“The natural foods industry was worth $2bn when I started and now it’s $120bn, but if you keep your costs down, and do the work, you can still make it. You’re only limited by your own creativity.”
It also helps to have a unique product, adds Reed, who is based in LA: “I was selling [non-alcoholic] brewed soda from fresh ginger root, lemon, lime, honey, cane sugar, pineapple, herbs and spices. It was completely new and very sexy, and when you’re talking to stores that just had 10 feet of Pepsi and Coke and you’ve got something completely different, they were like, come on baby, I need this stuff.
“Now, there is a lot more competition, but you just have to start one store at a time, one customer at a time.”
We haven’t really fulfilled our potential at all
Today, Reed sits at the helm of a public company on course to generate revenues of $43m this year with products sold in 15,000+ stores, but he’s still wearing his tie-dyed tee-shirts, remains suspicious of “vulture capitalists”, and feels like he’s at the beginning, not the end, of a journey.
“We haven’t really fulfilled our potential at all,” says Reed, who was speaking to FoodNavigator-USA after unveiling plans to pump up to $1.5m into tripling the speed of the company's West Coast manufacturing facility.
“We’ve made some acquisitions in the past but organic growth through existing accounts is what’s driving our sales right now. From a distribution perspective, we could triple in grocery from where we are now, but convenience stores are also a big growth opportunity.”
But what’s driving that organic growth?
“Part of it is that the world has gradually been moving in the direction of where we are over the 25 years since we started,” he says. “At first we were odd even to the natural food industry. Now we are almost boring to them and mainstream wants everything natural.”
Reeds Inc - which went public in 2006 - has had its ups and downs, but is currently on a solid growth spurt, with Q2 net revenues up 18%, driven by a 34% rise in sales of Reed’s Ginger Brews, a 35% rise in sales of Culture Club Kombucha and a 10% rise in sales of Virgil’s craft sodas. EBITDA is expected to be $1.5 - $2m for the year.
Big CPG companies can ‘screw around’ with smaller brands
And there’s still a world of untapped opportunity still out there, says Reed, who now owns “less than a quarter” of the business he founded, but is still his own boss, and hasn’t got into bed with Coke, Pepsi or another big CPG firm.
“They sometimes do a good job if they let the brands they buy have more of a free reign,” he observes.
“Ben & Jerry’s is a good example [sold to Unilever in 2000]. But they can also start screwing around with some great brands."
So how has he financed the business? Via a combination of bank loans, Small Business Administration loans and angel investors in the early days, followed by a Small Corporate Offering Registration, or SCOR, which lets companies sell up to $1 million worth of stock to the public without having to jump through as many SEC hoops and avoiding the costs of a full IPO.
“There wasn’t internet crowdfunding in those days, so we basically hung neck tags on our bottles and invited customers to become owners at $2 a share,” he says. “We raised $892,000 from our customers, people that actually buy our products.”
But he has always remained wary of venture capitalists ("I call them vulture capitalists") and recalls being wined and dined in Las Vegas by a VC firm after exhibiting at a trade show on the east coast, but declining their offer because “it just felt wrong”.
He finally pulled off a full IPO in late 2006, after a painful and protracted process that started in 2004, and has subsequently done some further private placements that have further diluted his personal stake in the business. “We didn’t start at a great time, after all the fall-out from Enron,” he recalls. “But we knew that wouldn’t last, or you’d have to shut down America.”
Kombucha: I’m saying come on man, just taste it
Right now his fastest-growing product is Culture Club kombucha (fermented organic oolong and yerba mate tea made with spring water, ginger root and/or fruit juice and purees), which launched in 2012, after the 2010 recall in which most brands were pulled from shelves after it emerged their alcohol content was above the 0.5% abv legal limit.
Two years later, Culture Club is already the #2 brand in the trade behind market leader GT's kombucha, and it’s growing extremely fast (sales were up 35% in Q2 but would have been up twice that had a change in packaging - a move into glass bottles - not delayed matters, he says).
But is this a ‘me-too’ product?
No, says Reed, a chemical engineer by trade with a passion for ginger, who has also incorporated his favorite ingredient into his kombucha (tea fermented with a mixture of live bacteria and yeast that creates carbon dioxide, alcohol and acetic acid to give a fizzy, slightly vinegary taste).
“I saw other people doing ginger kombucha, and I thought we’re the kings of ginger, why aren’t we doing this, and doing this better, it just made total sense. So I started playing around with recipes and we worked out how to do it so that we could keep the alcohol down but get a better taste.
“Most kombuchas are fermented for 15-20 days; ours takes around 40 days. And they don’t all taste the same. You see these supermarket buyers and they hold their noses because they don’t like the taste, and I’m saying come on man, just put it in your mouth and they are like, Wow! It’s delicious, as if that’s a surprise. We know how to manage our micro-organisms and we are master formulators.”
You have to strike a balance between being austere and just eating raw vegetables to actually living your life on planet earth
So where does he see the natural soda market going, and is ‘natural’ and ‘healthy’ always the same thing?
While he doesn’t use artificial flavors, colors, sweeteners or preservatives in his products, and has also recently committed to using only non-GMO ingredients, Reed says balance is important.
“Sugar is 'natural' but too much is bad, so we’ve been cutting down on sugar and also use stevia in some products now. But you have to strike a balance between being austere and just eating raw vegetables to actually living your life on planet earth."
As for mass market grocery retailers, they are all stocking more interesting natural products as well as big legacy brands these days, because that’s where the growth is, he says.
“We've earned the right to be in there with the big guys. Sales of the big soda brands are going down or flat, and we're growing, so it [the space allocation on shelf] is changing. But the data shows it should be changing a lot faster."