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. (NASDAQ: 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. (OTCBB:
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. (NASDAQ: NUTR), may want to take an
especially close look at the stock.

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

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may increase or decrease such positions without notice. For making
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SOURCE: Emerging Growth LLC

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