For Reed’s Inc. founder and former CEO Chris Reed, the company’s manufacturing facility in Los Angeles represented an opportunity to push innovation and experimentation across a broad spectrum of beverage categories.
For current CEO Val Stalowir, the facility represents something altogether different: a punishing drain on the company’s capital and a strategic miscalculation he is determined to correct.
The opening step in that process occurred on Monday with the announcement that Reed’s has retained Gordon Brothers, a Boston-based advisory, restructuring and investment firm, to manage the sale of the plant, which was brought online in 2001. Since succeeding Reed as company CEO last July following a tumultuous period for the company, Stalowir has expressed his intent to reduce the company’s asset load and focus on supporting its two strongest lines, Reed’s Ginger Beer and Virgil’s craft sodas.
Selling the facility, ideally to a buyer who could continue manufacturing Reed’s products fit customers on the West Coast, will accomplish that goal, Stalowir said.
“We need every dollar of investment possible to support the reacceleration of growth on those brands,” he said. “When we did all the numbers, it just made a whole lot more sense to exit this, realize some capital from the new equipment that we bought and potentially sell it as a standalone operating business so we can take that money, pay down some debt and support the brands.”
Up until Stalowir’s appointment as CEO, the 30,000 sq. ft. facility — a mix of manufacturing, distribution and office space located in unincorporated Los Angeles — had been a central part of Reed’s business strategy. Built under Chris Reed’s leadership, the plant was designed to help realize the founder’s vision of a company spread across a range of beverage categories; at one point, Reed’s produced and sold 111 separate SKUs, including kombucha, soda and energy drinks. “This was his baby,” Stalowir said. “He really believed in this regardless of the numbers.”
The company spent, according to Stalowir, several million dollars over the last two to three years on upgrades to electrical, water filtration and gas supply systems at the plant, as well as $4 million on new equipment which he said “we really haven’t taken out of the packaging.” Those costs, in addition to the at least $5 million in estimated idle plant costs related to production shutdowns suffered in recent years, have “absolutely been a drain on the company,” he said.
But following Reed’s resignation and reassignment to the role of Chief Innovation Officer last year, Stalowir has sought to narrow the company’s focus and shed inefficiencies. In November, he announced Reed’s would focus exclusively on the core Reed’s Ginger Beer and Virgil’s craft soda brands, which together represent 28 total SKUs.
With no plans to move into new categories or products, and without a proprietary production process that requires technical supervision, Stalowir made the decision to hire Gordon Brothers to explore a potential sale. The facility will remain in operation until a sale is completed.
Though Stalowir said the company will “make the best choice based on the numbers,” he indicated that Reed’s was open to selling the facility as a standalone business to a potential co-packing partner that could service its existing private label customers. He noted that Reed’s could help the buyer negotiate a deal for the company’s private label business, which is valued at about $4 million.
“The question is going to be whether that partner is going to continue supporting the private label customers; if so, then we’ll still be providing formula and support on an ongoing business to keep that business,” Stalowir said, adding that the company had several backup options co-packing facilities for West Coast production already in place. “If we don’t get a buyer in place, then we’ll have to negotiate with our co-packers and maybe find them other arrangements and lend them our intellectual property to have them maintain their product.”
Gordon Brothers has also been retained to help Reed’s sell its candy business. The company imports ginger chews and crystallized ginger candies from Asia and sells the products through retailers and e-commerce outlets that Stalowir said had few synergies with the beverage business. However, he noted that the candy segment was not a significant strain on the company as a whole.
“If we don’t get the number that we think is material enough to really be able to divert either in paying down the debt or investing in the brands, we’ll keep that business,” he said.
The sale of the facility will represent the end of a chapter that Stalowir is eager to close. He estimated that, with at least $10 million in investment and a further $5 million in losses due to inefficiencies, the cost of pursuing Chris Reed’s original vision has been significant.
“The company would be in a different place today if you spent $10 million on the brand instead of this facility,” he said. “It’s not what I would have done, but that’s what we inherited. It’s a stage we went through and we can’t go back to the past and change it.”