By Hannah Crum & Alex LaGory
One year later, last summer’s withdrawal proves more hiccup than handicap. For a nascent beverage category like Kombucha, there’s not a much bigger crisis than having all major brands disappear from store shelves, just as growth appeared headed for warp speed. Everything was lining up in favor of the category. With a clear market leader in GT’s Kombucha and Synergy, a number of creative brands and established beverage companies crafting their own offerings, swelling grassroots support for healthier beverage choices, including a strong home-brewing community, and a massive distribution pipeline via Whole Foods and UNFI, Kombucha seemed on the verge of a breakout.
Instead, it got a wake-up call. As rumors of boozy booch spread from producers and retailers to consumers, this functional beverage, long prized for its natural benefits was yanked off shelves and became subject to lab testing and regulatory scrutiny. Loyal Kombucha consumers, a group that had of late rejoiced at Kombucha’s increasing availability, suddenly found themselves scrambling to locate and stockpile any available cache of the stuff.
Now, a year later, what could have been disaster appears to have been only a blip on the radar. Much has changed in the Kombucha business, yet much looks the same. Having already roared back to once again become one of the biggest selling products in Whole Foods, Kombucha’s growth trajectory appears to be restored.
Despite last summer’s withdrawal, category sales grew by 28 percent in 2010 and, based on numbers through June 2011, are projected to jump a whopping 60 percent this year in the natural channel, according to data provided by SPINS (note: SPINS numbers do not include Whole Foods).
The ongoing proliferation of regional Kombucha bottlers, with products aimed at both the above-21 and all-ages demos, continues to reflect its growing popularity as a functional beverage. Though the industry faces clear challenges, the year-over-year growth numbers and the quantity of new brands appearing on shelves indicate that Kombucha’s breakout, while potentially delayed, has not been sidetracked.
HOW IT WENT DOWN
While GT’s Kombucha and Synergy brands are by far the most visible in the category and dominate the market, it is unclear which brand or brands caught the eye of Randy Trahan, a Consumer Protection Inspector for the Maine Department of Agriculture. Regardless, when conducting routine bottle audits at the Whole Foods in Portland, Maine in early 2010, Trahan noticed “some of the Kombucha bottles on the shelf were leaking. Being a public health official, I know that alcohol is a by-product of the fermentation process. I could immediately see that there might be a public safety issue,” he recalled. “Kids could get hold of this and get a buzz.”
Samples of at least four different brands of Kombucha were taken from those shelves and submitted to the Food Sciences Lab at The University of Maine. Tests showed alcohol levels ranging from slightly over .5 percent to over 2.5 percent ABV, each one in violation. The case was subsequently handed over to the Federal Government in February 2010, specifically the Alcohol and Tobacco Tax and Trade Bureau (TTB), the agency which regulates the sale of any beverage over .5 percent ABV.
On June 15, 2010 Whole Foods posted a notice on the Kombucha shelf: “Key suppliers and Whole Foods Market have elected to voluntarily withdraw Kombucha products in bottles and on tap from our stores at this time due to labeling concerns related to slightly elevated alcohol levels in some products. This is not a quality issue. Sorry for any inconvenience.” It would be months before many brands returned to shelves.
Indeed, once GT’s was off the shelf, for several smaller companies, the race was on. Upstart brand Vibranz out of Healdsburg, CA was one of the few companies to benefit from the timing of last summer’s withdrawal by shipping a lot of product and grabbing shelf space while others reformulated, yet paid a heavy price when GT’s came back. The company appears to have shuttered operations this summer under the weight of unsold product returned by the retailers, though no official announcement has been made. Vibranz declined to comment.
“The withdrawal has created confusion among consumers,” argues Will Savitri of Katalyst Kombucha (MA). Katalyst was poised to expand their keg program with Whole Foods when the withdrawal occurred. “Many consumers still don’t understand why Kombucha was removed from the shelves,” said Savitri.
That might be true, but many don’t seem to care, either. Most fans spent the summer wondering not why it was removed, but obsessing over how and when it would be coming back.
While some customers were satisfied with the re-appearance of other brands, an extremely loyal, and vocal, GT’s fanbase aired its frustrations with the withdrawal. Founder GT Dave himself stayed in close touch with his flock, even describing in detail the changes to the new Enlightened brand in a long and lively back-and-forth with customers on the company Facebook page: “The ratio of probiotics has been changed. The number has not been reduced, rather the probiotics that facilitated the increase in alcohol has been lowered while the ones that don’t were increased. This is achieved by a difference in the way the product is cultured (fermented). The taste will be slightly softer than our ‘Original’ line.”
Within that single Facebook thread can be seen the wild and varied reaction to the debut of the Enlightened line, including “does NOT nearly taste the same as before. Very very disappointed,” and the Enlightened “tastes very watered down.” Others defended the new formula, saying they “haven’t found the new batch to taste different at all,” and “It’s not the same … but it’s still a trillion times better than any of the other brands I’ve tried.”
Beyond consumers, however, the two-month interruption in these products’ route to market had reverberations for retailers and distributors as well. Removing Kombucha from the shelves constituted no small move for Whole Foods, which by industry research estimates sells about 110 cases per week/per store, amounting to $75M worth of the trendy fermented tea last year – almost 1 percent of the company’s total revenue.
This gives Kombucha, especially the market leader GT’s, a strong strategic position in the Whole Foods chain. It also means that Whole Foods was taking an especially big risk by pulling Kombucha off its shelves.
The withdrawal was not without casualties. Honest Kombucha, which had been gaining significant traction with retailers and consumers on a national level, halted production after the company was forced to take $1M+ in returns. Once the TTB got involved, Seth Goldman, CEO of Honest Tea, decided to discontinue the brand despite its growing popularity, citing an unstable regulatory environment. “We have never aspired to sell drinks that are labeled and distributed as alcoholic drinks,” Goldman said on the Honest Tea blog in Dec 2010. High Country Kombucha, one of the only other nationally distributed brands, must also be counted among the victims, as they had been enjoying an expanding co-packing relationship with Honest Tea Kombucha prior to the withdrawal. However the High Country brand continues to rebuild market share following the shake up with a new look and increased in-store demos.
In order to comply with federal law, most Kombucha makers have undergone “reformulation” or modification of their brewing processes in various ways, as well as attempting to more tightly control the natural continued fermentation in the bottle via additional temperature controls. While the exact specifics of each manufacturer’s process are often hush-hush, most are manipulating the yeast, either through filtration, centrifuge or other means. De-alcoholizers, pro-biotic boosting, altering of recipes (especially the sugar used) and many more techniques have been combined to tackle the problem of staying within government limits. “We have been fortunate to be able to work with the University of Wisconsin to help refine our fermentation process in order to keep our product in compliance,“ said Vanessa Tortolano of NessAlla Kombucha.
STEPS TOWARD RECOVERY
While last summer’s events presented challenges, many in the industry now believe they were a positive. “The withdrawal was good for the industry to bring everyone into compliance, to build intellectual capital, and to improve the product,” says Ron Lloyd, CEO of Búcha, a newer brand making a push for national distribution. Búcha was initially slated to enter the market in June 2010, but was delayed due to the withdrawal, even though their product was compliant.
Regional brands saw advantages to the recall as well. “Because we self-distribute, the national distribution withdrawal was a golden opportunity for us to introduce Buchi to Kombucha drinkers whose national brand was no longer available,” said Jeannine Bucher of Buchi. Nearly all Kombucha companies interviewed agreed that the difficulties of last summer generated more consumer interest and led to expansion rather than contraction.
An important part of that expansion is in the over-21 market, a new distinction for the beverage that could cause some confusion among consumers. Some regional Kombucha manufacturers, such as Deane’s (MN), Invisible Alchemy (OR), Unity Vibration (MI), CommuniTea (WA), & Beyond (NY) decided not to reformulate their brewing process and instead apply for beer or wine making licenses. By continuing to brew what they consider an “unadulterated” or “full-powered” Kombucha, the final beverage generally ranges between 1 – 3 percent ABV, depending on the maker. GT’s was first to market with an over-21 Kombucha in December 2010, now dubbed the “Classic” formula, and he remains the only brand with offerings in both over-21 and all-ages beverage categories.
Deane’s Kombucha, whose bottle lists 2.7 percent ABV, was a thriving local brand in Minnesota, so they decided not to alter their brewing process and instead make the shift to an over-21 product. But a big hurdle exists for the over-21 products: educating health food store retailers.
The concept of “healthy low alcohol” beverages is one many people have difficulty understanding. Bryan Bertsch of Deane’s Kombucha recently posted a blog exhorting others to tell GT’s to bring the Classic line to Minnesota, stating, “…granted I have an ulterior motive…Because let’s face it, (GT’s) following is HUGE.”
Dylan Goldsmith, owner of Captured by Porches, an indie beer brand out of Oregon, echoed a similar sentiment. CBP started its own brand of Kombucha – Invisible Alchemy – in response to the “tasteless reformulated products” that began showing up after the withdrawal. “Kombucha should have been grandfathered in as a non-inebriating beverage because it predates Prohibition,” says Goldsmith. Demand for their over-21 Kombucha has steadily increased yet their difficulties highlight the problem for all brands offering an above .5 percent ABV product: sales are robust when their product is displayed with other Kombucha brands but once it moves to the “beer” section, it’s a tougher sell.
These types of challenges aren’t exactly a surprise. When the Classic line was launched in Dec 2010, GT Dave had this to say, “We have to convince retailers, who don’t really know how to handle this, that (the Classic line) can be sold side by side (with the Enlightened version).“ Bertsch and Goldsmith couldn’t agree more.
Dave, however, acknowledges frustration with the hurdles and misinformation involved in distributing the Classic line to various states and retailers, including Whole Foods. “Unlike our Enlightened line, our Classic cannot be reviewed or approved nationally, therefore they must be presented on a state-by-state level,” Dave saida. “This means we have to treat each state as if it is a separate region and present to them individually. It involves changing the way people think: retailers, regulators and distributors.”
Whole Foods specifically employed a “wait and see” approach with the Classic formula, concerned about potential liability and that confusion over alcohol content may plague customers. “Some retailers expressed concern that if Kombucha returned as an over-21 beverage, the public’s perception that it’s healthy or nutritious would change and it would be grouped with a wine cooler or a malt beverage-like product.”
However, after taking time to assess how the withdrawal affected the industry, Whole Foods stores in some regions of the country have recently expressed interest in carrying the Classic line. Multiple companies also confirmed that the national food chain has required any Kombucha company that sells product through their stores to sign a full indemnification regarding the issue.
DISSENT AMONG THE FAITHFUL
Alcohol levels are not the only controversial issue in the Kombucha category. Many manufacturers have taken issue with health claims that are made on some Kombucha products. Others are upset with some competitor’s labels that they say do not accurately reflect levels of sugar, what types of bacteria and which organic acids may or may not be present in that bottle Kombucha. A few harbor the belief that other Kombucha companies are “cheating” by using forced carbonation but do not list that on the label. Without a legal definition of for “Kombucha,” or a trade group to self-regulate the industry, divergent viewpoints on industry standards will likely grow.
“There is a responsibility on the part of the manufacturer to disclose what’s actually in the product,” says Adam Goodman, founder of Kombucha Botanica. His product returned to shelves after perhaps the most dramatic reinvention. Partnered with Kefi-Plant, a Canadian bio-tech company specializing in kefir ferments, Kombucha Botanica posits that the original Kombucha culture actually derived from the kefir grain. Utilizing a lab induced fermentation process, they create a concentrate that is subsequently shipped to the US and mixed as the final drink, producing what Goodman believes is a Kombucha that is superior in health benefits and taste, but which is dramatically different from his pre-withdrawal beverage.
So is Kombucha a fad or is it here to stay? “The Kombucha ‘fad’ may not have even started yet as many people still have not heard about it,” said Mike Brady of BAO Kombucha, a New York City brand. “It is very early in the category, similar to coconut water.” And that small size may have ultimately been what shielded the entire category from disaster. Adherents don’t seem concerned about the presence of alcohol – they just want their drink, and whoever makes the best product will continue to win them over.
Growth seems inevitable: market researcher SPINS projects $110M in Kombucha sales this year, not including Whole Foods, meaning the entire category is expected to top $200M. Meanwhile, privately commissioned research by industry insiders shows Kombucha sales moving north of $500M by 2015.
And that seems to be why, for his part, GT Dave is intent on innovating to stay ahead. “We don’t want to focus on the past but rather are looking toward the future,” said Dave. His company has just released the first Kombucha with chia seeds, in grape, raspberry and cherry flavors, and he has hinted at a couple of “very different flavors to debut very soon.”
GT’s Kombucha has also expanded to the Canadian market and recently began appearing in convenience stores and at airports, new distribution channels that could mean a lot of new Kombucha consumers for a nascent category. As American consumer tastes shift from sedentary to active, and as the public’s interest in products perceived as unhealthy continues to wane, expect Kombucha’s star to rise – even while it carries the baggage of the past.
TEA BY THE NUMBERS
Kombucha might be getting all the headlines and the celebrity controversy (hello, LiLo) but it’s good old iced tea that remains one of the stalwart growth categories for the beverage business – to the tune of a 5.35 percent increase in dollar sales last year, according to IRI (not including Wal-Mart, as well as many delis and mom-and-pops, a key element for the tea biz).
With low-cost and high end options and an easily-understood functional premise, tea seems to fit most of the key areas for health and energy while still landing gently on the consumer wallet. The Tea Council projects overall tea sales at $15 billion in 2012.
That money includes dry tea, but the increase is indicative of the still-rising profile of tea in the U.S. – as does the more than $500 million IPO of Teavana stores earlier this summer. Teavana sells dry tea varieties and tea equipment, and has the potential to give a Starbucks-like push into increased category visibility.
Investors aren’t just looking at the hot stuff, either. There’s plenty of activity on the venture and growth capital side in the tea space, with placements coming from BYB brands and other incubator capital sources in recent years, along with two of the biggest investment takeouts in the past year: Sweet Leaf Tea and Honest Tea.
Still, the robust growth of all-natural products like independent brand Xing Tea and Hansen’s Natural-owned Peace Tea, combined with Honest and Sweet Leaf begs the question of how much room there is for other products in the category to push into a cohesive national footprint – particularly in light of the growth of tea subcategories like yerba mate and Kombucha, both of which seem to offer less-crowded routes to the shelf. In fact, many tea companies seeking growth have turned as much to lemonade and lemonade blends as much as they have to new tea varieties.
We’ll have more on that next issue, when we explore the overlap between tea, juice and lemonade. But right now, you can see that the numbers tell the story, and that story is largely driven by big distribution organizations like Coke, Pepsi, Dr Pepper/Snapple and AriZona’s independent network.
With those key routes to market largely locked down, and with Sweet Leaf leveraging Nestle’s distribution system, the battle to be the strong independent on the shelf remains the brass ring for too many brands. The natural channel offers them the opportunity to establish themselves regionally – and tea itself is a product that encourages tasting around as well – but until DSD momentum begins to center around one or two brands (and Xing has been pushing hard in that respect) expect there to be plenty of variety in the category. Call it simultaneously the oldest category there is, as well as one of the newest.
(Editor’s Note: This article also appears in August 30, 2011 issue of Beverage Spectrum Magazine. View the rest of the issue.)