The Boston Beer Company – parent of Samuel Adams, Angry Orchard, Twisted Tea, Truly Hard Seltzer and Dogfish Head – aims to become the No. 1 beer industry supplier in the fourth category, CEO Dave Burwick said during a conference call with investors and analysts to discuss the company’s third quarter 2022 earnings.
“In the near-term, our priorities are continuing focus on fueling Twisted Tea, supporting the launch of Dogfish Head canned cocktails, and working to stabilize Truly trends,” he said. “We’re also experimenting and planting new seeds in our search to cultivate new contributors to our future growth.”
Highlights from the call are below. For in-depth reporting on the quarter’s financial results, see yesterday’s Brewbound coverage here.
Twisted Tea Grew Retail Space by +35%
Boston Beer is focusing on making Twisted Tea omnipresent in both stores and consumers’ minds, the latter via running advertising year-round.
“What’s happened over the last 12 months with the brand is that we kind of hit a tipping point on both of those,” Burwick said.
Twisted Tea grew its retail space +35% this year, and still has a lot of runway left. The brand’s 12-packs are at 64% ACV, which allowed large format off-premise retail partners to “promote and support the brand much more aggressively than they had in the past,” Burwick said.
In the convenience channel, where Twisted Tea outsells sibling brand Truly, Twisted Tea Original 24 oz. single-serve cans are at 69% ACV. However, other single-serve flavors such as Half & Half, Peach and Raspberry “have much less distribution,” Burwick said. Other formats, including 12-packs have yet to catch on in the channel, “so we still think there’s a lot of upside there,” he added.
In the on-premise channel, Twisted Tea “is almost half of the share of FMBs,” Burwick said, adding “and we barely got going there.”
Twisted Tea grew deep roots in rural, predominantly white markets, but has been expanding its reach with drinkers of color.
“In the last five years, we’ve almost quadrupled the number of multicultural households who buy the brand,” Burwick said. “But they’re still off a very low base, so there’s still a lot of opportunity. So again, we feel like the formula of physical and mental availability is working.”
However, the hard tea space is becoming increasingly crowded as competitors line up to steal Twisted Tea’s share. Earlier this month, FIFCO USA announced it will launch Lipton Hard Iced Tea through a licensing agreement with PepsiCo and sell it via Pepsi’s Blue Cloud Distribution.
Burwick shared his thoughts on the influx of new brands:
“Twisted Tea has been around over 20 years, and there literally have been dozens of Twisted Tea competitors launched from small start-up entrepreneurs to great breweries like Anheuser-Busch or Molson Coors.
“The dust has settled over 20 years, and Twisted Tea is 90+% of the category. There really is no significant No. 2 in the category. Now, that being said, I don’t want to dismiss both the quantity and the quality of the next wave of competition coming from, again, everybody from small entrepreneurs to big multi-hundred-billion-dollar market cap companies with a great track record of beverages like Pepsi. So, this is another level of competition, but we withstood it in the past because we have a very, very loyal, very strong drinker base. People have been drinking Twisted Tea for a decade or two. It’s the only brand that really comes to mind when you think about hard tea.”
Truly Declines Outpace Hard Seltzer Segment
Truly’s year-over-year off-premise declines (-21%) are outpacing the hard seltzer segment (-15%) for the first nine months of 2022, Burwick said. The company expects those declines to continue, projecting that the segment’s volume will drop between -15% and -20%.
Burwick pointed to four reasons that could be behind this, the first being that “hard seltzer has lost its novelty as consumers have been distracted by many new beyond beer products.”
The crush of innovation within the segment “has caused consumer confusion and makes the segment hard to shop,” Burwick said. And messaging from hard seltzer’s largest players fails to “communicat[e] the core category benefits of refreshment, easy-to-drink and variety.”
The fourth driver behind the declines is that Boston Beer has noticed a shift in hard seltzer volume to premium light beers among drinkers older than 45.
Despite the declines, Truly has found success this year with its margarita-style variety pack, which launched in January and has captured a 4.1% share of hard seltzer volume. The company announced a reformulation at the end of the summer that added real fruit juice to all Truly products that didn’t already have it; however, it’s too early yet for those results to be felt.
“We feel very good about the reformulation and the quality of product that we delivered, and it’s going to take a while,” Burwick said. “It’s a very competitive market, as you know, and it’s not something that would show up, like, immediately overnight.”
After focusing on its fuller-flavored variety packs for several years (Truly Lemonade, Truly Iced Tea, Truly Punch and Truly Margarita), Burwick said the company is going to “really double back down on the core lighter flavors.” Both lemonade and punch have been reformulated, but Truly Iced Tea, which launched in January 2021, has been discontinued and a new variety pack in 2023 is “unlikely.”
Much of Truly’s innovation focus in 2022 has been on spirits-based products. Earlier in the year, Boston Beer and Beam Suntory partnered to release Truly-flavored vodka, which Burwick said has been the best-selling new product in bottled spirits. The company hopes that success “bodes well” for Truly Vodka Seltzer, which rolled out earlier this month.
“We continue to believe hard seltzers will remain an important beer industry category in the future, but the trajectory of the category in the near term remains unclear,” Burwick said. “While the hard seltzer segment was 9.8% of total beer dollars in the third quarter of 2022, it’s down from 11.4% in the third quarter of 2021.”
Dogfish Head Assets Overvalued by $27.1 Million; RTDs +79%
Boston Beer took a $27.1 million non-cash impairment on the value of Dogfish Head’s intangible assets to reflect the brand’s $71.4 million “estimated fair value.” When Boston Beer acquired Dogfish Head in 2019 in a very different craft beer market, the trademark assets were valued at $98.5 million.
“The transaction happened in the middle of 2019, which was literally half a year before COVID, and we had our own business proposition, which was the basis for defining the brand value that we put on the balance sheet, so we had certain assumptions in there,” CFO Frank Smalla said.
The addition of Dogfish Head spirits-based, ready-to-drink canned cocktails has been a welcome surprise, as they play in the coveted RTD space.
“I think it will provide a lot of growth and of a different quality, quite frankly, going forward than just having purely the craft beers, which we were kind of considering in 2019,” Smalla said. “So, I think the structure is a healthier structure, but given the size of canned cocktails, it will take a little bit longer, and that’s why we took the impairment.”
Sales of Dogfish Head’s RTD cocktails have grown +79% this year, launching the brand into the fifth or sixth largest RTDs spot, Boston Beer founder and chairman Jim Koch said.
“It’s got a reputation for great quality and for innovation and for culinary ingredients, and it has a unique positioning in some ways in this very crowded RTD space,” he said. “It’s a craft producer, bringing craft values of innovation, great ingredients, great taste and overall quality to – and kind of off-centered thinking and off-centered consumers to this crowded RTD space.
“So, we feel very good about the strength of the Dogfish Head brand, both in the mature craft category, but also as a unique vehicle for us to bring something special to RTD canned cocktails,” he continued.
Guidance Lowered; Truly Obsolescence Affects Margins
For full year 2022, Boston Beer said it has “narrowed” its depletion and shipment guidance from the previously communicated range of -2% and -8%, to between -4% and -7% . The company is also expected to take price increases in the +4% to +5% range, compared to the previous range of +3% to +5%.
“It’s still relatively volatile, to be honest,” Small said.
The company is waiting to issue preliminary full year 2023 financial guidance until its fourth quarter 2022 earnings call in February.
For the third quarter of 2022, Boston Beer’s gross margin was 43.2%, which was “below our own expectations,” due to obsolescence charges related to transition to reformulated Truly, Smalla said. He said it was “one of the largest products that we have done, if you look at the complexity of the portfolio, the number of variety packs that we have and the different flavors that are in there.”
Another drag on margin is the company’s decision to “run slightly higher inventories” so that it can ensure there is “enough inventory to service our wholesalers” and to get ahead of any supply chain disruptions that may arise, Smalla said.
Craft Beer Both ‘Relatively Stable and Mature’ and ‘Quite Competitive’
Asked to assess the state of craft beer, Koch said the segment “is a mature category at this point,” echoing sentiments he expressed earlier this year when he said traditional beer was unlikely to grow again.
“It has become a mainstay in American beer with a substantial drinker base,” he said. “It’s hard to go into a bar today that doesn’t have at least one and, often, multiple craft beers. So it’s a relatively stable and mature category, also quite competitive. There’s still innovation driving it.”
Samuel Adams recorded low-single digit depletions declines in the first three quarters of 2022. Its seasonal family grew sales and the brand overall “held share flat in a difficult craft beer market,” Burwick said.
The Sam Adams brand family was only mentioned by name three times during the call.