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Business Observer Friday, Dec. 13, 2019 2 months ago

Gut check: Kombucha brewer tackles growing pains as product gains traction

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A budding beverage industry star is on the cusp of some major obstacles to even more growth, from an outdated tax law to classic supply and demand issues.
by: Brian Hartz Tampa Bay Editor

Tonya Donati and Joshua Rumschlag, co-founders of Mother Kombucha in St. Petersburg, say they make kombucha for people who think they don’t like kombucha.

Kombucha, for the uninitiated, is a carbonated beverage made from fermented tea gaining traction as a healthful alternative to soda and other sugary drinks. For many years, it was a product made by home brewers and sold at farmers’ markets, so the quality would vary from batch to batch, which has provoked a “love it or hate it” reaction to its tart, somewhat vinegary taste.

“When I first started,” Rumschlag admits of his home brew, “it was disgusting.”

But for brewers who can get it to taste good, the upside is huge: a beverage loaded with good-for-your-gut-health ingredients, ranging from probiotics and B vitamins to amino acids, enzymes and adaptogens. That’s no small feat in an era when consumers increasingly are on the hunt for products across all categories that promote health and wellness.

Led by Mother Kombucha — a company with 20 employees that recently signed a deal to supply all 803 Publix grocery stores in Florida and is in talks for a trial run with select 7-Eleven locations — kombucha looks poised to have its moment in the sun, and grocery refrigerator section. Privately held Mother Kombucha — which launched in 2014 with $5,000 scraped together by its founders — declines to disclose revenue figures. But Donati says sales have been growing 75%-100% year-over-year since 2016.

Mark Wemple. Mother Kombucha co-founders Tonya Donati and Joshua Rumschlag have courted lawmakers in their fight against outdated beverage industry tax laws.

“We’re hiring more sales and merchandising teams,” Donati says. “We’re hiring staff in other parts of the state to get us in front of consumers.”

The old-fashioned taste test has been key to Mother Kombucha’s success, say Donati, 47, and Rumschlag, 42. The company doesn’t spend much on advertising, in print, digital or broadcast form, and prefers to sell product and hand out free samples at local festivals and events, such as St. Petersburg’s long-running Saturday Morning Market.

“The major focus of our marketing dollars is to get in front of the end consumer,” Donati says. “We tend to be the kombucha for people who think they don't like it or have tasted it and think they hate it. You can't do that with your branding or an ad or Instagram.”

The grassroots approach delivers a ripple effect. As more people experience Mother Kombucha’s offerings, they tend to seek them out at their local grocery stores and other retail outlets.

“It’s really about getting it in people's mouths,” Donati adds, “and by having the people who are sampling be paid employees of ours who understand and believe in our mission and can really tell the story — that's just been hugely valuable as far as getting in front of larger retailers.”

But going from farmers' markets, breweries and juice bars to the shelves of Publix, statewide, is a huge step, even for a beverage firm that already produces some 7,500 bottles of kombucha per day. (Mother Kombucha also supplies major grocery chains like Winn-Dixie and Whole Foods.) It's a step — making sure quality doesn't suffer while meeting a surge in demand — that has tripped up many others, in a host of industries. 

CONVENIENT TRUTH

Donati and Rumschlag say one way to ensure supply meets demand is to be strategic about retail channels they target. In 2020, for example, Mother Kombucha’s big goal is to penetrate more convenience store chains, which don’t need to carry as much stock as supermarkets. The move would have the added benefit of putting a healthful product on the shelves at gas stations, which are often overloaded with fattening food and drinks.

“Success in launching in the convenience channel is the big one,” Donati says of the company’s aspirations. “We’ve talked about this since our early days. If I’m on a road trip, or I’m just running late to pick up my kids, it’s so hard for me to stop in and find healthy choices in a convenience store. And for some people, that’s their grocery store.”

“We tend to be the kombucha for people who think they don't like it or have tasted it and think they hate it. You can't do that with your branding or an ad or Instagram.” Tonya Donati, co-founder of Mother Kombucha

Rumschlag adds that a bigger presence in convenience stores would help position Mother Kombucha as a leader in combating what are known as food deserts — areas of cities, typically low-income areas, that lack stores that sell affordable, nutritious food. Tangerine Plaza in South St. Petersburg, for instance, has struggled to keep a grocery store tenant. The shopping center had been anchored by a Walmart Neighborhood Market, but the retail giant closed in February 2017, and the space has been vacant ever since, hurting the surrounding shops that relied on the foot traffic generated by the grocery store. Also, many residents in that area don’t drive, and the nearest supermarket is a 45-minute walk away.

“For folks down there, a convenience store is all they’ve got,” Rumschlag says.

If companies like Mother Kombucha create consumer demand that, in turn, pushes convenience stores — both chains and independents — to carry more food and drinks that promote health and wellness, then that not only solves a social challenge but also a business challenge: market expansion.

“Convenience stores are going to be the key to eliminating food deserts,” Rumschlag says. “The mom-and-pops probably don’t want to be the first ones to do it, but when brands like 7-Eleven recognize that change, inherently it’s going to trickle down.”

EXPANDING HORIZONS

Mother Kombucha’s headquarters on 28th Street in St. Pete — just south of one of its first customers, Mad Hatters Ethnobotanical Tea Bar, which sells kombucha and kava but no alcohol — is a cacophonous place, with relentless hammering, sawing and drilling going on as the firm adds 3,000 square feet to its production space.

“Publix has basically tripled our business overnight,” Donati says. “That’s why you hear that sound all day and all night. We’ve gone from a couple bottlings a week to bottling every single day.”

Despite the mad rush to meet demand, Donati doesn’t anticipate needing new space anytime soon. “I think we’re pretty good here for the next five years or so,” she says. “We’re in a good place.”

Having expanded the horizons of consumers, another challenge lies in regulations — specifically how kombucha is taxed. Outdated laws from the Prohibition era hamstring companies like Mother Kombucha, whose products, due to the fermentation process, contain small amounts of alcohol — usually less than 0.5%.

Kombucha isn’t intended to be, and isn’t marketed as, an alcoholic beverage. But sometimes, if it’s not stored at the proper temperature, its alcohol by volume content can slightly exceed 0.5%. That means it can be taxed like beer under the Internal Revenue Code.

“That’s holding a lot of companies back from getting investment dollars,” Rumschlag says.

Donati adds, “These outmoded tax laws don’t really apply to modern culture.”

Determined to do their part to reform the tax code, Donati and Rumschlag began to lobby the office of Florida Sen. Marco Rubio, R-Miami, to support a bipartisan bill, known as the Keeping our Manufacturers from Being Unfairly Taxed while Championing Health Act (KOMBUCHA). The act would amend the tax code, so kombucha could be sold with ABV up to 1.25%. The bill, which would bring U.S. regulations on kombucha into alignment with Canada, the European Union and Australia, has garnered support in both the House and Senate from a coalition of Democratic and Republican lawmakers.

Mother Kombucha’s efforts have paid off in grand fashion: Not only did Rubio — who chairs the Senate Committee on Small Business and Entrepreneurship — visit the company’s facility Oct. 10, but he also named Mother Kombucha the U.S. Senate Small Business of the Week. Another victory: At a Senate lunch Rubio hosted in late October, Rubio served his Republican colleagues Cuban sandwiches, key lime pie and kombucha.

Capitol Hill Republicans might not be the No. 1 target market for kombucha, but as a voting bloc, they tend to dislike taxes, so Mother Kombucha’s move puts into practice a savvy business lesson: Don’t be afraid to forge ties with unlikely allies.

“The Republicans have been more interested than the Democrats,” Donati says. “I think because it’s a tax law that would open up more industry and support businesses.”

We can all drink to that.

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