‘Cautious and Prudent’ Boston Beer Adjusts Financial Guidance

As a response to the instability in segments of the beer industry, Boston Beer Company has adjusted both its financial guidance and its approach to innovation, executives shared yesterday during the company’s third-quarter earnings conference call.

The updated guidance includes a decline of -5% to -7% for both shipments (sales to wholesalers) and depletions (sales to retailers), but an increase in gross margin of +250 basis points, to 45.7%.

“We actually rounded up on gross margin, slightly down on depletions more because we’re being cautious and prudent given the current economic environment,” CEO Dave Burwick said. “We’re not quite sure. So we’re just being cautious, but we don’t see any change in trajectory than we had anticipated before.”

The biggest drivers of Boston Beer’s improved margins in Q3 were a “reduction of waste in our network optimization bucket” and savings in procurement, CFO Diego Reynoso said. The call was Reynoso’s first since joining the company on September 5.

To improve margins, Boston Beer – which makes Samuel Adams, Angry Orchard, Twisted Tea, Truly Hard Seltzer, Dogfish Head and Hard Mountain Dew – aims to keep its own production facilities running between 90% and 100% capacity.

Still, it depends on third-party contract brewers like City Brewing to fulfill its needs. Reynoso said the company hopes to increase its internal production to 70% of its volume, up from 65% last year. In the past, Boston Beer has run into trouble when contracted time at third-party facilities was greater than its needs as volumes for Truly Hard Seltzer fell short of forecasts.

The company operates large production facilities in Breinigsville, Pennsylvania, and Cincinnati, Ohio, as well as smaller breweries throughout the country where research and development takes place. City has facilities in Latrobe, Pennsylvania; LaCrosse, Wisconsin; Memphis, Tennessee; and Irwindale, California.

“It’s not just about the assets, but also where they’re located, so we will always have a split that helps us maximize our profitability,” Reynoso said.

Boston Beer raised the low end of its pricing guidance, up to between +2% and +3%, from +1% to +3%, which Reynoso said reflects the company “being very prudent, given what we’re seeing in the current environment.”

Innovation Strategy Changes

Boston Beer’s approach to introducing new products to market is markedly different from its strategy in the first couple years of this decade, when it rolled out Truly variety packs at a breakneck pace compared to some of its competitors. Between 2020 and 2022, Truly introduced Lemonade, Iced Tea, Punch and Margarita variety packs, which were all incremental to its core fruited seltzer packs, Berry, Citrus and Tropical.

“We got in this innovation cycle where we were adding a lot of new variety pack SKUs,” Burwick said. “And at some point, you just have to walk away from that and you have to find a way to do more with fewer, and that’s part of the plan for next year.”

Starting in 2024, Truly Tropical will be discontinued to make room for the Truly Party Pack, “an all-star assortment of flavors,” Burwick said. Truly Margarita will also be discontinued, in favor of Truly Unruly, a variety pack of 8% ABV hard seltzers.

“We’re maintaining our shelf space by swapping one SKU in most cases for another,” Burwick said. “But we’re doing it, importantly, we believe with SKUs that are going to be more productive and are going to turn better.”

Year-to-date through October 8, dollar sales of the Truly brand family have declined -28.2%, to $609 million, at multi-outlet grocery and convenience stores, according to market research firm Circana. The brand’s share of all beer category dollars declined -0.74%, to 1.71%.

By comparison, Twisted Tea, now Boston Beer’s No. 1 brand family, saw its dollar sales increase +35.7%, to $920.7 million in the same period, according to Circana. Twisted Tea’s dollar share increased +0.62%, to 2.58% of total beer category dollars.

Unlike Truly, the company’s innovation for Twisted Tea has been relatively withdrawn – “very deliberate and very disciplined,” Burwick said.

Boston Beer is turning its attention to variety packs for Twisted Tea, which used to source nearly 60% of its volume from 24 oz. single-serve cans, according to a report from Goldman Sachs equity analyst Bonnie Herzog. Twisted Tea’s Party Pack “has been terrific” and at 52% ACV distribution still has runway to catch up to Twisted Tea Original at 58-59% ACV, Burwick said.

Twisted Tea Extreme, an 8% ABV version of the hard tea, is in convenience stores in five test markets, but “has the potential for broader distribution,” he added. At the other end of the spectrum, the company has introduced the Twisted Tea Light Variety Pack at 4% ABV and 110 calories per 12 oz. serving.

This method of bolting new products onto existing brands after test market trials is one Boston Beer plans to repeat, founder and chairman Jim Koch said. Gone are the days of the company launching a new brand nationwide, such as Bevy Long Drink, which Boston Beer discontinued in 2022 after less than a year.

“We’re approaching line extensions, if you will, with a little more comfort and rolling them out quicker and bigger,” he said. “Then we want a pipeline of innovations that are new brands. And we’re gonna do that more slowly and build on success. I think our model is Twisted Tea, which is obviously a huge brand now for us, but it took 25 years to get there.”

YTD through October 8, Boston Beer is the fifth-largest beer category vendor. Its dollar sales were roughly flat at -0.2%, to $1.899 billion, but its volume declined by -4.9% and its share of dollars declined by -0.17%, to 5.32% of the overall beer category.