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Can the kombucha billionaire survive the rush of competition?

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g_117705_george_thomas_dave_280x210.jpgGT Dave, founder, GT’s Living Foods
Image: Ethan Pines for Forbes India

Before entering his kingdom, George Thomas Dave dons his crown—a blue hairnet pulled over a fashionably short buzz cut. He pushes open the doors of his year-old factory, releasing a gust of cold air and the scent of vinegar. The interior is all-steel and ­fluorescence, light glinting off Dave’s diamond-sheathed Rolex, the metallic studs on his dress shoes and the platinum rings on his forefinger, ring finger and little finger.

Winding his way through the place, he watches a batch of his bestselling organic ginger kombucha get pumped into 16-ounce glass bottles, 100 at a time. Each has a white label touting the fermented tea’s ingredients (electrolytes, probiotics, enzymes) and purported benefits (reawaken, rebirth, renewal). Dave reaches the end of the 200-foot bottling line, where four robotic arms fill, stack and move cases of kombucha. He spent $40 million on this building in Vernon, California, 5 miles south of Los Angeles, allowing him to produce more than 1 million gallons a year. “This is the next level for us,” says the impeccably cheekboned Dave, known as “GT” since before he began brewing kombucha at his mother’s kitchen table.

Dave, 41, takes the opportunity to make a point, one very important to him and his GT’s Living Foods, a business with an estimated $275 million in sales. This new, 260,000-square-foot factory doesn’t mean he’s changing how his kombucha is made. Unlike many of his rivals, he says, he makes his authentically, and it’ll stay like that: “From day one, I tried to emulate a homemade process.” Dave lets nature do much of the work, as he has since the beginning: Fermenting a blend of black and green teas in small batches of 5-gallon jars for a month. It is not pasteurised, though doing so would make the beverage less perishable and easier to ship. And Dave does not skim away the mix of yeast and bacteria that does the fermenting, leaving small amounts floating gelatinously in the drink. “This is what the customer wants,” he insists.

Dave’s absolute certainty that he knows best—and that GT’s Living Food should change little about its hit product—has played out in a number of other ways. He has rebuffed numerous acquisition offers, taken no outside funding and remains the sole owner of GT’s, a firm conservatively worth over $900 million. His stake in GT’s, plus homes in Beverly Hills, 8 acres in Kauai and a growing contemporary art collection, makes Dave a billionaire. (Here, he’d like the record to be clear. “I didn’t start making kombucha,” a drink with humble origins in the Far East, likely among pilgrims and travellers on the Silk Road, “because I wanted to be rich.”)

“He has been able to scale his company while retaining his craft ethos and independent spirit,” says Greg Steltenpohl, an admirer of Dave’s and a founder of the Odwalla juice company. Steltenpohl knows what it’s like to give up independence, chafing at the chains wrapped around him by public shareholders after Odwalla’s 1993 IPO. He long ago left Odwalla and has a new nut-milk startup, Califia Farms. Dave has “the freedom to still be 100 percent himself,” Steltenpohl says. “I can’t point to a single other beverage entrepreneur who has done that.”

A less sure-minded person in Dave’s position might be waffling on his convictions right now, for his kingdom is increasingly under siege. He was the first to put kombucha on store shelves, in the late 1990s, and GT’s is still the biggest manufacturer, owning 40 percent of the US market. His $3 to $4 bottles can be found at retailers like Walmart, Costco and Kroger. But the shelves are getting crowded. There are more than 350 kombucha makers in the world (most in the US), and they’ve slurped up roughly $340 million in funding from venture capital, private equity and big conglomerates like Coca-Cola and PepsiCo, which paid $260 million for GT’s biggest rival, Kevita, three years ago.

These well-funded competitors are eating away at Dave’s first-mover advantage, putting him on his heels and prompting him to fire off defensive potshots. With the sanctimoniousness of a perturbed monk, he decries competitors who have “bastardised” kombucha. He turns his ire on fast-growing rival Health-Ade, which now has $50 million in sales. “You know what they are?. . . Cherry-berry. Tropical punch.  . . .  [They] make it basic, make it mainstream.” Health-Ade sells its drink in medicinal-looking yellow-tinted bottles, which draw even more of his disdain. “If your claim to fame is that you’re in ambre bottles, or you’re three cool hipsters behind this product, and that’s it? Your days are numbered, in my opinion.”

Dave makes no secret what he considers his company’s greatest asset: “Our saving grace is that at the end of the day this company truly is an extension of me.”

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The first time Dave tried kombucha, at 13, he nearly spat it out. He was at his family’s Bel Air home, and the tea was one of the first batches made by his parents. The Daves were the type of family who vacationed at Indian ashrams, and they’d received a starter lump of bacteria and yeast from a vegan friend, who in turn had received it from a Buddhist nun. “I thought it smelled weird. I thought it tasted weird. I thought it looked weird,” Dave recalls. The living cultures of yeast and bacteria suspended in the drink—made when they feed off carbohydrates, usually from the fruit juices often added to ­flavor kombucha—were particularly unappetising.

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His perspective changed the next year when his mother, ­Laraine, received a sudden cancer diagnosis. He recalls the grim time in their lives unfolding like this: Laraine’s initial prognosis was bad, a growing golf-ball-size tumour in her breast. Doctors scheduled a bone marrow transplant before additional tests came back. When the doctors finally got them, they were astonished. Despite their initial guess, the tumour was years old but dormant.

They asked if she had been eating anything unusual. No, she said. But she had drunk homemade kombucha every day for the past two years. The doctors raised their eyebrows and, Dave says, deemed her condition “miraculous.”

That prompted him to research kombucha at a local library. Its origins are mysterious, no one is quite sure exactly where it began. What’s clear is that ancient Asian warriors consumed it as an “immortality tonic” to acquire great strength before a battle. It became a peasant’s drink in Russia and parts of eastern Europe, and in the 20th century, it became a supposed immune-booster for HIV patients during the AIDS epidemic.

Kombucha captured Dave’s interest at an opportune moment. Almost 16, he was failing his classes at Beverly Hills High and had fallen in with a crowd that had “lots of money, lots of drugs.” He needed an exit. “You quickly can get swept up in it. I certainly did, until I caught myself.” He passed his GED and left school early, thinking he would start fresh at a city college. Then it dawned on him to make kombucha instead.

He lived at home and began GT’s there in 1995. Within a year he was selling some 20 cases a day to natural food stores around LA, generating north of $150,000 in sales, and moved out to a rented commercial kitchen in Los Angeles. He used the same batch of yeast and bacteria his parents had received years prior (he still uses the same colony today).

“I was a one-man show. I brewed, bottled, delivered, labelled—you name it,” Dave says. “This product was something really special and something that very much had aspects of me in it, and I wanted to protect it.”

His mother became his first employee. They had grown closer after the surprise death of Dave’s older brother from kidney and liver failure, and her divorce. She helped Dave get GT’s into a few shops in Los Angeles, often appearing as an in-store pitchwoman, regaling potential buyers with her story of kombucha’s health benefits. He printed a summary of her tale on his labels, but even with that tearjerker marketing, he still struggled: “I got a lot of noes. But I was persistent. That creates humility.”

The turning point came when word-of-mouth reached Whole Foods, which started carrying his tea in 1999. It caught on, becoming a cult-favorite wellness drink in health-conscious southern California and then across America. Soon Gwyneth Paltrow, Madonna and Tom Cruise were spotted sipping GT’s.

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In a decade, GT’s reached about $35 million in sales, while competitors like Coke-backed Honest Tea followed behind with their own kombuchas. Then, disaster struck in 2010. A few bottles of kombuchas were found bubbling and leaking at a Whole Foods in Portland, Maine. Test results from the Department of Agriculture found alcohol levels in the teas close to 2.5 percent, higher than they should’ve been. While none of the offending teas were GT’s, Dave suffered the same fate as everyone. Overnight, Whole Foods removed kombucha from its stores. More chains followed.

Class actions came next. Two came in September 2010, one alleging GT’s falsely claimed alcohol levels were below 0.5 percent. The other called out GT’s for “deceptive, misleading, unfair and unlawful labelling” for marketing its products as “wonder drinks that possess amazing health benefits.” A third filed in November combined both allegations, accusing GT’s of making unsubstantiated health claims such as “weight control,” “anti-aging” and “healthy skin.” He denied the allegations but settled all three for $40,000 combined and paid lawyers’ fees of $350,000. (“Corporate extortion at its finest,” he sniffs.) And Dave removed Laraine’s cancer story from labels.

 At first, Whole Foods hesitated to return to kombucha. Honest Tea threw up its hands completely and stopped making it. Many more of GT’s competitors began pasteurising to control alcohol levels and quickly won back spots at Whole Foods. But the grocer was still reluctant to restock GT’s. Dave was adamant that he wouldn’t pasteurise, believing it would zap away some of the alleged health benefits. He spent months tinkering with his recipe and came up with a new line called Enlightened. It is less fermented, lowering its alcohol content, and has become GT’s most popular item. The original recipe is still available in some stores (including Whole Foods) but is treated like alcohol and sold only to customers 21 and older.

“When 2010 hit, it occurred to me that the fact that I’ve remained independent was a blessing. It allowed me to get out of it on my own terms,” Dave says.

Around this time, he decided to entertain acquisition offers from “two big food companies”—he won’t say which ones, but Coke, Nestlé and Unilever are reasonable guesses—even though he had steadfastly rejected any overtures in the past. The pair of suitors used every ploy possible to win him over. Roses, champagne, limos to meetings. They promised far-reaching distribution and help in landing a TED Talk so he could spread the gospel of kombucha. It sounded good, but both deals required him to give up control over his formula. He passed.

“I’m not for sale,” he says. “If you’re just looking to wine and dine me the rest of my life, I’m going to be incredibly unhappy.”

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For the natural-products industry, an almost implausibly large group of businesses encompassing everything from mango-flavored sparkling coconut water to hair conditioner made from seaweed, Christmas comes in March, when Expo West begins. The five-day trade show has occurred annually since 1981, and it attracts thousands of vendors, all jockeying for the attention of buyers from the nation’s biggest retailers at the glassy Anaheim Convention Center, across from Disneyland, stationed in their respective booths.

    That’s not how George Thomas Dave rolls. He’s a floor above the zoo­ish fray, holding court in his private room, surrounded by a small group of his sales team and executives from retailers like H-E-B grocery and Sprouts Farmers Market. He has never exhibited. People come up to see him.
He’s pouring out small tastes of his latest product, Dreamcatcher, a sparkling water infused with cannabidioil, or CBD. He spent months perfecting the four flavors: Cucumber-basil, ginger-lemongrass, orange-­elderflower and blood rose. “CBD is very controversial right now,” Dave says. “A lot of companies our size shy away from risk. I think that’s what kills the entrepreneurial spirit.”

Dave doesn’t walk the show floor anymore. It depresses him too much, he says, to see his rivals’ ill-conceived kombuchas and how they’re damaging customers’ appreciation for more authentic ones like his. (“I refuse to let someone else who just joined the party change the narrative.”) But the competition below him is hungry to take a piece of his long-established position in the industry. “Kombucha is growing at 40 percent a year. It will be a $2 billion category by 2020,” says John Hackett of Coca-Cola, who’s here hawking something called Smoobucha from Odwalla, which Coke now owns. “We took a smoothie, put it together with pasteurised kombucha and blended it in a way that we think makes kombucha more drinkable, because 68 percent of the people who try kombucha don’t like it,” he says, citing an industry survey.

Dave’s two biggest rivals are here, too: Kevita, owned by Pepsi, and Health-Ade, which is backed by Coke. Dave is quick to complain that Kevita shouldn’t be allowed to call its popular Master Brew line kombucha, saying it doesn’t follow an appropriate recipe. Dave uses a cumbersome, small-batch manufacturing process that took years to fine-tune. It requires careful logistics to keep the kombucha fresh as it winds through multiple facilities and ­warehouses in southern California before getting to stores. Kevita does something totally different. It uses lab-created probiotic strains, adds a tea flavoring and pumps it full of artificial carbonation.

As a result, Kevita doesn’t contain the same stringy threads of bacteria and yeast that GT’s does, and its teas are more mellow tasting, leaving Dave to snipe: “If you want [a drink that’s] clear and consistently sparkling with no vinegar flavor, that’s called carbonated flavored water. You can get it for 99 cents at the thrift store.” Customers don’t seem to share Dave’s concerns. Kevita sales are up an estimated 100 percent since Pepsi bought it in 2016, and it beat Dave to Europe, a market he plans to reach later in 2019, a year behind.

As for Health-Ade, Dave is stewing about the price war it has ignited with him. Health-Ade has raised $30 million from Coke and other investors, according to PitchBook, and it has used that money to build a factory, allowing it to keep its manufacturing costs and pricing low. “Right now, you can go and buy a Health-Ade for 99 cents because they offer a coupon here and a coupon there, and you can stack the coupons. That’s killing the category.”

His complaints go on. “This category—that I feel that I was instrumental in allowing it to be what it is—is slowly being killed by all the noise and all the success,” Dave says. “I say that with almost tears in my eyes. The future for kombucha may not be as bright. ”

A few years back, Mark Rampolla experienced something similar as one of the originators of the coconut-water craze. “I do think [Dave] may have some challenges in the future if he wants to continue to grow and maintain relevance,” says Rampolla, now a co-founder of Powerplant Ventures, a Los Angeles venture capital firm.

Rather than go mainstream, Dave is pushing hard in the other direction. He convinced people to love a weird, funky drink once, and aims to do it again. In 2016, he made his first acquisition, buying a family-owned Minnesota business called Tula’s CocoKefir, a maker of fermented coconut water. The story of how CocoKefir started resonated with Dave: Parents creating a drink they hoped would help their autistic daughter.

“We needed something to give us permission to play in other spaces,” Dave says. For CocoKefir, Dave imports Thai coconuts that employees scoop out by hand. “We’re doing absurd things”—like manually processing coconuts—“that from a financial and business standpoint, you look at and think is never going to work. But we’re fine with that. We think that’s what makes us special.”

GT’s also debuted a line of hard kombucha at the end of last year. It has an Alcohol By Volume (ABV) of 3 percent, less than the 4 percent or so in a light beer. There’s also CocoYo, a non-dairy coconut-based yogurt, and Alive, launched by GT’s in 2017 as a probiotic apple-cider vinegar drink but recently rebranded as tea filled with traditional Chinese herbs like reishi and chaga.

“Kombucha is special, but it’s not the only thing in this world,” Dave says. “I’m fearful that one day I wake up and kombucha doesn’t mean anything. I’m going to fight it, but I may find myself outnumbered.”

He extends his vision out to decades. “Our kefir and yo is where kombucha was for me 22 years ago… I’m not in a rush,” he says. “I don’t have to answer to anybody.”

(This story appears in the 05 July, 2019 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)



via Forbes India

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