Celestial Seasonings, Inc.

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Celestial Seasonings, Inc.

4600 Sleepytime Drive
Boulder, Colorado 80301
U.S.A.
(303) 530-5300
Fax: (303) 530-5969

Public Company
Incorporated: 1972 as Celestial Seasonings, Inc.
Employees: 221
Sales: $70.1 million (1995)
Stock Exchanges: NASDAQ
SICs: 2099 Food Preparations, Not Elsewhere Classified

The largest manufacturer and marketer of herb teas in the United States, Celestial Seasonings, Inc. markets roughly 50 different tea varieties in the United States and abroad. Chiefly responsible for creating the herb tea industry in the United States, Celestial Seasonings was founded by Mo Siegel and Wyck Hay, who introduced the country’s consumers to colorfully packaged, decaffeinated herb teas that offered “soothing teas for a nervous world.” In 1984, the company was purchased by Kraft, Inc., then cut its ties to its parent company through a leveraged buyout in 1988 before going public in 1993. During the mid-1990s, Celestial Seasonings controlled an estimated 51 percent of the herb tea market.

The Founding of Celestial Seasonings

The birth of the United States’ largest manufacturer of herb teas begins in the canyons and forests of the Rocky Mountains, where 19-year old Morris “Mo” Siegel began gathering wild herbs in 1968. Despite its idyllic image of a teenager traipsing through meadows and harvesting what nature had to offer, the Rocky Mountain tableau, with 19 year-old Mo Siegel at its center, marked the beginning of what would in a short time become Celestial Seasonings, the pioneer of the herb tea industry in the United States and its leading competitor in the decades to come. What could have represented nothing more than a carefree excursion made during the “Summer of Love,” or perhaps another example of the 1960s generation “tuning in and dropping out” by returning to the simplicity of nature, represented instead the first stirrings of a powerful corporate enterprise, undoubtedly one of the anathemas of wild herb pluckers throughout the country. Though Mo Siegel’s first herb harvesting trip touched off the creation of a new corporate force in the business world, the development of which was spearheaded by Siegel himself, the company’s history did not betray the idyllic setting nor the revolutionary social movement from which it emerged. Celestial Seasonings, twenty years after it was created, continued to occupy a singular position in the corporate world, standing out as a unique enterprise that in many respects outlived and then carried forward the environmental and philosophical precepts engendering its birth. A colorful tale of corporate history was the result, a story played out during the company’s formative decades that charted the rise, development, and maturity of Celestial Seasonings, building to the dominant market position it occupied during the 1990s.

Well before Mo Siegel traveled to the forested countryside neighboring Boulder, Colorado in 1968 to pick herbs, he demonstrated a penchant for using the yields of nature to make money. At age eight, Siegel picked wild berries and sold them to neighbors who used the berries to make jelly. Herbs, as the means to make tea, was another matter. In Europe and elsewhere, herb tea was a commonplace and sought after product, but in the United States herb tea was perceived generally as a medicinal beverage, a foul-tasting liquid imbibed by a select few and only when health concerns arose. Siegel was instrumental in changing the image and desirability of herb tea, helping create what would become a billion-dollar industry, but not until his soon-to-be partner joined him in 1970. That year, Wyck Hay, a pivotal figure in Celestial Seasonings’ early development, and Siegel discovered a massive, naturally-grown crop of wild herbs. The pair enlisted the help of their friends, their wives and girlfriends, and picked the herbs, then used screen doors to sift them and a paper cutter to chop them. In the end, the team produced 500 pounds of their first blend of teas, then sold the quantity—amounting to 10,000 tea bags—to a local health-food store called the “Grainery”, labeling the product somewhat mysteriously as “Mo’s 36 Herb Tea.”

The herb tea was packaged in hand-sewn muslin bags, the most inexpensive method available to the hopeful crew of entrepreneurs. Of these early days, Siegel later said, “We were so broke, we couldn’t even afford to have ties to close the bags. So we went to Ma Bell and asked if we could have its telephone scrap wire. If you have ever opened a cable of telephone wire,’’ Siegel explained further, “you see copper wire covered with multi-colored plastic. So we would slice the cable like that and slit it open, and there would be these cute little red and pink and blue wires. We would use those to close the tops of the bags.”

Growth in the 1970s

The beginnings of Celestial Seasonings were modest, to be sure, but prospects brightened somewhat with the arrival of Wyck Hay’s brother, John Hay, in 1971. The more conventionally named Hay brought with him more fundamental needs for the meager tea-making venture, most notably money and a business degree, which neither Siegel or Wyck Hay possessed. Once settled from his trip from New York to Boulder, John Hay helped his brother and Siegel relocate from an old barn located outside Boulder and establish a larger base of operations in Boulder. Quickly, the business began to take shape. From delivering its tea to a local health-foocl store, the trio of entrepreneurs set their sights higher, expanding throughout Colorado, New Mexico, and as far away as the East Coast. Along with geographic expansion came the assemblage of a labor pool, as the aspirant tea producers gave up on the idea of picking all the herbs themselves and began buying the herbs. Gradually, a national herbal tea company began to emerge.

The following year, in 1972, the six employees who composed the venture were elevated to corporate legitimacy when Celestial Seasonings was incorporated, taking its name from the “flowername” of Wyck Hay’s girlfriend, Lucinda Ziesing. That year also witnessed the introduction of one of the company’s perennial best-selling products, Red Zinger Herb Tea, a mixture of hibiscus, rosehips, and lemon that made its debut in January 1972 and would be listed among Celestial Seasonings’ leading sellers nearly 30 years later.

One year after incorporating his company, Mo Siegel began traveling around the globe, canvassing the world in search of herbs for Celestial Seasonings teas. As the 1970s progressed, the company steadily grew, making the leap from distributing its products to health-food stores to distributing its products to supermarkets, a move that greatly increased the familiarity and availability of Celestial Seasonings teas. Packaged in colorful boxes decorated with charging buffalos and dancing bears, the company’s teas were embraced by consumers who were seeking “soothing teas for a nervous world,” as the decaffeinated teas produced by Celestial Seasonings were marketed.

From a company whose exotic herb mixtures were labeled with whimsical names, such as “Red Zinger,” “Sleepytime,” and “Grandma’s Tummy Mint,” emerged a corporate culture that was unique, carefree, and casual. Among a list of milestones published by the company that highlighted Celestial Seasonings’ history were pioneer events that pointed to the relaxed corporate atmosphere pervading the company’s headquarters in Boulder: the inauguration of lunchtime volleyball in 1974, then lunchtime horseshoe in 1975, and the first non-vegetarian meal served at company headquarters in 1977. Despite the nonconformity of Mo Siegel, Wyck Hay and other executives, Celestial Seasonings, a decidedly non-corporate entity, flourished during the 1970s in the corporate world it refused to embrace, becoming the defining force in the herb tea industry.

Though lunchtime volleyball and the transportation of company executives on company bicycles rather than in company cars had their place in the development of Celestial Seasonings, there were other, more conventional events that described the company’s rise during the 1970s. Sales eclipsed $1 million in 1974, Celestial Transport, a freight carrier, was established in 1976, and the distribution of teas to international markets began in 1977. By the beginning of the 1980s, the company was enjoying unblemished success, firmly positioned as the leader in a market that was growing rapidly and attracting an increasingly larger customer base comprised largely of coffee drinkers seeking a more salubrious alternative to hot, caffeinated beverages. Annual sales by 1983 were quickly approaching $30 million, up exponentially from the $1 million generated a decade earlier. With business booming and ambitious expansion plans on the table, including the purchase of 91 acres of land in Boulder in 1982 for the construction of future corporate offices, Siegel and his cohorts were ready to make a signal move into the public spotlight. An initial public offering (IPO) of the company’s stock was slated for 1983, but before investors had the opportunity to purchase a stake in Celestial Seasonings disaster struck the company for the first time in its history.

Company Perspectives

We remain committed to making the highest-quality, most inspiring, and most soul-satisfying specialty teas and good-for-you botanical products. In pursuing this passion, we remain dedicated to building shareholder value, to developing exciting, rewarding careers for Celestial employees and to contributing to our community and environment.

In 1983, a Mississippi woman who was seeking some relief from a broken hip she was nursing, brewed a particularly strong batch of Celestial Seasonings’ comfrey tea. Into one mug she steeped enough tea to make 18 servings, then drank the brew and subsequently complained of nausea and blurry vision. Researchers attributed her symptoms to a natural toxin called atropine that had mysteriously found its way into Celestial Seasonings’ tea, which sent company officials scurrying about to somehow mitigate the damage to Celestial Seasonings’ image. “It’s been the worst week of my life,” Siegel confided at the time, as preparations were made to recall 6,000 cases of comfrey tea and the plans for the $12 million IPO were scrapped. The damage done to the company’s standing was not permanent, however, but in the wake of the aborted IPO, a new chapter in Celestial Seasonings’ history began, one that would wed the informal Celestial Seasonings to the formality of a corporate giant.

1984 Acquisition by Kraft, Inc.

In 1984, Kraft, Inc. maker of “Miracle Whip” and “Velveeta” and a subsidiary of Dart & Kraft Inc., was orchestrating a diversification program that included entry into the beverage business, a move that was completed when the company acquired Celestial Seasonings and added the motley mix of people and products based in Boulder to its comparatively rigid and staid operations. Mo Siegel left the company the following year, but before his departure he selected his successor, Barnet M. Feinblum, Celestial Seasonings’ treasurer for the previous four years. Upon taking the reins of command from Siegel, Feinblum appraised both his new responsibilities and the acquisition that had precipitated his rise, noting, “Kraft bought the best small company in America. The only thing I intend to change is the small.”

During the ensuing years under Kraft’s ownership, Feinblum’s word’s rang true, as the largest herb tea maker in the country before the acquisition became even larger after the acquisition. During the first four years of Kraft’s ownership— the entire period the two companies would be united as it turned out—Celestial Seasonings blossomed, increasing its stature while under the sponsorship of its deep-pocketed corporate parent. Celestial Seasonings’ advertising budget increased tenfold in the fours years of Kraft ownership, enabling the company to advertise for the first time on national television. Annual sales swelled from under $30 million in 1984 to $45 million by 1988, while diversification and international expansion picked up pace, as Celestial Seasonings benefitted from Kraft’s distribution network and expertise.

The two companies were, however, complete opposites, and it was not long before their divergent corporate attitudes butted against each other. When Kraft’s management ordered Feinblum to put an end to Celestial Seasoning’s long-time practice of sponsoring and participating in bicycle races, Feinblum responded by signing Greg LeMond, America’s preeminent road bicycle racer, to Celestial Seasonings’ racing team, a deal both the public and Kraft management first learned about at a press conference after the agreement was reached. “If I’m going to be subordinate, I’m going to do it in a big way,” Feinblum later admitted, but Kraft executives answered back by implanting an undercover agent at Celestial Seasonings’ factory in 1987 after receiving anonymous letters that accused Celestial Seasonings’ employees of using drugs.

What appeared to be the end of the increasingly strained relationship between Kraft and Celestial Seasonings occurred in 1988 when Kraft announced its was selling Celestial Seasonings to Thomas J. Lipton, informing Feinblum of the deal the day after the agreement was signed. The proposed combination of Celestial Seasonings and Lipton paved the way for a company that would control 81 percent of the tea market once Celestial Seasonings’ 50 percent market share and Lipton’s 31 percent market share were combined. Aside from the overwhelming market control the merger would engender, the union of Celestial Seasonings and Lipton also made sense on numerous other levels, providing a more suitable match for Celestial Seasonings than its four-year relationship with Kraft had produced. “Lipton are tea people,” one Celestial Seasonings employee noted. “Kraft, they’re cheese people.”

1988 Leveraged Buyout

The merger never occurred, however, once Connecticut-based R.C. Bigelow, the maker of Constant Comment tea, raised objections and successfully blocked the merger on antitrust grounds. Family-owned R.C. Bigelow’s intervention left Celestial Seasonings still under the ownership of Kraft, but before the year was out, the ties connecting the two companies were forever severed when Feinblum and Vestar Capital Partners, a New York investment firm, took Celestial Seasonings private in November 1988 through a leveraged buyout (LBO).

The LBO saddled the newly-independent Celestial Seasonings with $45 million of debt, an enormous load that required the company to double its revenues in the next five years and increase its operating margins from 15 percent to 20 percent of sales just to service its debt. To achieve this goal, the company’s management, with Feinblum still leading the way, planned to launch new products and expand its loyal customer base, but after several years a new line of attack emerged, beginning with the return of one of the company’s most pivotal personalities. Mo Siegel rejoined Celestial Seasonings in 1991 as chairman and chief executive officer, gaining a reported 25 percent interest in the company in exchange for his company, Earth Wise, Inc., a manufacturer of environmentally friendly products.

One year after Siegel’s return from what amounted to a six-year hiatus, Celestial Seasonings continued to reign as the leader in the U.S. herb tea market, holding onto its enviable position by controlling half of the market for herb teas. By this point, in 1992, the company was generating more than $50 million in sales a year, but the debt incurred from the 1988 LBO still hobbled its ability to perform and expand as Celestial Seasonings’ officials hoped. Relief from the pernicious influence of the debt on Celestial Seasonings’ operations was sought in 1993, when the company once again prepared for an IPO. This time, as opposed to exactly ten years earlier, the public offering was completed, with 1.9 million shares of the company’s stock entering the market in July 1993.

Celestial Seasonings raised $31 million from the IPO, a sum that helped whittle the company’s debt significantly. Following the conversion to public ownership, Celestial Seasonings embarked on the course that would carry the company through the late 1990s. As company officials looked ahead to the future, they were attempting to broaden the range of Celestial Seasonings’ products and contemplating several moves that would carry the company in new directions, including the possibility of opening Celestial Seasonings retail stores, which would serve hot and iced teas and stock the company’s full line of tea products. With such developments possible in the future, Celestial Seasonings and its founder Mo Siegel moved ahead toward the late 1990s, beginning the next chapter in its unique corporate history.