As headwinds hit the hard seltzer segment, Boston Beer Company executives reiterated their confidence in Truly Hard Seltzer’s ability to perform during a conference call to discuss the company’s third quarter earnings with investors and analysts on Thursday evening.
“We also believe that Truly is blazing its own path and not following in the category like so many other entries,” CEO Dave Burwick said. “Thus, we believe we are well positioned to succeed in the future, when it will be much harder for new entrants to gain share. We have created a billion dollar brand in only five years, and we’re confident we’ll continue to grow it going forward.”
The seltzer segment’s summer slowdown has left Boston Beer with more than $100 million in costs directly attributable to Truly missing its growth projections and not needing the production capacity the company secured at third-party contract breweries.
“As a result, we have taken $102.4 million third-quarter charge related to direct costs of the hard seltzer slowdown, consisting of inventory obsolescence and destruction and related destruction costs of $54.3 million, contract termination costs, primarily for excess third-party contracts production of $35.4 million, and equipment impairments of $12.7 million,” chief financial officer Frank Smalla said during the call.
The thwarted plans that led to those charges were necessary, Burwick said.
“Building our capacity and inventory levels was an essential part of playing to win,” he said. “In that strategic context, we believe the risk of undersupply was bigger than that of oversupply. So, we resourced against a high-growth scenario, securing supply constrained materials and capacity to gain market share in a highly competitive and fast-growing category.”
Those optimistic projections didn’t come to fruition. The company is now facing a class action lawsuit from investors who allege executives “made materially false and/or misleading statements, as well as failed to disclose material adverse facts about” Truly’s performance. The lawsuit also claims the company failed to disclose to investors that:
- Boston Beer’s hard seltzer sales were decelerating;
- The company was likely to incur inventory write-offs;
- The company was likely to incur shortfall fees payable to third-party brewers;
- The company’s financial results would be negatively affected;
- The company’s positive statements about its business were “materially misleading and/or lacked a reasonable basis.”
Boston Beer pulled its financial guidance on September 8, which was cited as a triggering event for several proposed class action lawsuits, but the company reinstated its guidance in the Q3 earnings report. The company’s new projection models call for the hard seltzer segment to be flat to +10% in 2022, and Boston Beer expects Truly to outpace its competitors, Burwick said.
“Volume growth has slowed this year, but we continue to believe that hard seltzers can reach 15% to 20% of total beer dollars in the next five years,” he said.
Financial analysts’ takes on Boston Beer’s third quarter have been mixed. In his report, Credit Suisse equity research analyst Kaumil Gajrawala noted that “the ‘return-to-Earth’ stabilization process is well underway” and rated the company’s stock as outperform. Jefferies equity analyst Kevin Grundy noted that the company’s projection for 2022 “is likely to be met with skepticism” and maintained his underperform rating.
The reinstatement of Boston Beer’s financial guidance for 2021 and offering of projections for 2022 surprised Goldman Sachs equity research analyst Bonnie Herzog, “given the level of industry volatility, uncertainty and category confusion as new brands continue to enter the market,” she wrote. Herzog maintained her neutral rating for Boston Beer stock and mused whether revised Truly projections were realistic enough.
“While some investors may view the quarter as timely action by management to reset expectations lower, we wonder if the new bar is low enough, as we see little evidence of category stabilization or improved visibility,” she wrote.
During Q3, nearly all of Boston Beer’s brands — Truly, Twisted Tea, Samuel Adams and Dogfish Head — contributed toward an +11% increase in depletions (sales to retailers). Only Angry Orchard did not grow depletions in the quarter. Twisted Tea, Samuel Adams and Angry Orchard contributed toward a shipments (sales to wholesalers) increase of +11.2%, with Truly and Dogfish Head partially offsetting.
Innovation Pipeline Prepped for 2022
For 2022, Boston Beer’s innovation pipeline is more like a firehose, with three new brands, a brand extension and a handful of new flavors. The company is preparing to launch Bevy Long Drink, a malt-based, cocktail-inspired creation modeled after the Finnish Long Drink; Sauza Agave Cocktails, agave-flavored FMBs made through the company’s partnership with Beam Suntory; and HARD MTN DEW, an alcoholic version of Mountain Dew made through Boston Beer’s partnership with PepsiCo.
In addition, Truly will debut the Truly Margarita-Style variety pack, “which has received a terrific response in initial discussions without distributor partners and retailers,” Burwick said. For the 2021 holiday season, Truly will roll out a cocktail-inspired variety pack.
New-news from other brand families includes a reformulated Twisted Tea Light with 109 calories; Angry Orchard HardCore, which checks in at 8% ABV, and a tropical-flavored Angry Orchard offering; and new vodka and gin crush styles in the Dogfish Head canned cocktail family.
Marketing ‘Hitting Its Stride’
Boston Beer leaders didn’t namecheck any new products for Samuel Adams, but detailed how that brand’s marketing campaigns have been winning over new consumers, particularly the Your Cousin From Boston campaign. This year, the Cousin has starred in several commercials that have depicted him freeing Budweiser’s famous Clydesdales, getting a COVID-19 vaccination shot and meeting retired Red Sox star David Ortiz.
“Your Cousin from Boston is really resonating and we’re bringing in a lot of younger drinkers that we didn’t have before,” Burwick said. “On top of that, I would say there’s a huge PR angle that good copy can create, which is worth a lot.”
In 2021, Boston Beer expects to spend between $80 million and $100 million on advertising, promotional and selling expenses, and projects that range to increase by $10 million and $30 million in 2022, but perhaps more if opportunities arise.
“If we feel like there’s some heat there, we’re going to go hard,” Burwick said. “So, we’re never going to back away from investing in our brands if we think we can get a return.”
However, the $10-$30 million incremental investment for next year is “a significant step-down” from past projections, Herzog noted. The decline in marketing spend could be a sign that “management doesn’t think the hard seltzer category specifically warrants additional spending, which is a concern of ours especially given it has been driving the bulk of the category growth,” she continued.
Nationwide Price Increases Coming in 2022
Next year, Boston Beer is predicting price increases between 3-6% nationwide, which Smalla attributed to “the inflation of input costs that everybody is facing.” Costs for necessary items such as aluminum, paperboard, linerboard and sweeteners have increased between 5% and 6%
“Our confidence is relatively strong because so far, even with the softening of the growth in the category, price hasn’t seemed to be a real decision factor in the purchase decision,” he said. “What we have seen is really what makes the difference is the brand strength and the quality of the beverage in itself.”
In her report, Herzog called the projected price increase “ambitious in light of decelerating category trends and the likelihood that a shakeout of the category at retail could result in more price competition.” But founder and chairman Jim Koch noted that consumers have always viewed hard seltzer as a premium product and pointed to Anheuser-Busch InBev’s Natty Hard Selter’s failure to gain traction as evidence.
“I believe the last time I looked it had 0.3% share,” he said. “Yes, it’s significantly below the industry leaders, us and White Claw. But it really has not drawn a lot of consumers to it.”
Other Boston Beer brands — such as Twisted Tea — have also faced competition from lower-priced alternatives but still maintained their share.
“Our feeling is that our consumers and our brands are, while not impervious to price, there’s got to be elasticities,” Koch said. “We don’t see a volume impact from passing on a portion of our costs. We’re not going up as much as our costs have and we think that will not impede the volume growth. It will look reasonable. And in the context of everything else, we’re going to be going up less than the [Consumer Price Index].”