U.S. Markets closed

A Brewing Bucha Opportunity in the Functional Beverage Space

REDONDO BEACH, CA / ACCESSWIRE / September 22, 2015 / The craft brewing industry may be struggling amid intensifying competition, with companies like Craft Brew Alliance Inc. (BREW) falling some 36% over the past 52 weeks, but there's another type of brew that has been taking off over the past couple of years.

Kombucha is a brewed and fermented probiotic tea that could grow from $122.7 million in 2013 to upwards of $500 in 2015. In many Whole Foods Inc. (NASDAQ:WFM) stores, for instance, the category accounts for about a third of its refrigerated functional beverage shelf space. The market also remains rather fragmented with only one market leader - GT - and a number of much smaller competitors looking to secure a share of the market.

Despite its introduction thousands of years ago, consumers have just now been embracing kombucha in increasing numbers due to its perceived healing and cleansing characteristics. Kombucha teas include probiotics from the fermentation and a number of potentially beneficial byproducts found in the tea itself, such as polyphenols, antioxidants, and flavonoids. Some manufacturers are also developing coffee, beer, and other styles of kombucha.

In this article, we'll take a look at a company that's leveraging its experience in craft brewing to introduce a revolutionary kombucha product into health and grocery stores nationwide.

Capitalizing on Kombucha

American Brewing Co. Inc. (ABRW) is a Washington-based craft brewer with four beers in its portfolio, including the Flying Monkey Dogfight Pale Ale, Breakaway IPA, American Blonde, and Caboose Oatmeal Stout. After getting its start in the beer industry, the company expanded into the kombucha category with its bucha(TM) Live Kombucha brand of gluten-free, organic, sparkling kombucha teas back in April of 2015 with distribution throughout North America.

When the company was acquired there was distribution into 1800 stores including health, natural and grocery chains. The company is looking to double that store count over the next 12 months with distribution into all major U.S. markets utilizing a new national broker network.

Its proprietary blend differentiates itself from other kombucha producers through its proprietary extraction process that reduces the sour taste and may appeal to a larger audience. In fact, the sour nature of most kombucha could be a leading factor that's holding back wider consumer adoption.

Profitable & Growing

American Brewing reported revenue of $940,007, gross profit of $326,628, and net income of $19,217 during the quarter ended June 30, 2015. Following the acquisition of bucha(TM) Live Kombucha, the company generated 73% of its revenue and 84% of its gross profit from its bucha tea Wholesale division. The oversized impact on gross profit suggests that the transition into kombucha will continue improving overall margins over time.

Figure 1 – Q2 Earnings – Source: SEC Filings

In terms of near-term potential, investors may want to take a look at Reed's Inc. (NYSE:REED) success in entering the market. Reed's reported second quarter kombucha sales that increased 11% as it worked to improve its production techniques and add additional flavors – including the addition of a coffee-based kombucha. According to their 10-K filing, kombucha has grown to account for about 12% of the company's $43.4 million in net sales - or about $9.5 million.

American Brewing has a market capitalization of just $7 million, which leaves substantial room for upside if can capture just a fraction of the market. Reed's trades with a price-sales ratio of about 1.4x, while many larger beverage companies trade with even higher multiples. The company's pure-play focus on kombucha could lead to an above-market multiple, since it would presumably be able to grow faster than its diversified competitors.

Looking Ahead

Kombucha is the largest growth segment of the functional beverage category of food and drinks, which includes coconut water, yogurts, and fresh juices. The refrigerated juices section of the market alone grew by approximately $200 million in 2012 to an estimated market of about $600 million (50% growth), according to SPINS data. Kombucha accounts for an overwhelming majority of that explosive growth and accounts for a large part of the segment.

With its growing distribution footprint and product innovation, American Brewing is well-positioned to become a virtual-pure-play in the kombucha space. Investors interested in the functional beverage space may want to take a closer look at the stock given these catalysts. In particular, investors in micro-cap functional beverage stocks, like DC Brands International Inc. (OTC Pink: HRDN), or nutraceutical firms, like Nutraceutical Int'l Corp. (NUTR), may want to take an especially close look at the stock.

For more information, visit the company's website at www.americanbrewing.com.

Legal Disclaimer:

Except for the historical information presented herein, matters discussed in this release contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from any future results, performance or achievements expressed or implied by such statements. Emerging Growth LLC is not registered with any financial or securities regulatory authority, and does not provide nor claims to provide investment advice or recommendations to readers of this release. Emerging Growth LLC may from time to time have a position in the securities mentioned herein and may increase or decrease such positions without notice. For making specific investment decisions, readers should seek their own advice. Emerging Growth LLC may be compensated for its services in the form of cash-based compensation or equity securities in the companies it writes about, or a combination of the two. For full disclosure please visit: http://secfilings.com/Disclaimer.aspx.

SOURCE: Emerging Growth LLC