Boston Beer Volume Doesn’t Double for First Time in 16 Quarters
Boston Beer Company is maintaining its guidance of 4% to 10% volume growth in 2022, despite first quarter losses, the company’s leadership team shared during an earnings call with investors Friday.
As Brewbound reported Thursday, Boston Beer’s depletions (-7%) and shipments (-25.1%) both declined compared to Q1 2021. The quarter marked the first time in the last 16 quarters that the company’s volume didn’t grow double digits compared to the corresponding quarter, according to Boston Beer founder and chair Jim Koch.
“This reflects both our own slow 2022 start and a decline in the overall beer market,” Koch said. “More particularly, the decline reflects our internal supply chain issues that continued into 2022, but also the continuing broad scale supply chain issues and inflation that are affecting consumer purchases and the weakness of hard sell-through demand as the category lapped 62% growth from the first quarter in 2021.”
The “heavy comparative challenge” of Q1 2021 was a +48% and +60% increase in depletions and shipments, respectively, versus Q1 2020. The quarter was followed by the slow down of the hard seltzer segment, which resulted in Boston Beer revising its 2021 shipment guidance downward, and writing off more than $100 million in direct costs and destroying millions of cases of Truly.
Despite the losses, CEO Dave Burwick said “Q1 performance was in line with our internal targets for depletions, shipments and financials,” and that the quarter is “not reflective of trends we see for the full year.”
Additionally, Boston Beer reported a net loss of $2 million, compared to a net income of $64.6 million in Q1 2021, according to Frank Smalla, Boston Beer CFO. Operating costs increased +1.2% year-over-year (YOY) to $175.1 million, while general expenses increased +24.3% YOY to $7.8 million, “primarily due to increased salaries and benefits costs and increases in services provided by third parties,” including brewing contracts.
What hurt Q1 numbers were “the hangover cost from the 2021 slow down,” which Smalla said should not continue through the rest of the year. Additionally, Boston Beer battled a “bad mix” of inventory, with “too much” of some brands and not enough of others, resulting in high warehousing costs.
Additionally, internal capacity limitations created higher co-packing costs from outsourcing to third parties. Smalla said those costs should decrease in the rest of the year, with internal capacity increase, a new canning line and a new variety pack line.
“Q1 is also the smallest quarter that we have,” Smalla said. “So while it was significantly below, it’s impacting a smaller portion of the overall volume.”
Leadership expressed optimism for the rest of the fiscal year, with Smalla projecting depletions for the rest of the year to increase at least +10% compared to the last nine months of 2021, and +29% compared to the last nine months of 2020, in order to reach the company’s midpoint projections.
Boston Beer also doubled-down on its Q4 statements that 2022 projections could be met, despite the performance of Truly Hard Seltzer, with CEO Dave Burwick noting that “if Truly is negative, we can still hit the top end of our guidance.”
“We’ve learned something from the last year or so about this,” he said. “So we’re being very cautious about that.”
Heavy Truly Innovation Year, But Evaluation of Portfolio Expected This Fall
“Regardless” of where the hard seltzer segment growth settles in 2022, Burwick said the company’s goal “is to outgrow the category for the full year, driven by innovation, continued brand building and superior distributor support and retail execution.”
Boston Beer expects the hard seltzer segment to grow between zero and 10% this year. Burwick noted that in 2021, the segment grew +62% in Q1, but saw significant slowdown mid-year, growing only +5% the following three quarters.
Through December 2021, Truly outgrew the hard seltzer category for 17 straight months, gaining four volume share points and growing depletions +27% in 2021. That streak ended in Q1 2022, when Truly volume declined -15% and off-premise dollar sales declined -10%, losing two share points YOY.
Despite the declines, Burwick said week-to-week off-premise share of Truly held steady throughout Q1, and the company expects the brand’s share of the segment to increase from 23% to 26% at the end 2022.
Investors Hesitant on Optimism: Following the earnings call, Goldman Sachs analyst Bonnie Herzog wrote that she was “surprised” by the optimism for the brand and segment, particularly given that retailers in Goldman Sachs’ April “Beverage Bytes” survey project only a 4% volume increase for the hard seltzer segment this year.
“While we appreciate management’s enthusiasm for what appears to be a full pineline of innovation, we wonder if FY22 guidance contemplates what we imagine are considerable investments to bring innovations to scale,” Herzog wrote.
Truly innovations this year include:
Truly Margarita: The 2022 innovation for the Truly brand, launched in January, has been “the most successful new product launch” so far this year, claiming a 4.6 volume share of beer and 4.4 share of hard seltzer, according to Burwick. The brand has also possibly addressed issues within the segment of consumers wanting the next new thing, as Truly Margarita has “the highest repeat rate after its first 13 weeks of any new entrant ever in hard seltzer,” outpacing repeat rates for Truly Lemonade and Truly Fruit Punch, Burwick said, citing Numerator data.
Truly Poolside: A limited edition variety pack launching in May. Burwick said the offering is expected to have “better execution” than Truly Fruit Punch did when it launched last summer. At the same time, Boston Beer will launch its new promotional campaign with musician Dua Lipa.
Truly Flavored Vodka: Boston Beer partnered with Beam Suntory to launch Truly Flavored Vodka earlier this year. Burwick said the offering is “generating strong marketplace excitement and social media buzz.”
Truly Vodka Seltzer: The vodka-based, ready-to-drink canned cocktail (RTD) was announced yesterday and will launch later this summer (more below).
Other innovations this year for Boston Beer include Hard MTN Dew, launched in three states in February in partnership with PepsiCo. Burwick said the brand is “the highest trial I’ve ever seen, ever, ever,” with a 27% share of flavored malt beverages (FMBs) in off-premise channels. Hard MTN Dew was first available in Florida, Iowa and Tennessee, followed by Arkansas and Oklahoma, and Minnesota coming next week. Burwick said the brand will expand into 15 states by the end of this summer.
Addressing concerns of cannibalization within Truly’s portfolio, Burwick said Boston Beer is becoming more focused on limited-edition offerings, such as Truly Poolside, to avoid overlap. He said the company “intends to take a look at that whole portfolio” after the summer season and explore rationalization.
“We’re probably more weighted to innovation this year than we normally would be,” Burwick said. “But we go where the opportunities are and that’s where we see the opportunities right now.
“The challenge with this category is that consumers, they want news and they really become attracted to whatever’s new,” he continued. “We think [limited time offerings] are a really good way to do it. And certainly we know how to execute them: We do seasonals as well as anybody in beer.”
Koch added that the company still needed to be “realistic” on innovation growth this year, and that “the jury is still out” on what demand will look in the coming months for the brands that have launched so far. He noted that the company is facing headwinds from “geopolitical problems,” a “wobbling” economy, as well as “extraordinarily high” inflation, which could all impact final outputs.
Spirit-Based Truly Vodka Seltzer to Release in Summer
Boston Beer revealed its answer to E. & J. Gallo’s High Noon Sun Sips ahead of its earnings call. Truly Vodka Seltzer, a vodka-based version of the sugar-based original that will be released “late this summer.”
Truly Vodka Seltzer (5% ABV, 110 calories, 2g sugar, 4g carbs) will be made with six-times distilled vodka and real fruit juice. The line extension will come in four flavor varieties: Cherry & Lime, Blackberry & Lemon, Peach & Tangerine, and Pineapple & Cranberry. Vodka Seltzer will be sold in 12 oz. slim can variety 8-packs, 8-packs of Cherry & Lime, and single-flavor 4-packs.
Truly Vodka Seltzer is in addition to the previously released Truly Flavored Vodka, a one-liter bottled vodka being produced and sold by Beam Suntory. Burwick called Truly Vodka Seltzer “a complementary companion” to the Truly line, which he said will attract a different consumer than the existing 21-to-34-year-old Truly drinkers — consumers in the 45-plus age range, female, African-American, with higher incomes.
“We see there is a window here and there is a place to go with Truly Vodka seltzer at the high end of hard seltzer with a different consumer,” Burwick said.
With its spirit-base leading to a higher tax rate, Truly Vodka Seltzer will be priced in line with products such as High Noon. Truly Hard Seltzer, which is sugar-based, falls under beer’s lower tax rate.
“If you look at it from a gross margin perspective, it is probably about the similar gross margin to Truly Hard Seltzer out of the gate and ideally over time it’s accretive to Truly,” Burwick said.
Twisted Tea to Increase Distribution, Gain Shelf Space
Twisted Tea, the best-selling FMB brand on the market, remained a bright spot for Boston Beer, growing double-digits in the quarter in off-premise channels. Twisted Tea’s +15% volume growth and +20% dollar growth in the quarter made it “the “fastest growing brand among the top 20 brands,” Burwick said.
“In fact Twisted Tea has been the fastest growing brand among the top 20 in all of beer for the past seven straight months,” he added.
As such, Boston Beer expects Twisted Tea to increase its shelf space by about +13% in both large- and small-format stores this year, with points of distribution increasing about +19% in large-format stores and +67% in small-format stores, Burwick said.
In order to drive awareness of the brand, Boston Beer is now advertising Twisted Tea year-round. Among the efforts to build the brand this year, Boston Beer is driving distribution growth with Twisted Tea 12-packs, which now have a national footprint, according to Bruwick.
“We can start getting national retailer support and promotions behind it, which we’ve never had before,” he added.
Line extension Twisted Tea Light is also receiving “a huge campaign” centered about convenience stores, and Twisted Tea will also have a joint promotion with Doritos as part of Boston Beer’s PepsiCo partnership.
Additionally, Burwick said he sees an opportunity to drive growth of Twisted Tea in the on-premise channel, where the brand has about 4% of its volume. “That’s an opportunity for us as well to pursue that, and there’s a lot of customers interested in that,” he said.
Truly Draft Sales +35% in Q1
Boston Beer now has 4,200 draft placements for Truly Hard Seltzer, as sales per point in the first quarter increased +35% YOY, “pulling the same rate as Boston Lager,” Burwick said.
About 1,250 of those placements are Buffalo Wild Wings locations, which are committed through the end of the year, Burwick added. Still, draft sales make up only 12% of the brands total on-premise sales.
“We’re the most legitimate national provider of draft for hard seltzer,” Burwick said. “We think there’s opportunity there.”
“We’re not quite sure where Truly on draft goes,” Burwick continued. “It’s ebbing and flowing, but it’s on the uptick right now.”
Samuel Adams, Angry Orchard Could be Growth Contributors
Samuel Adams and Angry Orchard hard cider, which have previously been a drag on Boston Beer’s business, are both showing momentum over the last 12 months and could be contributors to the company’s growth in 2022, Burwick said.
“We feel pretty confident there won’t be a drag and might even be contributors,” Burwick said.
In the quarter, Samuel Adams’ Cold Snap seasonal performance was strong, and although overall Samuel Adams portfolio depletions were flat, the brand gained share of the craft beer market. Burwick said those gains were supported by the “Your Cousin From Boston” advertising campaign and Super Bowl commercial, featuring robots from Boston Dynamics that generated 2 billion earned media impriessions and more than $18 million in ad value equivalency.
Burwick added that on-premise is “contributing significantly” to Samuel Adams and Angry Orchard total volume.
In regards to Samuel Adams’ improving trends, Koch said the fragmentation within craft beer “is kind of done.”
“We’re pretty much stable in a declining craft market,” Koch said of Samuel Adams.
Koch continued that the craft beer industry in the U.S. has matured and “roughly found its level.”
“In that kind of situation it begins to be sort of a grind it out battle where the competitors that have the most and best resources and talent and products can slowly begin to gain share in this more mature stable, maybe slightly growing, maybe not, over the last few years,” he added. “We have all of the benefits of the largest player in terms of scale, retailer appreciation, wholesaler support and we can do things that are not available to many of our craft colleagues like have a Super Bowl ad that gets 2 billion impressions or have national presence and be able to go to the national teams and get draft distribution all across the country.”
As such, Koch said Samuel Adams is reaping the benefits of being a 30-plus-year-old brand with scale and retailer and wholesaler support.
Meanwhile, Dogfish Head depletions declined in the quarter, although the brand’s spirits-based canned cocktails such as its Blood Orange & Mango Vodka Crush and Lemon & Lime Gin Crush, and Bar Cart variety pack grew triple-digits in Q1, although off a small base, Burwick said. He added that the company will make a “big push” with those products this summer.