Boston Beer Company adjusted its full-year forecast for shipments and depletions growth after a significant slowdown in the hard seltzer segment in the second quarter.
The company previously projected full-year growth of 40-50% in shipments (sales to wholesalers) and depletions (sales to retailers), but has trimmed that projection to 25-40%. Its depletions increased 24% during Q2, decelerating by half from Q1’s growth of 48%, according to remarks from founder and chairman Jim Koch in the quarterly earnings release.
“To be totally honest, we’re surprised at the sharpness and the suddenness of the change in trajectory,” Koch said during a conference call with investors and analysts.
The downgrade contrasts sharply with the company’s projections for the hard seltzer segment during its Q1 earnings call in April, when CEO Dave Burwick estimated the segment would grow 60-90% this year and the company’s Truly Hard Seltzer brand would outpace its competition.
Yesterday’s call’s question-and-answer portion kicked off with Goldman Sachs analyst Bonnie Herzog flummoxed at the abrupt change in guidance.
“I understand that the category has been slowing; everyone is aware of this,” she said. “That said, I’m truly struggling — and yes, pun intended — with how meaningfully your results have deteriorated. I guess I’m saying this because even as recently as May, your tone and comments suggested that even with a slowdown in the category, you could still deliver relatively strong growth and hit your full-year guidance.
“So I guess, for me, this begs the question, how confident are you that you’re going to be able to hit your new guidance and really how much visibility do you have in your business?” she continued.
Koch tackled the question of visibility into the hard seltzer segment later on during the call with his signature colorful language.
“It’s a really, really murky crystal ball,” he said. “It’s more like looking into a bowling ball. You can’t see much.”
Although hard seltzer off-premise dollar sales growth has slowed to +23.1% year-to-date through July 10, Truly is still outpacing the category, with off-premise dollar sales increasing 49.3% in the same time period, according to market research firm NielsenIQ. Data firms are predicting 20-50% growth for the hard seltzer segment for the rest of the year, Burwick said.
“We believe if it’s at the low end of that range, we can continue to grow two or three times that rate,” he said. “We’ve been doing it for a long time now, we feel very confident. If it gets to the high end of that range, we’re probably not going to be growing two or three times 50%, but we know we can grow faster than the category.”
Burwick pointed to the onslaught of new segment entrants with little differentiation as a potential driver for consumers’ waning interest.
“There’s a herd-like mentality in this business, broadly, and I think people try to bring new brands into the marketplace and there’s a sameness to these brands,” he said. “There’s a lack of originality and I think what’s happened is a little bit of the luster, the specialness, the excitement for some consumers has been lost.”
Truly has outpaced the hard seltzer segment “for 11 months straight,” Burwick said and pointed to other performance metrics that indicate the segment’s No. 2 brand is in better shape than its competition.
“It’s the one brand that has increased household penetration significantly. We’ve grown our user base by almost 40% for Truly, which means the innovation is working,” he said. “We’re growing the business — we’re growing and we’re actually bringing in younger and more multicultural consumers. We’re seeing that with Tea and with Punch.”
However, Koch noted that Truly Punch, which launched in May, seems to have cannibalized other Truly offerings.
Dollar sales of all variety packs of Truly’s fruited seltzer flavors have declined in the last 4- and 12-week periods, ending June 13, according to market research firm IRI:
- Berry variety pack, -17.7% L4W, -11.4% L12W;
- Tropical variety pack, -29.3% L4W, -21.7% L12W;
- Citrus variety pack, -37.4% L4W, -31.3% L12W.
Burwick said he expects a hard seltzer shakeout to come soon due to the influx of new brands, which positions Truly well for upcoming fall rests at retail. Year-over-year, the brand has gained 60% more space, and he expects that Truly “could probably pick up another 25%.”
Following the call, financial analysts’ reports ran the gamut. Herzog downgraded Boston Beer’s stock (SAM) from buy to neutral. Jefferies equity analyst Kevin Grundy maintained the stock’s underperform rating. Cowen analyst Vivien Azer noted that “tough upcoming comps and increased competition leave us cautious on SAM’s ability to gain market share over the course of 2021.”
Credit Suisse, which predicted that hard seltzer could reach 10% of total beverage alcohol sales by 2025, maintained its outperform rating for SAM, noting that “double-digit growth should continue with the company continuing to gain share from competitors.”
Pandemic-driven market forces last year pushed consumers to concentrate spending in the off-premise, but a reopened on-premise channel this summer has created a significantly different environment for off-premise-oriented hard seltzer. The company has secured about 4,000 draft handles for Truly Wild Berry, which it had originally launched days before the pandemic shut down bars and restaurants nationwide.
“Hard seltzer in general, including Truly, will under-index on-premise for the foreseeable future, unless the draft takes off as a big volume driver,” Koch said. “If you don’t play on draft you’re missing a sizeable hunk of the on-premise.
“We’re all begging for a crystal ball here and none of us has it. But on-premise historically has been between 15-20% of the business,” he continued. “If you held a gun to my head, I’d say it’s gonna be 10-ish, maybe a little less, of the seltzer business for the next year or two. But longer term there may be upside from innovation that we haven’t seen yet.”
Outside the U.S., Truly is “growing rapidly” in Canada, Burwick said. The company has just launched Truly in the United Kingdom and Ireland through its partnership with Faversham, U.K.-based Shepherd Neame.
“We’re not quite sure you know where hard seltzer is going to play outside of North America,” he said. “We’re a little bit hopeful, but we’re not betting the farm on it.”
Boston Beer’s gross margin declined to 45.7% in Q2, down from 46.4% in the same quarter last year, “primarily as a result of higher processing and other costs due to increased production at third party breweries, partially offset by price increases, and cost saving initiatives at company owned breweries,” chief financial officer Frank Smalla said.
The company began contract brewing at City Brewing’s Irwindale, California facility and will begin contract brewing at Red Bull-maker Rauch’s facility in Arizona in Q4, which will cut freight costs to the West Coast, Koch said.
“One of the things we have reduced is high capital cost capacity, which is the internal capacity, because we believe we have really good contract partners with favorable terms and locations, and very efficient production,” Koch said.
Boston Beer plans to increase prices 1-3% per barrel nationwide, and has sliced its increased investments in marketing, advertising and promotion from a previously announced $130-150 million to $80-100 million for the rest of the year.
Shares of SAM closed at $701, a decrease of $246.54 from yesterday’s market close and $605.45 from its highest point of $1,306.45 at the close of trading on April 20.
Editor’s note: this story was update to reflect the price of SAM share price at the close of the market.