Boston Beer Company’s growth continued in the third quarter, as the company’s revenue increased 24.2 percent, while shipments (+23.5 percent) and depletions (+18 percent) also grew.
During a call with investors and analysts Thursday evening, Boston Beer founder Jim Koch credited the company’s “key innovations” — Angry Orchard Rosé, Truly Berry variety pack, Truly Wild Berry, Samuel Adams Sam ’76 and Samuel Adams New England IPA — with driving the growth.
Koch admitted the challenge moving forward will be maintaining the momentum behind those brands in year two. In fact, he said he anticipates “some slowdown.”
“This was a year where we just hit home runs with new products, and we don’t think we can continue to hit home runs of that magnitude in 2019,” he said. “We would be quite happy if that happened again.”
Boston Beer CEO Dave Burwick added that non-beer offerings continued to pace the company, with Truly growing “beyond our expectations.” Twisted Tea, meanwhile, increased distribution and velocity despite growing competition, while Angry Orchard Rosé attracted new drinkers to the cider category from wine and spirits, he added.
Burwick — who most recently served as the CEO of Peet’s Coffee & Tea, but also worked for more than 20 years as an executive at Pepsico — compared Twisted Tea’s growth potential to Mountain Dew in the mid-1990s. He characterized both brands as unique products with low distribution and household penetration but high frequency of purchases.
Nevertheless, Burwick admitted that Boston Beer’s core beer business remains “a challenge” due to volume declines of its flagship Boston Lager.
“The question for beer is, how close could we get to zero or above zero, quite honestly, and this year it significantly below zero, notwithstanding, the great overall of volume results,” he said.
In order to reverse those trends, the company launched a new advertising campaign in Q3 featuring Koch in the lead role.
“I think we found our voice,” Burwick said of Koch’s onscreen return. However, he admitted that the ad campaign alone won’t return the brand to growth, and so the company is planning additional moves, including a packaging refresh.
“The brand does not show up on the shelf the way it should,” Burwick said. “We are going to address that. We think it can have a pretty big impact.”
The news wasn’t all bad for Boston Beer’s core beer products, however. Burwick said the company’s seasonal offerings returned to growth this year, which he credited to a “smoother transition” from Cold Snap to Summer Ale compared to 2017’s “pileup” of spring and summer offerings. The fall release of Octoberfest built on that momentum and exceeded expectations.
“We expected to be down, and we are up by about 4 percent or 5 percent,” he said of Octoberfest.
Meanwhile, New England IPA and Sam ’76 rank as the top two brands in repeat purchase rate of any beer, cider or FMB launched in 2018, Burwick said.
Looking ahead to 2019, Burwick teased a new innovation that would fit into the health and wellness category, which he said “is clearly a trend that’s gripping every, every food and beverage category, alcoholic and non-alcoholic.”
“We are excited about what we are going to bring to the market that will address those needs and those interests from consumers,” he said.
Due to the company’s growth in 2018, Boston Beer was operating at “a record high capacity during peak weeks,” which led the company to increase its use of third-party breweries, especially for canned offerings.
That’s led to increased supply chain costs, as the company shipped more product and relied on third-party breweries for excess capacity, Burwick said. Those increased costs led the company to lower its gross margin expectations for the year, from between 51 and 53 percent to between 50 and 52 percent.
To address those costs, Burwick said the company is investing in its own capacity and aiming to increase the efficiency of its in-house production.
“Depending on how the volumes are going for the rest of the year and also next year, third-party production will continue to be a significant part of our sourcing,” he said.
Finally, during the Q&A session, analyst Caroline Levy of Macquarie Capital asked how the company is taking advantage of its sponsorship of the Boston Red Sox, who are currently playing in the World Series. Burwick said the company hasn’t yet “fully accounted” for the sponsorship’s’ impact on the New England market, but said the company has leveraged the brand on its packaging and graphics and trialed new offerings at Fenway Park.
“Locally it’s helped us connect and reconnect with consumers, as well,” he said. “And I think, importantly, we get some good learning by seeing what people are buying at Fenway and understanding what the potential is for some of our, in particular, new products.”