Business Overview and History
Reed's, Inc., the owner of the nation's leading portfolio of handcrafted, natural ginger beverages, has demonstrated remarkable resilience in the face of macroeconomic challenges. With a focus on ginger-powered innovation and strategic partnerships, the company is positioning itself as a key player in the rapidly growing functional and better-for-you beverage segment.
Reed's, Inc. was founded in 1989 by Christopher J. Reed, who developed the company's signature ginger ale and other natural ginger-based beverages. Initially, Reed's products were sold at farmers markets and natural food stores in Southern California. As the company expanded its distribution and product offerings, it encountered challenges in the early 2000s while scaling up production and distribution. Reed's faced issues with its co-packing partners and experienced inventory shortages that impacted its ability to meet customer demand. However, the company successfully overcame these obstacles by solidifying its co-packer network and investing in automation to improve operational efficiency.
Around 2010, Reed's began diversifying its product portfolio beyond its core ginger ale products, adding organic and zero-sugar varieties of its classic sodas as well as new lines like Virgil's craft sodas. This expansion helped the company capture a broader share of the growing natural and better-for-you beverage market. Reed's also invested in building out its sales and marketing capabilities to drive greater brand awareness and retail distribution.
In the late 2010s, Reed's faced renewed challenges with its balance sheet and working capital, leading to production limitations and inventory shortages that again impacted sales. The company worked to restructure its debt and secure additional financing, taking steps to stabilize its operations and strengthen its financial position. Despite these headwinds, Reed's continued to grow its branded beverage portfolio and expand its retail presence across the country.
Today, Reed's product lineup includes Reeds Real Ginger Ale, Virgils Zero Sugar handcrafted sodas, Reeds Classic and Stormy Mule, and Reeds Hard Ginger Ale. The company's commitment to using premium, high-quality ingredients has earned it a loyal consumer base and a reputation for exceptional taste. In recent years, Reed's has also expanded its product innovation efforts, introducing a line of functional, better-for-you beverages that leverage the proven benefits of ginger and other natural adaptogens.
Financial Performance
Despite the challenges posed by supply chain disruptions and inflationary pressures, Reed's has continued to navigate the evolving beverage landscape. In the third quarter of 2024, the company reported net sales of $6.8 million, a decrease of 43% compared to the same period in the prior year. This decline was primarily driven by tightened credit terms from suppliers and a reduced collateral base that impacted the company's ability to purchase raw materials.
Gross profit for the quarter was $1.2 million, representing a gross margin of 18% compared to 34% in the same period last year. The decrease in gross margin was attributable to higher trade spend and increased cost of goods sold as a percentage of net sales.
For the most recent fiscal year (2023), Reed's reported revenue of $44.71 million, with a net loss of $15.523 million. Operating cash flow for 2023 was negative $4.266 million, and free cash flow was negative $4.354 million. The company operates primarily in the United States.
In the first nine months of 2024, Reed's core beverage segment, which includes Reeds and Virgils brands, represented 100% of the company's total beverage volume. Gross billing for these core brands decreased 10% to $32.86 million compared to the same period in 2023, driven by a 10% volume decline for Reeds and a 16% volume decline for Virgils. Despite lower volumes, prices on the core brands increased 1% to $20.81 per case. The gross margin for the core beverage segment improved to 30% for the nine-month period, up from 28% in the same period of 2023.
Liquidity
To address these liquidity challenges, Reed's has taken decisive action to strengthen its financial position. On November 14, 2024, the company closed on a $10 million revolving credit facility with one of its trusted long-term partners, Whitebox. This new credit facility, combined with the purchase of all outstanding secured notes by the company's largest shareholder, D&D Source of Life Holding LTD, provides Reed's with the capital and flexibility it needs to build inventory levels, fulfill customer demand, and drive sustained growth.
As of September 30, 2024, Reed's had $306,000 in cash and $7.53 million of additional borrowing capacity under its $13 million revolving credit facility, subject to borrowing base availability. The company's current ratio stood at 0.38, while its quick ratio was 0.13. It's worth noting that Reed's had a negative equity position, which raised substantial doubt about its ability to continue as a going concern within one year of the financial statements' issuance. Management is actively evaluating funding alternatives and seeking to restructure its debt to improve the company's financial position.
Operational Improvements and Strategic Initiatives
In addition to its financial initiatives, Reed's has been focused on enhancing its operational efficiency and expanding its distribution footprint. The company has solidified its co-packer network, optimizing freight logistics and ensuring a more reliable supply chain. This strategic move has enabled Reed's to better serve its retail partners and meet consumer demand.
Moreover, the company's sales team has been successful in securing new authorizations and expanding the reach of its product portfolio. In the third quarter and early fourth quarter of 2024, Reed's has gained over 5,000 new points of distribution across major retail chains, including Safeway Albertsons, Giant Eagle, National Grocers Vitamin Cottage, Harris Teeter, and Cracker Barrel.
The company's e-commerce channel has also seen significant traction, with monthly sales exceeding $70,000 for the past two months. Reed's is projecting that e-commerce will generate over $1 million in sales in 2025, underscoring the growing consumer demand for convenient online purchasing options.
Innovation and the Functional Beverage Segment
Looking ahead, Reed's is poised to capitalize on the rapidly growing functional and better-for-you beverage segment. The company has been developing a new line of ginger-based products featuring organic ingredients, lower calorie and sugar content, and proven health benefits. These products are in the final phases of development and have already received positive feedback from key retailers.
By leveraging its expertise in ginger-powered formulations and expanding into this innovative, high-growth category, Reed's aims to complement its core product portfolio and contribute to its return to sustainable growth. The company has been collaborating closely with its retail partners, many of whom have expressed plans to significantly increase shelf space for functional and better-for-you beverages, further bolstering the growth potential of Reed's new product line.
Reed's expects to launch its new line of better-for-you beverages featuring organic ginger, adaptogens, and lower calorie/sugar content early next year. This strategic move aligns with the company's focus on simplifying its product portfolio and improving gross margins by transitioning to a fully outsourced manufacturing model and negotiating better vendor contracts.
Risks and Challenges
While Reed's has demonstrated resilience in the face of adversity, the company is not without its challenges. The highly competitive nature of the beverage industry, coupled with ongoing supply chain disruptions and inflationary pressures, continue to pose risks to the company's profitability and growth.
Moreover, Reed's reliance on a limited number of large customers and co-packers increases its exposure to potential disruptions or changes in customer preferences. The company's ability to maintain its relationships with these key stakeholders will be crucial to its long-term success.
Reed's has also faced significant headwinds in the carbonated soft drink segment due to price increases and inventory challenges. The company's inability to produce sufficient inventory levels to meet current demand, primarily due to tighter credit terms from suppliers, has negatively impacted its financial performance. As a result, Reed's has withdrawn its previous full-year 2024 guidance and is now focused on rebuilding inventory levels and driving towards sustained growth and profitability.
Conclusion
Reed's, Inc. has navigated the evolving beverage landscape with a steadfast commitment to innovation and strategic partnerships. Despite the challenges posed by macroeconomic factors, the company has taken decisive steps to strengthen its financial position and operational efficiency, positioning itself for a return to sustained growth.
By leveraging its expertise in ginger-powered formulations and expanding into the rapidly growing functional and better-for-you beverage segment, Reed's is poised to capitalize on the changing consumer preferences and solidify its place as a leader in the natural beverage industry. The company's focus on its core Reeds and Virgils brands, combined with its upcoming launch of innovative, healthier beverage options, demonstrates its commitment to adapting to market trends and consumer demands.
As Reed's continues to execute on its strategic initiatives, including the optimization of its supply chain, expansion of its distribution network, and development of new product lines, investors will be closely watching for signs of a successful turnaround and the realization of its long-term growth potential. While the company faces ongoing challenges, its recent capital infusion and efforts to deleverage its balance sheet provide a foundation for potential future success in the dynamic beverage market.