Boston Beer Company founder and board chairman Jim Koch was brutally honest about some of the company’s past failings in a fireside chat with Goldman Sachs analyst Bonnie Herzog today during the investment firm’s Global Staples Forum.
“We missed a lot of guidance in the last four years and that’s embarrassing and I don’t want to keep doing that,” Koch said. “I want to make sure we meet guidance and establish credibility.”
Boston Beer finished the first quarter of fiscal year 2024 with shipments growth of +0.9% year-over-year (YoY) and flat depletions. The company has maintained its full-year guidance of between low-single-digit declines and low-single-digit growth, with gross margin between 43% and 45%.
Koch said he aims to have a gross margin above 50% in the next five years, but that growth is “slower than you’d think.” Additionally, Boston Beer is still taking on costs from its efforts to rapidly expand Truly Hard Seltzer.
“It bothers me how much money is leaking out of the business unnecessarily,” Koch said. “It’s just a waste. There’s a lot of it.”
Part of Boston Beer’s strategy to reduce costs is to reduce its third-party manufacturing costs, with about 79% of the company’s production now done internally, and the rest at partners such as City Brewing. However, Koch noted that there are “disagreements” internally on how much should be produced in-house, as Koch sees the benefit of the “super freight efficient system” that City provides, giving Boston Beer access to facilities in vital states such as Texas and California.
Here are other highlights from the conversation:
On opportunities from the fourth category … Beer “has more upside than people give it,” mainly due to its ability to take advantage of the “fourth category,” or beyond beer offerings, according to Koch. He noted that beer is no longer losing share to wine, and that spirits’ numbers “are tricky” with the growth of canned cocktails and decline of bottled spirits. Meanwhile, the “broader definition of beer” is growing.
“I see a long-term growth rate there of somewhere between +2% and +5%,” Koch said of the fourth category.
Products within that category include flavored malt beverages, hard teas and lemonades and more – all products that have similarities to traditional beer, such as the importance of the cold box, distribution through beer wholesalers and “beer level prices and margins,” Koch said.
“It’s the blue ocean, where there’s opportunity to create new products that haven’t all been picked over, where the consumer is open to new things – in fact embraces new meaningful innovation, like Sun Cruiser, that meets a need that isn’t met yet,” Koch said.
Sun Cruiser is Boston Beer’s vodka-based hard tea offering, launched this spring. Ironically, while Koch said Sun Cruiser “meets a need that isn’t met yet,” he appeared to unintentionally mention competitor Surfside, when Herzog began listing brands within Boston Beer’s own portfolio that fall within the fourth category.
Koch said it’s “really too early to tell” how Sun Cruiser is doing, but he sees “long-term upside with vodka-based flavors.” He also noted that Gallo’s High Noon Sun Sips took “seven years to get where it is,” so it’s important for brands to stay persistent.
Asked about concerns of cannibalization of Boston Beer’s other fourth category offerings – which now make up 80% of the company’s volume – Koch noted that team members are instructed to “go ahead” on innovation even if there is a risk of cannibalization.
“If there’s an opportunity to take volume from Twisted Tea, we’d rather keep it in our portfolio,” he said.
On hard tea competition … Koch admitted he partially wants the quick rise and fall that happened to hard seltzer to happen with hard tea, as hundreds of competitors have entered the market.
Twisted Tea still has about 85% share of the hard tea market, while its nearest competitor, Molson Coors’ Arnold Palmer Spiked, holds about 3.9%, Koch said. The next largest brands, such as AriZona Hard and Voodoo Ranger Hardcharged Tea, have about 2-3% of the market, and then another 100-150 brands are all competing for the remaining share, he said.
“My view is you can write off that longtail,” Koch said. “They’re not gonna be around in three to four years cause the volume won’t hold shelf space – they’re on there as a trial.”
“Why would a consumer buy them? Why would a consumer even remember them?” he continued.
Koch also noted that Twisted Tea previously had between 90-95% shelf space, but it is now down to around 70%, as “a whole bunch of meaningless, undifferentiated brands” have taken space, but not volume, creating a “tidal wave of clutter.”
On Truly Hard Seltzer … Koch said there is “no point in putting anything” other than Truly or Mark Anthony Brands’ White Claw on shelves for hard seltzer, as the consumers who don’t drink either brand “aren’t really in the category.”
Koch believes Truly will stabilize “at a viable level” in the “next year or two.” He said he has the most confidence behind Wild Berry, the Berry variety pack, single-serve Strawberry Lemonade and Truly Unruly, the brand’s 8% ABV extension.
On Hard MTN Dew’s distributor transition … The expansion of flavored malt beverage (FMB) brand Hard MTN Dew has “been abandoned” in the transition of the brand from Pepsi’s now-defunct Blue Cloud Distribution to Boston Beer’s wholesaler network.
“We’re going through this disruption of distribution,” Koch said. “We’re not gonna see much the first half of the year.”
On April and the upcoming summer selling season … April “was a weird month,” due to various factors, including the comps from the conservative-led boycott of Anheuser-Busch InBev’s Bud Light, and a shift in the Easter holiday, Koch said. He noted that “apparently the weather was bad,” but added that “I’ve never used that excuse in my life … other people have.”
While some consumers “have left beer” after the Bud Light boycott – a “black swan event” – Koch expects the upcoming Memorial Day holiday to have a similar performance to 2023, and he is “not drawing any long-term implications” from the rocky three-week period that occurred last month.