Case Honest TEa
“The cost advantage that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs; i. e. the greater the quantity of a good produced, the lower the per-unit fixed cost because these costs are shared over a larger number of goods. Economies of scale may also reduce variable costs per unit because of operational efficiencies and synergies. ” Goldman (the founder of Honest Tea), justified the partnership with Coca Cola, stating that it will help Honest Tea spruce up distribution and reach more customers in US.
He opined that greater reach would benefit organic farming and would have a positive impact on the environment. It would also incultate healthy drinking habits among the customers. We can distinguish several advanatages of the economies of scale: Fisrt of all, the more orders that the Honest Tea company recieves, the more savings it makes, as it will in turn get cheaper prices for the materials it needs to produce its drinks (e. g. plastic, glass, sugar) as it will be buying them in larger quantities and receiving discounts, the manufacturing company in turn would give its customers cheaper prices for the more orders for drinks they make.
Secondly, the economics of scale help Honest Tea to run they own brewery and bottle manufacturing plant. It gives the company independence and allow to run the whole manufacturing process without any intermediaries, what have immediate impact on the price reduction. Thirdly, massive production require increased supervision and obligation to fulfill specyfic criteria. Receiving certain certificates push the Honest Tea to run full natural and healthy production. Initially, only the few products were made by using full organic indegriends.
In the end, the whole product range was full organic. It shows that economies of scale help the company improve the technology and reinforce their standards. The economies of scope: “An economic theory stating that the average total cost of production decreases as a result of increasing the number of different goods produced. ” Economies of scope is different to economies of scale though there is same principle of larger firms benefiting from lower average costs. The Honest Tea firm uses it existing resources to diversify into related markets.
The company has already produced few types of tea drinks. The Honest Tea used its marketing and distribution network to start producing more of different types of flavored tea drinks. Differentiation of new products help in several ways: First of all, it helps to decrease the average total cost of production as a result of increasing the number of different goods produced. Secondly, Honest tea runs a specyfic types of flavored beverages that are characteristic for particular regions of the world.
Some such flavors were Kaschmiri chai, from Kashmir in India, where the tea was mixed with spices like cinamon, cardamon, orange peel or cloves. These iniciatives helped in propagating cultures and native art from across the world. Thirdly, Honest Tea introduced Haarlem Honeybush organic tea. This particular tea used a rare herb found only in the Cape Town province in South Africa. Honest Tea produced it from Haarlem, South Africa. It helped from a partnership with the community to develop subsistence farming.
A portion of the revenues was shared with the farmers to help them expand and produce more of the ingredients. Lastly, Honest Tea bought the ingredients used in its beverages from small organic farms located across the world, at Fair Trade prices. The workers in the tea gardens benefited in terms of better wages due to Fair Trade practices. Those examples show that increasing the number of Honset Tea products line, not only affect on the average total cost of production. It also have a huge impact into sustainability practices.
What’s more, differentiation of new products encourage youngest to buy new types of low calories drinks – a great alternative for soft drinks which are one of the largest source of sugar in the American diet. The diseconomies that apply to Honest Tea prior to the Coca-Cola deal: After selling the equity stake, Honest Tea has come under the authority of Coca Cola. It gives the Honest Tea a huge advantage of scale and scope (that i have mentioned above) but it also comes up with some serious diseconomies.
Honest tea has build it reputation over past decade on a commitment to healthy organic products, environmental quality, and social justice for its producers. Coca Cola was widely seen as a company with a track of record of environmental abuses and unethical practices in many countries where it operated. This conection has some negative influence on the pro-organic image of the company. In fact, it has immediate impact on the losing reliance of the company by the customers. What’s more, the Coca Cola bought the whole Honest Tea company in 2011 and control the production and brand of the Honest Tea.