Truly Hard Seltzer boosted Boston Beer Company’s 2020 revenue to $1.74 billion, but production of the popular bubbly beverage remains a drag on the company’s gross margins, the company reported during its full-year and fourth quarter earnings report Wednesday.
To keep up with demand for Truly, Boston Beer leans on third-party co-packers, which along with increased freight costs, dragged down gross margins to 46.9% in both Q4 and for the full year, a decline from 2019 levels. The company’s margins have been crunched since third party production ramped up in December 2019.
During a call with investors and analysts Wednesday evening, Boston Beer chief financial officer Frank Smalla explained that the declining margins are worth it in the short term, because Truly is gaining share of hard seltzer category and is still soaring as the company’s long-term play.
“The strategy that we’re following is that our No. 1 priority is to grow share, because as long as the category is growing, it’s relatively easier to impact the share out and to carve out our part of the category,” he said. “Once the category stabilizes, this is going to be harder. But if you have a larger share, that will pay dividends for the long-term, whereas the negative impact on the margins is relatively short-term until the category stabilizes.”
Between 80-90% of Truly’s volume is in variety packs, which are labor-intensive and costly to pack, Boston Beer founder and chairman Jim Koch added. The company has made improvements at its brewery in Breinigsville, Pennsylvania, to cut down on co-packing costs.
“We’ve begun to automate that and we’ve implemented that in our Pennsylvania brewery and we think we’ve been successful,” he said. “That has actually helped that gross margin number from dropping as much as you might have predicted, had we not done that.”
Boston Beer plans to bring the same variety pack technology to its co-packing partners over the next two years. None of them currently have the ability to automate variety packs, Koch said.
“We will have almost all of our co-packers being able to do variety packs without anything like the current upcharges required,” he said.
Truly is the second biggest brand in the $4.1 billion hard seltzer segment, trailing Mark Anthony Brands’ White Claw. Boston Beer believes the segment will continue to grow in 2021.
“Maybe it won’t be 100%, but we think it will be at least 70% ,” CEO Dave Burwick said of the segment’s potential growth in 2021. “Whatever it is, our intent is to grow faster than whatever that number ends up being.”
In 2020, the Truly brand family sold $923.2 million at off-premise retailers tracked by market research firm IRI. That made Truly the No. 10 beer category brand family last year. At +147.1%, its dollar sales growth outpaced segment leader Mark Anthony Brands’ White Claw, whose dollar sales increased 130.6%, to $1.973 billion.
The overall hard seltzer segment increased off-premise dollar sales 160.4% over the 52-week period ending December 26, 2020, market research firm NielsenIQ reported. 2020 brought several new entrants to the segment (Anheuser-Busch InBev’s Bud Light Seltzer, Constellation Brands’ Corona Hard Seltzer, Molson Coors Beverage Company’s Vizzy Hard Seltzer), and slower growth for more mature brands seemed inevitable, as does slower growth in 2021.
According to Burwick, there are several reasons for confidence in hard seltzer’s continued ascent, including a household penetration rate that is just half of that of light beer. Burwick sees room to grow, and he also expects grocery and other large format stores to increase shelf space for hard seltzers this year. On average, grocery stores allot 7% of their cubic feet for hard seltzers, he said.
“We see that going up to 11%, 12%, 13% this year, so I’d say 50% plus in terms of space,” he said.
Boston Beer also hopes to find growth for Truly by closing the 6-point ACV gap between it and White Claw and increasing sales at convenience stores.
“We think there are definitely pockets in the U.S., different chains,” Burwick said. “Also, convenience store is a big opportunity for us — we’re very close in share perspective in grocery, but we’re much too distant in convenience.”
The company estimates that hard seltzer could reach 15% of beer category dollar sales in 2021. RBC Capital analyst Nik Modi recently offered his own estimate, projecting that hard seltzer could become 17-20% of the beer category by 2025.
Boston Beer is leaning on innovation to continue to drive its growth in the segment. Last month, the company released Truly Iced Tea Hard Seltzer. Stocking up retailers ahead of the launch contributed to a 26% increase in depletions (sales to retailers) in Q4 2020. The company rolled out Truly Lemonade at the same time last year, but wholesalers and retailers were more cautious of a then-unproven new product.
“Whereas the Truly Iced Tea launch, there was a lot of goodwill from the wholesalers to retailers and the consumer,” Smalla said. “So we knew this launch was going to be bigger, so we had to build a little bit more.”
Despite the initial hesitance, Truly Lemonade became “the most incremental new product in the entire beer industry in measured off-premise channels in 2020,” Burwick said.
The Truly Lemonade variety pack was the company’s second best selling SKU in IRI data in 2020, with $269.1 million in sales. Only Twisted Tea original sold more, posting dollar sales of 29.7%, to $284 million, according to IRI.
With just a few weeks in the market for Truly Iced Tea, Koch said it was “way too early.”
“I think retailers were very supportive of it, because they saw the success of Lemonade last year,” Koch said. “I mean, Truly Lemonade was basically the biggest thing to come into the hard seltzer category and their expectations are quite high.
“We got tremendous support from retailers; we got tremendous support from our distributors,” he continued. “But it’s still only in the middle of February.”
Boston Beer has two decades of experience in the hard tea segment with Twisted Tea, but Koch said he views Truly Tea as a different product and does not expect it to follow the regional growth pattern Twisted Tea took.
“We think that hard tea is now more widely accepted everywhere,” he said. “We don’t see it being particularly focused in places that are big drinking places like the south, and we think it won’t have the slow rollout that Twisted Tea did and therefore we will more closely follow whatever regional pattern, which is fairly weak, that you see with hard seltzer.”
On-Premise Returns Expected to Boost Samuel Adams, Angry Orchard and Dogfish Head
Although most of the company’s brands have recorded off-premise growth since the COVID-19 pandemic began, the Samuel Adams, Angry Orchard and Dogfish Head brands have lagged due to significant on-premise exposure.
Boston Beer is betting that the return of on-premise sales and new products — including the reimagined Wicked Hazy and Wicked Easy and non-alcoholic Just the Haze for Samuel Adams, canned cocktails and Hazy-O IPA for Dogfish Head, and new fruited ciders for Angry Orchard — will boost each brand.
“We think our plans add up to positive growth for each of those three brands,” Burwick said.
Looking ahead, the company expects full-year 2021 depletions to grow between 35-45%.
Increased Marketing Spend
Boston Beer upped its marketing spend in both Q4 and the full year, which investment firm Cowan and Company noted “seems to be working.”
In Q4, the company increased its marketing spending by 51.6%, about $48.1 million more than it spent in the same quarter in 2019. And for the full year, Boston Beer spent $92 million more than it did in 2019, an increase of 25.9%. Truly was the biggest benefactor of the increased budget, with Twisted Tea and Sam Adams also receiving a boost in ad spending, Koch said. But the pandemic forced the company to shift its focus and dollars.
“We were going into 2020 and had really strong plans for the first half, and that was impacted by COVID,” he said. “COVID happened and we couldn’t execute everything as we had planned for.”
No Plans for Acquisitions
Boston Beer ended 2020 with $163.2 million in cash and cash equivalents on its balance sheet and projected 2021 capital spending between $300-$400 million. Asked if this allowed the company to explore another acquisition like the Dogfish Head merger in 2019, Koch said no.
“I don’t think at this point we have any plans or appetite for another craft beer acquisition,” he said. “Obviously, it depends on what company and what the situation is. I would say, the Dogfish Head acquisition was somewhat unique, because of the synergies with the founders.”