Boston Beer Company’s leadership admitted the company has not performed “as expected” so far this year, lowering its guidance to a volume loss between -2% and -8%, during an earnings call with investors Thursday afternoon.
The change is a significant shift from Boston Beer’s Q1 earnings call a few months ago, when the company maintained its guidance of +4% to +10% volume growth, despite first quarter losses. At the time, leadership expected trend overlaps from 2021, when growth rates improved after the first quarter, and stressed that Truly didn’t need to grow for the company to hit its guidance. Now, it appears improvements are unlikely.
Boston Beer also cut its gross margins projections yesterday to 43%-45% (previously projected between 45%-48%).
Year-to-date through July 16, Boston Beer’s depletions declined -7%, while shipments were down -12.6%. For Q2, depletions and shipments declined -7% and -1%, respectively, compared to +24% and +27% growth in Q2 2021.
Lackluster performances from Boston Beer’s Truly Hard Seltzer brand were credited as the biggest driver in the guidance change, with second quarter depletions declines “primarily driven” by Truly, CEO Dave Burwick said. Excluding Truly, depletion volumes were +14% for the quarter, and +11% for the first half of the year.
The total hard seltzer segment recorded a -17% volume decline in the quarter in IRI-tracked off-premise channels, and a -13% decline in dollar sales – a “deeper” decline than “previously expected,” Boston Beer founder and chairman Jim Koch said during the call. In Q1, Boston Beer projected volume growth for the segment to be between flat and +10%. They have now adjusted that projection to between -15% and -20%.
Truly lost 1.3 share of the hard seltzer segment over Q2, but remained a “strong number two” after Mark Anthony Brands’ White Claw, with Boston holding a 28 share in the past four weeks. The brand also maintains a “strong” household penetration, particularly with younger legal-drinking-age consumers, as the No. 1 beer brand year-to-date in household penetration among 21-34 year olds.
Additionally, Truly has been plagued with continued out of stocks – in part due to limited availability of ingredients and packaging materials, which leadership said it is “managing” for the second half of the year – and tough margins, due to increased scrap from volume losses, and delays in the additional of internal variety pack capacity, according to Boston Beer CFO, Frank Smalla.
What’s Driving Hard Seltzer Losses?
First, the segment has lost some of the “novelty” it once had, as “consumers have been distracted by many new beyond beer products entering a hyper-crowded marketplace,” Burwick said.
Second, some of the light beer drinkers that first shifted to hard seltzer are returning to lower priced, premium light beers – particularly consumers 35-44 years old.
“Whether this continues into the future, or reverts back, is still to be determined,” Burwick said.
On-average, there is about a 7% price gap between hard seltzers and premium light beers, according to Burwick, giving some indication that greater economic factors are causing the volume shift. However, Boston Beer does not see price as the way to gain back Truly drinkers, Burwick said. The company expects prices for its beer to increase between +3% and +5% nationally this year.
“[There’s a] need to reinforce and remind people why hard seltzer has been successful in the first place, and why it’s a 10 share of beer,” Burwick said. “We need to do a better job in communicating the benefits of hard seltzer.”
One of those benefits is “flavor variety,” which Boston Beer hopes to capitalize on with its Truly reformulation, announced yesterday. The company is adding real fruit juice to its core variety pack flavors “for an even smoother, easy to drink and refreshing taste profile.” The reformulated Citrus pack is in market now, while its Tropical and Berry variety packs will release in August, supported by a new ad campaign.
Boston Beer has been “disappointed” in the performance of its core flavors over the past few seasons compared to its bolder flavor packs such as Truly Hard Lemonade and Truly Hard Punch, Burwick said.
“In the short term, the reformulation is bigger than you might think,” Burwick said. “It is more than just putting a little bit of fruit into Truly, it’s actually reformulating and optimizing all the flavors that we have. So it is meaningful.”
Burwick also indicated “eliminating” Truly SKUs “that aren’t performing,” but would not give specifics, saying Boston Beer needs to talk to its wholesalers. He said hard seltzer needs to focus on “creating news without SKUs,” and focusing on existing products rather than constant innovation.
While some of Truly’s latest innovations have had success – including its Truly Margarita release, which maintains its spot as the No. 1 innovation year-to-date in beer, with a 4.2 share of the hard seltzer segment – Burwick said Boston Beer needs to “deliver simpler, fewer, better ideas.” He specifically called out Truly’s limited-time-only (LTO) approach, which he said “can be smarter and more strategic” going forward.
Burwick also expressed optimism for Boston Beer’s Truly Vodka Seltzer – a vodka-based ready-to-drink canned cocktail (RTD), launching later this year – which the company will “count” in its hard seltzer gains, should the brand perform well.
Boston Beer appears to be less concerned about RTDs taking share from hard seltzer, despite the segment’s rapid growth in the past couple years. While “there’s a lot of noise and excitement” around the category, Burwick said the biggest players in the space are vodka sodas such as Gallo’s High Noon Sun Sips, which Boston Beer regards as hard seltzer.
RTDs have a 1.4 share of off-premise beer category dollar sales, according to Burwick, citing Numerator. However, 0.8 of that share is credit to vodka-based hard seltzers such as High Noon. The other half of those sales are higher ABV spirits-based RTDs for “different occasions” and “different consumers” that also have a “lower repeat rate” and “lower buy rate” to hard seltzer, Burwick said.
“I’d say there’s more support and execution and focus in RTD cocktails than maybe is warranted by what the consumer’s saying,” Burwick added.
Hard MTN Dew Growth Faces Regulatory Hurdles
Hard MTN Dew was one of the few Boston Beer brands to contribute positive depletion trends over the quarter, despite being in only seven markets. Within those markets, Hard MTN Dew is the No. 1 FMB brand, with between two and five times the velocity of the No. 2 FMB in each market, according to Burwick.
“I’ve never seen anything like it, quite honestly,” Burwick said.
However, the brand contributed to Boston Beer lowering its guidance, as “the brand rollout has been delayed in certain states due to a slower than expected regulatory process,” resulting in “fewer depletions in 2022 than originally envisioned,” Burwick said.
Hard MTN Dew launched in three states in February in partnership with PepsiCo, which handles distribution of the FMB through Blue Cloud Distribution. The brand will expand into 10 states by the end of this summer, and two additional states will be added by the end of the year. Next year, Boston Beer will go “all out” on expansion of the brand, according to Burwick.
“Next year we expect it to be a big contributor, but it’s too early to talk too many details about that,” Burwick said.
Twisted Tea a Bright Spot for Boston Beer
Twisted Tea has been the darling of Boston Beer so far this year, and was the only brand besides Hard MTN Dew to contribute positive depletion trends in the quarter.
While Twisted Tea has maintained consistent low double-digit growth in its 20+ year lifetime, the brand has recently hit the accelerator, increasing volume +21% year-to-date. Volume increased +27% in the last 13 weeks, and +39% in the past four weeks.
Burwick credited the growth to improved distribution of Twisted Tea 12-packs, noting that the brand previously performed as more of a “regional brand” – primarily in northern New England, Montana and Michigan – with a consumer base of “blue collar guys driving pickup trucks.”
Twisted Tea 12-packs have increased distribution to “58% of the ACV,” about double of what it was last year, according to Burwick.
“That was sort of the tipping point,” he added. “Once we got distribution of 12-packs – we have three of them – then that’s when everything started to come into play with our wholesalers and with our retailers.”
Twisted Tea’s 24 oz. single-serve packages are the fourth largest beer category single-serve in national convenience, according to Burwick. In the latest spring resets, the brand gained +28% shelf space, and increased FMB share to 13.4%.
“The household penetration, the distribution, the brand awareness [is] far lower than its primary competitors in the space,” Burwick said. “So there’s still a lot of upside to grow the brand.”
However, Burwick noted that he’s “learned over the last year or so never to predict anything at all.”
Investors Mixed on Adjusted Guidance
Wall Street analysts projected Boston Beer would revise its guidance in the weeks leading up the Q2 earnings call. However, some have asked if “whether guidance is de-risked enough.”
Goldman Sachs analyst Bonnie Herzog said she is “not yet convinced,” as the company’s latest results “disappoint.”
“We expect the stock to remain pressured and underperform until measurable signs of stabilization and/or improvements for the hard seltzer category emerge, which realistically could take significant time,” Herzog wrote.
Jefferies analyst Kevin Grundy said while a decreased guidance was expected, the “revision was weaker than feared.” He added that Burwick “sounded as dire as we have heard him” when speaking about the hard seltzer segment.
Analysts at Credit Suisse had a more positive outlook on the quarter, writing that Boston Beer is “beginning to turn the corner.”
Despite rebased expectations, a margin miss was a surprise,” Kaumil Gajrawala, Keith Devas and Theo Brito wrote. “But we think the new guidance will be the end of a series of cuts. New growth drivers are in play but in a myopic environment where macro concerns dominate, holding the portfolio together will be viewed as a win.”
As of press time, Boston Beer stock (SAM) was trading above Thursday’s close of $335.41.