Right now I am devouring something while it is still alive…
Before you accuse me of being a cruel, cannibalistic psychopath, let me explain.
Instead of my usual cup of coffee today, I’m slurping down a bottle of grapefruit kombucha — the latest health drink craze. Kombucha is a fermented tea — in other words it is “alive” with bacteria. While it sounds bizarre and perhaps downright disgusting to most people, I find it to be a deliciously tangy, refreshing beverage.
Many health experts claim that kombucha increases mental function, aids in weight loss, stimulates the immune system, aids digestion, and even helps you live longer.
Kombucha is made with tea, sugar, filtered water and a SCOBY — or “symbiotic culture of bacteria and yeasts”. 
This SCOBY — also affectionately known as a “mother” — promotes the fermentation which creates the health benefits. It also gives the drink a very unique sour flavor.
It could also be a huge investment opportunity as more and more consumers are ditching unhealthy sugar bombs like Coke and Pepsi and turning to healthier choices like coconut water, organic iced tea, and vitamin water.
In fact, the functional beverage market could be worth an astounding $89 billion by 2016…
As Americans ditch processed and artificial foods in droves, companies that specialize in healthy, natural foods have skyrocketed. In fact, the health food market has been one of the most profitable industries in the country for the past few years as consumers have wised up and savvy marketers have seized on the trend.
Just take a look at some of the biggest movers in the space.
- Whole Foods (NASDAQ: WFM) natural food market is up 815% since 2009.
- Organic Mexican restaurant Chipotle (NYSE: CME) is up 943% since 2009.
- America’s largest grower of organic produce, WhiteWave Foods (NYSE: WWAV), is already up 200% since it IPO’d in 2012.
This trend has also taken the massive beverage market by storm. Perhaps the best example is the meteoric rise of coconut water…
Put the Lime in the Coconut and Drink ‘Em Both Up
What started as a cheap drink on the beaches of Thailand and Brazil has turned into a billion dollar industry in a few short years. Now it has actually overtaken soda in shelf space in many grocers around the country.
Just check out the sales figures over the past few years:
That is astounding growth. And big soda companies are trying to play catch up.
“For the big soda companies, all hell is breaking loose,” according to Cyrus Schwartz, the owner of Dora’s Naturals. “There’s a seismic change happening in the beverage world, and companies like Coke and Pepsi are having a very hard time adjusting.”
It’s true. In 2013 soda sales fell for the eighth consecutive year.
Beverage giants like Coca-Cola and Pepsi have responded by doing what they do best: buying up the much smaller competitors. PepsiCo bought O.N.E., the third-largest coconut water brand in the U.S. It has grown over 1,100% since its introduction to the Whole Foods market in 2006.
Coca-Cola bought up ZICO, the second-largest brand in the U.S. While the company was only doing around $100,000 in 2007, it was banking $87 million by 2013.
VitaCoco — the largest coconut water company — sold almost $270 million dollars worth of coconut water last year — 300 times as much as in 2004, and more than double 2011’s numbers.
Coconut water is considered a “functional beverage” — these are healthy beverages that contain vitamins, minerals, and natural ingredients and are marketed as drinks that improve your health and performance. As I mentioned, functional beverages are projected to be an $89 billion market, and if kombucha can pull in even a small share of it, the beverage could be an obvious addition to big beverage companies’ portfolios.
And when it does, it will send a few small companies soaring in value…
It’s Alive!
As many of you know, I’m also the publisher of Health Wire — a natural health newsletter that covers just about every health trend under the sun, and separates the facts from the hype. I have covered kombucha’s rise since the early 2000s.
I attend a slew of natural health expos and conferences and they have always been a great barometer for the next big trends. Over the last three years kombucha has blown up on the expo circuit.
What once was a quirky niche health food has now exploded onto the mainstream.
From a health perspective, it has probiotics to thank. Simply put, probiotics are “good” bacteria and yeasts that usually found in fermented foods. These good bacteria are the opposite of the bacteria your doctor normally warns you about, and instead of bringing about disease, these probiotics have actually been shown to improve your health. The probiotic market has been rising for years and is expected to hit $52 billion by 2020.
So between the trends in functional beverages and probiotics, kombucha companies could stand to make a healthy payday. Here are the two up-and-coming companies that have serious upside in kombucha sales…
REEDS, Inc. (NYSE: REED)
This beverage company makes the top-selling natural sodas in the natural foods industry. These are sold in more than 15,000 natural and mainstream supermarkets nationwide.
It has a stable of brands all made with natural ingredients, including Virgil’s Root Beer and Cream Soda, which has a huge cult following, China Cola, which is the best selling cola in the natural food market, and Reed’s Ginger Beer — which, in full disclosure, I use to make the best damn Dark ‘N’ Stormy this side of the Caribbean.
It also owns Culture Club Kombucha — the number-two selling kombucha brand in the country (and perhaps the most delicious version I’ve tried). Kombucha sales made up about 12% of the company’s gross sales in 2014. I expect that to grow. 
The company continues to nurture these brands, which makes it perhaps the most likely company for a big-beverage buyout. Bringing on Mark Beaton — ex-VP of Operations at Dr. Pepper Snapple Group — as Chief Operating Officer is a step in the right direction.
Here are few recent financial highlights:
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Net sales increased 19% to a record $10.6 million
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Gross profit dollars increased 12% to $3.3 million versus $2.9 million in the first quarter of 2014
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Adjusted EBITDA for the first quarter of 2015 improved to $354,000 versus $106,000 in the first quarter of 2014
Keep in mind that this is a small company with an $86.47 million market cap. It is not currently profitable.
In other words, this is a company that has great products and loyal customers, but has not yet broken out. If it continues to ride the trends as well as continue to market and develop its functional beverages like kombucha, it could be the target of a takeover — which would send its stock through the roof.
But the next company I’m going to introduce you to has even more upside…
American Brewing (OTC: ABRW)
This small brewer has entered the kombucha market in a big way. It just added the bùcha brand into its portfolio of award-winning craft beers. Its Breakaway IPA was named ‘Best in the West’ by Beer West Magazine and its Brave American and Polska Porter won Bronze Medals at the Great American Beer Festival.
Now, while it may seem strange that a beer brewer would jump into the burgeoning kombucha space, it actually makes a lot of sense. Live kombucha and craft beer share a very similar brewing process, and this new partnership represents a strong step in diversifying beverage offerings for American Brewing.
One of the main gripes about kombucha is the sour taste. But bùcha prides itself on a proprietary process that reduces the sourness of the brew and makes it more palatable for a wider audience. 
The bùcha brand is already distributed in major grocery stores like Safeway, Kroger, and Whole Foods.
In fact some have predicted that revenue from the kombucha business could be triple that of ABRW’s beer brand. Considering that this small-cap has a market cap of $6.9 million, the acquisition could add tremendous upside to the stock.
Taking into account the 3,418 craft breweries in the U.S. to compete with, and only 70 commercial kombucha brewers internationally, I’d say it’s a smart move.
These two companies can give you direct access to a fast-growing industry. With kombucha sales growing by 30% a year, it’s only a matter of time until the big beverage companies come to scoop up these small brewers.
In the meantime, I’m off to find a SCOBY of my own and try my hand at brewing a batch.
