of herbal teas as flavorful, healthy beverages for everyday consumption. At that time, herbal teas were perceived as foul-tasting medicinal brews. Few retail stores carried a complete line of herbal teas, so creating awareness, favorable image, and distribution posed a daunting challenge to the company. Initially, Celestial Sea- sonings promoted and distributed its products through health-food stores.
In 1984, food industry giant Kraft Foods bought Celestial Seasonings. With its marketing muscle and channel power, Kraft expanded distribution of Celestial Seasonings and added a line of gourmet black teas under the Celestial brand name. Shortly after the Kraft buyout, Mo Siegel retired from the com- pany, and Barney Feinblum was named successor. However, the Kraft way of doing business sometimes conflicted with Celes- tial’s culture, which from the beginning was influenced by “hippie-style” entrepreneurship, employee involvement, and earth-friendly community initiatives.
*This case and the script for the accompanying video were prepared by Professor Davis Folsom of USC Beaufort.
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The values of the company are epitomized in its belief statement:
We believe in marketing and selling healthful and naturally ori- ented products that nurture people’s bodies and uplift their souls. Our products must be superior in quality, of good value, beauti- fully artistic, and philosophically inspiring.
In 1988, Celestial Seasonings management along with a venture capital firm bought the company back from Kraft. A new board of directors was created, and new headquarters were constructed outside of Boulder, Colorado. In 1991, Mo Siegel returned as CEO and chairman of the board and agreed to stay until 1997.
During Mo’s second period of leadership, Celestial Season- ings went public and attempted a variety of product diversifications. A partnership with Perrier was formed to li- cense and produce a line of ready-to-drink bottled teas under the Celestial Seasonings brand. A line of After Dinner Teas was launched, targeting more upscale consumers than Celes- tial’s original back-to-the-earth customers and promoting tea as an after-dinner beverage. Iced Delight teas were created and marketed as “Brews in Your Fridge.” A licensing agree- ment with Warner-Lambert produced Celestial Seasonings Soothers, herbal throat drops. In 1995, with HP Hood Com- pany, Celestial created iced tea flavored frozen popsicles, but they were not a market success. That same year, Celestial de- veloped its first medicinal herb tea—Herbal Comfort. In 1997, based on the success of Herbal Comfort, Celestial Sea- sonings expanded the line of medicinal teas to include Echinacea, Green Tea, GinkoSharp, Diet Partner, GingerEase, Detox A.M., LaxaTea, and Melatonin P.M. Celestial Season- ings now has 46 percent (up from 24 percent in June 1998) of the fast-growing medicinal tea category.
In 1998, Celestial acquired Mountain Chai, a Boulder- based manufacturer of concentrated Indian-style tea. Six varieties of Mountain Chai were reformulated and introduced under the Celestial logo. That same year, a line of six green teas was launched. Green teas have been used in Asian cultures for hundreds of years and are known for their curative qualities. Green teas were introduced to the American market in the 60s but were not widely successful due to their bland taste.
In 1997, Mo Siegel’s commitment to manage the company ended, and Steve Hughes, known in the industry for growing the Healthy Choice line of food products, became Celestial’s CEO. With Hughes at the helm, Celestial Seasonings entered a new phase. Saying that Celestial was “a $500 million brand trapped in a $100 million business,” Hughes initiated a series of efforts to leverage the Celestial brand name, including the creation of herbal supplements. According to Hughes,
For 25 years we’ve cared about one thing—creating healthy, natural products that make our customers feel good. Our herbal supplement line is a natural extension of that mission. We know the power of herbs and the simple solutions they provide for good health. We want to share that.
Launched in April 1998 in capsule form, the herbal supplements line included nine single-herb extracts and eight advanced-formula blend products. The timing seemed perfect. Herbal supplements were rapidly gaining consumer acceptance as alternatives and additions to traditional health and wellness products. A 1998 Market Facts survey showed the percentage of Americans who reported using herbal supplements had grown from just 3 percent in 1990 to 37 per- cent in 1998, and almost 80 percent of respondents felt herbal supplements were safe to take. Herbal supplements also have a number of logical synergies with Celestial’s exist- ing products. Many of the same ingredients are used, and herbal supplements can be sold through the same distribu- tion channels.
Herbal supplements are promoted on the company’s Nat- ural Wellness website (www.celestialseasonings.com):
We do our best to eat right, get enough rest, and exercise, and the benefits are undeniable. But our health can be affected by things we can’t control. Environmental toxins, emotional and physical stress and simply getting older create concerns that show up in many ways—as wrinkles, low energy, a flagging mood, and more. We’re not defenseless, though. Nature, as usual, provides what we need.
Clearly, Celestial Seasonings is appealing to specific target market segments, like aging baby boomers and health-con- scious consumers of all ages. In fact, whenever a new Celestial product or service is proposed, the first question asked is “What will Tracy think?” Tracy Jones is the company’s nick- name for their primary target market: a 35- to 54-year-old, college-educated, socially involved woman with a focus on healthy lifestyle and household income greater than $50,000. Tracy also is not a major viewer of television. Herbal supple- ments are primarily targeted to Tracy and secondarily targeted to other health-conscious consumers. With labels that talk about “Tummy Mint” and “Tension Tamer,” these new herbal supplements are designed to strike an emotional chord in Tracy.
Launched with a $4 million dollar campaign and priced at a premium, the herbal supplements line brought in 21 percent of Celestial’s revenues in 1998. But just as things looked as bright as a summer day in the Rockies, Celestial learned a clas- sic marketing lesson. The market for herbal supplements peaked at the same time two major competitors, One a Day and Centrum, entered the market. Also, 1999 SPINS and AC- Nielsen market research data indicated a variety of changes in the herbal market. Green teas, medicinal blend teas, and Chai were gaining sales, but previously popular single-herb supple- ments, including St. John’s Wort and Ginseng, showed sharp declines.
In response, Celestial restaged the herbal supplements line in 1999 by dropping six products, reducing the advertising budget, and doubling the number of capsules per bottle. Celes- tial’s herbal supplements line still represents a major part of company sales, but initial enthusiasm has mellowed, and the marketing team has begun to look for new opportunities. Also, companies specializing in herbal supplements face several eth- ical and legal issues.
Almost 80 percent of American consumers believe that herbal supplements are safe. However, as one FDA director has stated, “Realize that the label term ‘natural’ doesn’t guarantee that a product is safe. Think of poisonous mushrooms. They’re natural.” Herbal supplements companies must abide by FDA rules regarding claims of effectiveness of their products; they
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Video Cases 701 cannot represent their products as medicines. Mike Gross, Celestial’s regulatory expert, explains, “What it all boils down to is that you cannot make any claim to cure, treat, prevent, mitigate, or diagnose any disease state—or even mention a disease! For example, you cannot say ‘for the treatment of prostate enlargement’ but you can say ‘to keep your prostate healthy.’ ”
One new direction under consideration at most consumer goods companies is the Internet. Surprisingly, the Internet ini- tiative at Celestial started in the Information Technology division of the organization. Celestial started a modest web storefront designed to educate consumers and sell seasonal items and gifts from its mail-order catalog. Then the catalog manager got onboard and the marketing group joined in to build this alternative channel.
Part of the success of Celestial’s catalog and Internet sales is attributable to the company kitchen! Started in 1973 as a free lunch program for employees, outsiders began to drift in, want- ing to buy products. As more and more customers visited the factory, the idea of a factory tour gained favor. Between 1994 and 1999, over 350,000 people took Celestial’s factory tour, creating a huge database for catalog and Internet marketing strategies.
1. What kinds of synergies do herbal supplements have with herbal teas?
2. What environmental trends seem to be fueling sales growth for herbal supplements? What environmental trends pose threats to the sales and profits of herbal sup- plements?
3. What kinds of new products should Celestial Seasonings develop? What criteria would you use to evaluate new product ideas for Celestial Seasonings? Why?