REED - Reed's Inc

[Palantir]

I have recently opened up a small position in this stock. The firm has not been profitable for most of its history, however, it has constantly decreased its losses over the past few years and last year finally became profitable, resulting in a huge pop for the stock. That being said, it seems to me that the company is still in the embryonic stages of its growth (72M Market Cap).

 

What I like:

- Firm has a niche, natural sodas and drinks, which could be appetizing to those who like sodas but dont want to put chemicals into their body.

- Fast growth, firm has been growing at about 20% annually.

- Increasing margins, which will likely rise after the introduction of their Kombucha drink, which is cheap to produce but sells at a premium.

- Founder owns a large chunk of stock.

 

What I don't like:

- Difficult to put a valuation number on it, as it's only recently profitable, and you'd need to make some generous growth assumptions.

- Risky, goes without saying, simply due to its size.

- Very competitive marketplace, the firm needs time to get brand recognition in order to thwart commoditization.

[BG2008]

I've noticed the stock price spike and went to the supermarkets and bought a couple of their drinks.  Their price points are quite high.  About $6 for a 4 pack.  Great tasting cream soda. But, I wonder how they can compete against Coke with these price points.  Maybe a good take out candidate at some point.  Does anyone know supermarket slotting fees etc well?  For me to get comfortable, I need to understand the dynamics of slotting fees, as someone described that it is the "shadiest thing ever"

[Parsad]

I've noticed the stock price spike and went to the supermarkets and bought a couple of their drinks.  Their price points are quite high.  About $6 for a 4 pack.  Great tasting cream soda. But, I wonder how they can compete against Coke with these price points.  Maybe a good take out candidate at some point.  Does anyone know supermarket slotting fees etc well?  For me to get comfortable, I need to understand the dynamics of slotting fees, as someone described that it is the "shadiest thing ever"

 

Reeds has the same problems that Jones Soda also faces.  Their price points are high and it's tough to compete with the giants.  They are better off marketing their sodas to niche markets...Whole Foods, delis, bistros, etc.  If they try and compete mainstream, then they are going to lose money.  Cheers!

[FCharlie]

I have recently opened up a small position in this stock. The firm has not been profitable for most of its history, however, it has constantly decreased its losses over the past few years and last year finally became profitable, resulting in a huge pop for the stock. That being said, it seems to me that the company is still in the embryonic stages of its growth (72M Market Cap).

 

 

 

Reed's becoming profitable is only part of the reason for the huge stock movement this year, In my opinion.

 

The other reason would be Reeds entry into the $150 million per year market for kombucha which is dominated by a single player, GT's/Synergy. This is a product that people in the world of natural/organic obsess over and pay $4 per bottle for. To paraphrase Chris Reed, the founder of Reeds, "Kombucha costs the same to make as our sodas, but we can charge twice as much."

 

When Reed's Culture Club kombucha was first being introduced, the reception was very positive. The first production run was 100% sold out to a single grocery chain in North Carolina. The product is just now getting placement nationally. Time will tell how this product works out, but if it's anything like the ginger sodas, it will do quite well.

 

Keep in mind, Reed's goal here is to take a large chunk of the market for Kombucha. It's a $150 million market so if Reeds can take 30% of it, they would triple their sales. Not bad.

 

 

[Evolveus]

I know Reed's best from a good Dark & Stormy:

 

-2 oz. Meyers Dark rum

-1/2 fresh squeezed lime

-Top off with Reed's Ginger Beer over ice

-Sit back and listen to the ocean.

 

I've always used Reed's Ginger beer specifically for this cocktail, so when I go to stores I always look for it. Distribution is definitely expanding as I used to only see it at Whole Foods in Lost Angeles, but now I see it in local grocery stores in South Louisiana. I also notice that they have expanded their offerings to lozenges as well as the above mentioned products.

[Palantir]

All good news. I think this is def better than Jones Soda as they have ridiculous growth, and even if they just stick to the Whole Foods Trader Joe's crowd, they can do really well, they have loyal customers. One year of Kombucha sales could make them very profitable, and their other business lines have been moving towards profitability in their own right too.

 

One thing that could be a catalyst is people drinking less of Coke/Pepsi, and more of natural sodas due to health reasons. This could be similar to people drinking craft beer v Bud Light.

[compoundinglife]

I know Reed's best from a good Dark & Stormy:

 

-2 oz. Meyers Dark rum

-1/2 fresh squeezed lime

-Top off with Reed's Ginger Beer over ice

-Sit back and listen to the ocean.

 

I've always used Reed's Ginger beer specifically for this cocktail, so when I go to stores I always look for it. Distribution is definitely expanding as I used to only see it at Whole Foods in Lost Angeles, but now I see it in local grocery stores in South Louisiana. I also notice that they have expanded their offerings to lozenges as well as the above mentioned products.

 

+1 I have loved Reed's ginger beer for a long long time and it also makes a great dark & stormy. I had no idea they were public.

[compoundinglife]

On a similar note. I noticed a few years ago when I started drinking coconut water that the local whole foods could not keep it in stock.

 

A particular brand which happens to be the most expensive still sells out all the time.

 

http://www.harmlessharvest.com/WORLD-S-BEST-COCONUT-WATER

 

"We source our unique coconuts from small organic agroforestry farms, then use a cutting-edge, heatless, high-pressure process for food safety and extended shelf life in your fridge. The result is the outstanding flavor and nutrition of raw and organic without the need for unnatural and harmful additives."

 

This market seems like a hard one to have a differentiator as is illustrated by the all different brands that mostly IMO compete on price. Also there is probably nothing stopping the big players from getting into this market once it reaches the right size to make it worth it.

 

But I would be interested if anyone comes across any public companies in this market.

 

[Palantir]

 

 

+1 I have loved Reed's ginger beer for a long long time and it also makes a great dark & stormy. I had no idea they were public.

 

So you have been willing to pay a premium price for this soda over multiple years?

 

I need more people like you.  ;)

[compoundinglife]

 

 

+1 I have loved Reed's ginger beer for a long long time and it also makes a great dark & stormy. I had no idea they were public.

 

So you have been willing to pay a premium price for this soda over multiple years?

 

I need more people like you.  ;)

 

Yes I have. I think the first time I tried their ginger beer was 17 years ago when I worked in health food store for a brief spell. However I would guess over that 17 years I probably have bought it no more than twice a year. Not sure if I am a typical customer though. Some people may but it specifically for the potential health benefits of ginger and drink one a day. I buy for it for the ocasional treat or to make some good cocktails.

 

I think the Kombucha market may have more daily consumers who treat it like they would taking a supplement or vitamin. The Kombucha market appears to be a harder nut to crack. Honest Tea (owned by KO) and Hain/Celestial tried to get a piece of GT's market share and did not succeed.

 

I did a bunch of research on the Kombucha market this weekend and will post my notes a little later after I clean them up.

 

If you haven't already I would suggest listening to REED's latest quarterly CC. It was quite entertaining and informative, the CEO called in on his cell phone from jury duty. A bunch of the people asking questions were gushing about the rise in stock price. One of the guys asking a question didn't even really now what Kombucha was, lol! One of the more entertaining calls I have heard. 

[compoundinglife]

One other quick thought. When Buffett talks about KO he talks about the fact that someone can drink 5 a day and not get tired of the beverage, and that they can raise their prices 1 cent a serving and create a huge impact to top line. My guess is that Kombucha will continue to come down in price because of competition. Granted I realize that an investment in REEDs is not trying to find the new coke its just trying to find a company of whose potential the market has not fully realized yet. But something to keep in mind when making estimates.

 

I think Kombucha will be similar to Coconut water. When I first started seeing Coconut water there was "one" and a few other brands that were fairly high priced with very small serving sizes. Then you started to see all of these knock off brands come in like Blue Monkey and Amy and Brian with larger servings (big cans) and lower cost. If you walk into a Whole Foods (at least in Seattle) the large lower priced cans tend to dominate the shelf space. I could be wrong on this though, alot of the people who consume this stuff are very health focused so their loyalty may be strong. Also during the alcohol content kombucha crisis alot of new brands try to get their foot in the door while GT was reformulating their process to reduce alcohol content. A bunch of those brands did not succeed once GT was back on the shelves. 

 

[Sportgamma]

Anybody done any research on Lifeway? They do kefir.

 

 

[no_free_lunch]

The valuation seems doable.  If you look at monster, they are sporting net margins of around 16-17%.  Obviously Reed is puny in comparison but if you look at their operating margins, I could see how they could to get margins in the 10% range once their sales are at say $40M.  That would put them at a PE of 18 which is cheap for a fast grower.  It just comes down to whether they can continue to grow at that 20% rate.  I have never heard of them so it is just a guessing game for me.

 

Also, in regards to slotting fees, stumbled on this in the 08 annual report:

 

Supermarkets, particularly supermarket chains and prominent local supermarkets, often impose slotting fees before permitting new product placements in their store or chain. These fees can be structured to be paid one-time only or in installments.  We pursue broad-based slotting in supermarket chains throughout the United States and, to a lesser degree, in Canada.  However, our direct sales team in Southern California and our national sales management team have been able to place our products without having to pay slotting fees much of the time. However, slotting fees for new placements normally cost between $10 and $100 per store per new item placed.

[LC]

Down quite a bit recently. I am thinking of initiating a small stake.

[Parsad]

Down quite a bit recently. I am thinking of initiating a small stake.

 

So is Jones.  It is a very tough business...their best bet is to be acquired.  Cheers!

[Palantir]

Sold out my position, I just cant have that much volatility in my tiny 10,000 Roth IRA.

 

that being said, these guys are profitable and going to be more profitabl.e.

[Palantir]

I have opened a position in this lately. I feel that 2*Sales is a fair multiple for a mature player in this space, but this ignores the growth that this firm is having. With a 20% annual Sales growth rate, plenty of room for expansion, and a more profitable product mix....I think Reed's best days lay ahead.

[Palantir]

Reed's: 50% Potential Upside - Kombucha Is The Best Thing Since Craft Beer In Beverage Industry

http://seekingalpha.com/article/1822042-reeds-50-potential-upside-kombucha-is-the-best-thing-since-craft-beer-in-beverage-industry?v=1383940266&source=tracking_notify

[no_free_lunch]

If you look at the quarterly numbers (as per yahoo finance), their sales are 9.5M in june 2013 vs 7.9M in Sep 2012.  However, their gross margin was virtually unchanged.  Any idea why their gross margin percentage is going down?  I would have expected them to increase as they gain scale.  I know you shouldn't read too much into quarter by quarter numbers but it's a little discouraging, especially when they are losing money.

[krazeenyc]

If you look at the quarterly numbers (as per yahoo finance), their sales are 9.5M in june 2013 vs 7.9M in Sep 2012.  However, their gross margin was virtually unchanged.  Any idea why their gross margin percentage is going down?  I would have expected them to increase as they gain scale.  I know you shouldn't read too much into quarter by quarter numbers but it's a little discouraging, especially when they are losing money.

 

They had a ton of execution issues including:

 

1) a bad bottle cap that caused a bunch of orders to be rejected.

2) production issues that caused an inability to deliver product as well as shipping inefficiencies.

 

I think they'll grow like a weed over the next few quarters (I love their products by the way).  I just wonder... if Kombucha is a fad. Their margins on their sodas are just worse despite their high price b/c of the way it is produced (as a customer I would not want to see this changed -- if i'm a shareholder this might be a different story).  Would a potential acquirer not want to buy them simply b/c they don't want to deal with selling Kombucha.

[Palantir]

Shouldn't GM stay unchanged as it is mostly commdodity costs, while expecting improvement to occur in net margins? I agree though, I like the prospects for this business, but I wonder if it would be best if Mr Reed stepped back and became chairman, and let an experienced operations guy run the show. That way he could stay focused on the long term strategy and product, while having a smooth ramping up in distribution.

[no_free_lunch]

GM stayed the same, but sales went up so GM% went down.  I would expect the percentage to be consistent or go up.

 

Thanks for the explanation krazeenyc.

[krazeenyc]

FWIW i bought 3 different bottles of REEDs Kombucha -- disgusting -- lol.  I'd only drink if it directly cured a known ailment. 

 

I bought the GT Kombucha as well -- at least that tasted worse. It's amazing to me that Kombucha is a hot product. I wonder if they can ever get it to taste good.

[rkbabang]

FWIW i bought 3 different bottles of REEDs Kombucha -- disgusting -- lol.  I'd only drink if it directly cured a known ailment. 

 

I bought the GT Kombucha as well -- at least that tasted worse. It's amazing to me that Kombucha is a hot product. I wonder if they can ever get it to taste good.

 

There's no accounting for taste I guess.  I've never tried REED's, but I love GT Kombucha.  My kids do as well.  Although it's too expensive to buy it other than once in a while.

[FCharlie]

FWIW i bought 3 different bottles of REEDs Kombucha -- disgusting -- lol.  I'd only drink if it directly cured a known ailment. 

 

I bought the GT Kombucha as well -- at least that tasted worse. It's amazing to me that Kombucha is a hot product. I wonder if they can ever get it to taste good.

 

I agree it's disgusting.

 

I work in the industry though, and people can't get enough of this product. Customers buy it by the case