The story of Boston Beer Company’s Truly Hard Seltzer brand remains the same; the company can’t keep up with demand for the hard seltzer category’s second largest brand. The mid-March pantry stock up caused by the novel coronavirus shutting down virtually all on-premise sales led to a spike in Truly sales earlier than expected.
Executives from Boston Beer explained Wednesday that the inventory that they had built up for an expected summer rush of sales was instead depleted earlier than planned (Boston Beer reported Q1 depletions growth of 32% and shipments growth of 36%).
Similar to Boston Beer’s 2019 strategy, the company pre-built inventory with its wholesalers at the start of the first quarter through March, CFO Frank Smalla explained. Then COVID-19 caused consumers to pantry load to drink at home and depleted Boston Beer’s early summer volume buffer.
“Luckily they had enough inventory,” Smalla said. “But it has changed a little bit, that dynamic, because the second half of the first quarter, we depleted more than we had expected.”
So Boston Beer’s summer inventory is smaller than anticipated, but Smalla said the company believes it has enough capacity between its internal capacity and external production at contract facility City Brewery in Memphis.
“We were trying to build more inventory as a wholesaler to be prepared for the summer, but the COVID crisis increased the depletions beyond our planning,” he said.
Supplementing that capacity is two new full-time canning lines, Boston Beer founder Jim Koch said. The first came online within the last two weeks at Boston Beer’s Pennsylvania brewery, and the second at City Brewery in Memphis will be operational in May. Both of those lines will more than double Boston Beer’s production of Truly in order to meet demand in the summer months and the back-half of 2020.
During a call with investors and analysts, Koch was asked if Boston Beer would consider making an acquisition to bolster its capacity. Koch responded that the company is “always looking at opportunities.”
“We would prefer to own our own capacity if the economics are equal, but we have been fairly agnostic if the economics are superior,” he said.
Koch said he expects there to be opportunities as craft breweries that borrowed money and expanded are now under heavy financial pressure due to the loss of on-premise and taproom sales.
“There will be craft brewers who overextended and now don’t have demand and will be under some pressure,” Koch said. “As those opportunities arise, we will look at it.”
But Koch said Boston Beer’s need is in canning capacity, not brewing or kegging capacity.
“That’s generally not what craft brewers have,” Koch said. “It may happen, probably not, but it’s not out of the question.”
As Brewbound reported Wednesday, Boston Beer posted double-digit growth in net revenue, depletions and shipments in the first quarter of 2020. The Truly, Twisted Tea and Dogfish Head brands were credited with driving the company’s shipments and depletions growth, and were “only partially offset” by sales declines of the Samuel Adams and Angry Orchard brands, the company said in a press release. Dogfish Head offerings accounted for 6% of the increased depletions.
Although Boston Beer executives declined to share the split between off- and on-premise volumes, Koch said kegs account for roughly 12% of the company’s volume, and Samuel Adams and Angry Orchard are both heavily weighted with draft presences at national accounts.
“We’ve seen so far just a complete devastation of our keg business,” he said. “It’s damn near zero. It happened very quickly.”
Little is known about what the reopening of the on-premise channel will look like or when it will happen without a vaccine for COVID-19, but Koch said in states without statewide shutdown orders, the company’s draft business “is a trickle.”
“Some of it’s driven by shutdown, but a lot of it’s driven by who wants to go out and rub elbows with a lot of people until there’s a vaccine or effective treatment or therapy?” he asked. “We are anticipating that the on-premise business is not going to just snap back, and it may be a matter of a year or two before it gets anywhere near what it was at the end of February.”
Since the pandemic began, Boston Beer has spent $5.8 million on returned kegs from wholesalers and retailers, according to the release. The company has had a long-standing policy of splitting the cost of returned kegs with its wholesalers.
The impact of COVID-19 on the city of Boston has led to the postponement of the Boston Marathon and the Boston Red Sox season, both of which the Samuel Adams brand is a major sponsor and generate significant draft volume in the city.
As such, CEO Dave Burwick said the company is reassessing its marketing spend and has delayed some campaigns.
“Sam Adams and Angry Orchard’s volumes continue to decline, as they’re more deeply impacted by the on-premise shutdown,” Burwick said. “We continue to work hard on returning these brands to growth, but do not expect them to grow during 2020.”
As for the Samuel Adams brand’s resurgence in off-premise retailers during the COVID-19 stock up phase, Koch said he didn’t want to “predict an overnight change in a seven year trend.”
“I do think it might bend the ark a bit, but we’re very focused on trying to get Sam Adams back to growth, and we’re not gonna assume that some twist of fate is going to change that we feel like we need to do it ourselves,” he said.
Nevertheless, dollar sales of Samuel Adams’ flagship Boston Lager have increased 22.3% in off-premise multi-outlet and convenience stores tracked by market research firm IRI for the four weeks ending March 22. During that same time frame, dollar sales of Samuel Adams’ seasonal offerings increased 41.8%.
Asked about retailers and wholesalers prioritizing high-volume SKUs during COVID-19, Burwick said they are looking for “power SKUs” and large pack sizes, which benefits Boston Beer’s brands.
“Whether it be 30-pack and 24-pack cans, 12-packs, well-established brands, that’s what’s getting the space now because nobody wants to run out of stocks, so they cut the longtail [of smaller craft beer brands],” he said. “As one of the larger crafts … it’s benefited us, as it’s benefited someone like Sierra [Nevada] and New Belgium, as well. We’re basically going with the flow here, and what our customers want, we’re going to deliver.”
Koch added that retailers and wholesalers both like getting “more volume with fewer SKUs.”
“So the channels they think will kind of want to keep this going if they can,” he said. “What would yank everybody back to the status quo ante of more SKUs, lower volume per SKU, more difficult prime mix to manage to keep in stock, it’s going to take the consumer requesting it. I don’t think it will automatically snap back to the way it was because both retailers and wholesalers benefited economically from this new state of affairs.”
The hard seltzer category has grown considerably more crowded since the start of 2020, with launches of Anheuser-Busch InBev’s Bud Light Seltzer and Constellation Brands’ Corona Hard Seltzer. However, even in the face of added competition, Truly’s category share has grown from 22% to 22.1%, the only brand in the category to do so since January.
“It’s only a tenth of a share point, but we’ll take it,” Burwick said.
During the quarter, Truly’s household penetration rate doubled and repeat purchases grew by 25%. Boston Beer’s research over the last month also showed that 44% consumers who have tried Truly are new to the brand.
Truly Lemonade Hard Seltzer, which launched in early January, has grown to a 5.2% share of the category.
Burwick attributed Truly’s success to its consumer base, which is more affluent and more diverse than that of category leader Mark Anthony Brands’ White Claw or Bud Light Seltzer. Truly also generated higher basket rings and sources more drinkers from wine and spirits, he added.