Filling a natural niche
The smell of success, Chris Reed hopes, is the sharp, spicy aroma wafting through his Los Angeles microbrewery.
For now, it’s just the smell of ginger.
Reed is founder and chief executive of Reed’s Inc., which produces a line of natural sodas. And he’s a fan -- some might say a fanatic -- of the pungent herb.
Each year, his company chops 1 million pounds of fresh ginger, enough to fill 28 big-rig trailers. In addition to sugared ginger candies and ice creams, he produces six ginger brews: Spiced Apple, Raspberry Ginger, Cherry Ginger, Original Ginger, Premium Ginger and Extra Ginger, the last of which packs 26 grams’ worth of the stuff.
When Reed introduces his teenage daughter and son, he refers to them as “Ginger” and “Brew.” Never mind that their names are really Kate and David.
“If you ask a Chinese herbalist for four or five herbs to take on an island, ginger would be one of them,” said the gray-haired, 48-year-old Reed, who projects a New Age image with his black jeans, yellow-and-green company T-shirt and ponytail.
“It’s a real general tonic on the body.”
In a business dominated by Coke and Pepsi, healthful soda sounds like a contradiction. But unusual beverage companies such as Reed’s are etching out a niche within the carbonated beverage industry, which sells about $28 billion worth of drinks annually to U.S. consumers, according to ACNielsen.
Sales of natural sodas and those sweetened using organic sugar and fructose hit $50.7 million in the 12 months that ended Jan. 27, up 11.3% from the previous year, according to Spins, an Illinois company that tracks sales of natural products.
Natural sodas aren’t as popular as non-soda categories, including ready-to-drink teas and enhanced beverages such as energy drinks, which are growing at least four times faster, said David Browne, a natural-products expert and a former vice president at Spins.
But there is a future for these natural products, often sold as “premium” or “gourmet,” particularly in light of overall flat sales of carbonated beverages. Drink makers are rolling out all sorts of new products to counter the trend.
“There’s a lot of fabrication in this market,” Browne said. “That’s why companies like Reed’s and such are doing well. They still have that premium niche; they still have some growth.”
Natural sodas saw 36.5% sales growth in conventional food stores and 12.4% in natural food stores during the last year, Browne said.
“Consumers are becoming so much more aware of what kind of sugar they are consuming,” said Browne, noting the prevalence of obesity and diabetes. “They are reading nutrition labels more carefully.”
Reed’s Inc. competes against much larger companies by catering to health-conscious shoppers. The 18-year-old company calls its drinks “quality of life” beverages that are free of artificial flavorings, colorings and processed ingredients.
The sodas are concocted by brewing and aging fresh fruits, herbs and spices in stainless steel vats. Some ingredients, such as the ginger, are shipped to Los Angeles and Pennsylvania breweries from growers in Hawaii, Brazil and China.
The company’s brews are drawn from 19th century home-kitchen recipes, and borrow from some perfected in the Caribbean and England. Reed’s research also led him to a 1780 White House cookbook, which influenced his cream soda and root beer.
Reed first created his drinks during the 1980s in his kitchen in Venice, cutting ginger by hand, stirring vats with “a big canoe paddle” and pasting labels on bottles with a glue stick.
At first, the business was just a safety net for the engineer from Queens, N.Y., who in 1985 gave up designing oil refineries and headed West with his guitar. But when that safety net started catching customers, he launched Vital Foods Co., which was later christened Reed’s Inc.
Now, the company has 32 employees and produces 25 million drinks a year. Its products are sold in 7,000 stores in the U.S. and Canada, including Trader Joe’s, Whole Foods and Ralphs.
Last year, in hopes of going mainstream, the company sold 2 million shares of stock at $4 each, promoting its public offering to its customers by slinging tags around the necks of soda bottles.
“We did it like Ben & Jerry’s,” Reed said, referring to the Vermont ice cream maker, which also used its products to peddle shares to customers.
Sales grew 32% in 2004 to $9 million, according to the company’s prospectus, and Reed estimated that sales last year hit $10 million.
But the company has been losing money, which Reed attributes to the growing pains of going public. The company posted net losses of more than $800,000 in 2005 and $1.4 million in the nine months that ended Sept. 30. Reed’s auditors said in financial statements that losses and a working capital deficiency “raise substantial doubt about the company’s ability to continue as a going concern.”
Reed’s also has been hurt by rising fuel costs, among other things.
In January, Reed’s settled a $2.6-million lawsuit filed by Consac Industries Inc., which accused Reed’s of negligence in manufacturing Prism Green Tea Soda for Consac. Reed’s, which contended that Consac supplied a defective formula, paid $300,000 to settle the suit.
“Going into court, it was just going to get messier, so we just settled,” Reed said. The suit also included allegations of an injury, which Reed said occurred when “the bottles became over-carbonated and they exploded.”
The suit was an important lesson in Business 101, Reed said, because it taught him the necessity of insurance and contracts to limit liability, neither of which the company had at the time.
Despite the setbacks, Reed said he hoped the company would see 8% to 10% growth in profit in a couple of years, particularly with new sodas in the works, including a diet brew and a natural energy drink.
Still, what lies between Reed’s and success are risks.
Among them are its history of operating losses, a highly competitive beverage business, dependence on brand recognition and price fluctuation of its raw materials. In addition, Reed, who makes $150,000 annually and also serves as the company’s chief financial officer, has no formal financial training.
But Reed, who noted that he works with outside financial consultants, said the bubbly beverage company would rise above those risks with the help of health-minded drinkers.
“People are looking toward longer living, quality of life and better products,” Reed said. “And we’re the direction they’re going to go.”
