Boston Beer Supply Chain Leader Quincy Troupe to Exit Company; Hard Seltzer Slowdown Fallout Detailed in Annual Report

Boston Beer Company announced the exit of one of its top executives, as well as offered a deep dive into its business across a pair of filings with the U.S. Securities and Exchange Commission Tuesday evening.

In an 8-K filing, Boston Beer reported that Quincy Troupe, senior VP of supply chain, tendered his resignation on February 21. However, the company said Troupe’s last day and other details of his exit were not yet finalized but would be disclosed in the future.

Troupe was notably one of two Boston Beer named executive officers to not receive a pay bump in 2022. The other, CEO Dave Burwick, declined his 5% raise, the company reported last week.

Troupe had served as Boston Beer’s VP of supply chain since February 15, 2016.

In addition to the filing announcing Troupe’s impending departure, Boston Beer also offered a peek into its business via its Annual Report in a Form 10-K. Here are some notes from that filing.

Third-Party Contracts: Boston Beer relied on third-party breweries to produce 44% of its volume in 2021 and 35% of its volume in 2020. As consumer demand for hard seltzers began to slow in 2021, the company decreased its planned production volume at its contract breweries, leading to $19.6 million in fees related to the termination of some contracts and $9.5 million “prepaid pursuant to a third-party production agreement that the company has no future plans to utilize.”

City Brewing is Boston Beer’s largest contract brewing partner, and produced 33% of the company’s shipment volume in 2020 and 32% in 2021. Boston Beer has paid City $113.4 million for capital improvements and prepayments. The companies’ agreement is in effect through 2024, and Boston Beer has the ability to extend annually through 2035.

Boston Beer signed a contract with City Brewing in order to “ensure access to capacity at a new location and continued access at certain existing locations.” That agreement went into effect in Q2 2021, as City closed on a deal for the Irwindale Brew Yard in Inglewood, California. As part of that deal, Boston paid $10 million for capital improvements at the location during Q3 2021 and an additional $17.9 million to lock down capacity during Q4 2021. That agreement includes monthly shortfall fees slated to begin in January 2023.

Boston Beer also entered into an agreement with Rauch North America for third-party production, which will begin in 2022 and runs through December 31, 2031.

If current volume projections are borne out, Boston Beer expects it will fall short of future volume commitments each year through 2026 and anticipates $38 million in shortfall fees. Those break out to $6 million in 2022, $15 million in 2023, and $11 million in 2024.

Boston Beer expects third-party producers to account for 30% of its volume in 2022.

Production: Boston Beer “brewed, fermented and packaged” about 56% of its volume at its company-owned breweries in Breinigsville, Pennsylvania; Cincinnati, Ohio; and Milton, Delaware; in 2021, and 65% of its volume in 2020.

Supply Chain: Boston Beer reported that more than 75% of the company’s total volume was packaged in cans in 2021, a percentage the company expects to increase in 2022. In the filing, Boston Beer noted that demand for cans within the beverage industry increased over the last couple of years leading to shortages.

“In 2020 and 2021, as the Truly [Hard Seltzer] brand family and the Twisted [Tea] brand families had grown significantly, the company experienced supply shortages and these supply shortages impacted the company’s production schedules.”

Boston Beer said it is working with its can suppliers to ensure there are no further supply disruptions. The company expects to have an “adequate supply” in 2022.

Beyond cans, Boston Beer noted a 2020 shortfall in its supply of cardboard packaging for wraps, carriers and shipping cases. The company said it is working with its suppliers on supply and believes it has enough for 2022.

Boston Beer also expects to have enough glass bottles in 2022 after experiencing its “most recent disruption” during the fourth quarter of 2020.

The company noted little to no issues with its malt, hops and flavoring supplies, but noted limited availability of some apple varieties.

Boston Beer’s provisions for expired inventory grew by more than 600% in 2021, when the company allotted $62.6 million in its cost of goods sold, ostensibly to account for excess hard seltzer inventory following the segment’s slowdown. In 2020, Boston Beer allotted $11.3 million for the same purpose, and $8.1 million in 2019.

Diversity: Boston Beer rolled out the first phase of its diversity, equity and inclusion (DEI) strategy in early 2021. Throughout the year, the company focused on pay equity, and committed “to closing all uncovered gaps” over the next two annual cycles. DEI was emphasized in “quarterly meetings, company-wide newsletter, focus month observance platform and courageous conversations listening and learning bi-monthly series.”

The talent acquisition team emphasized recruiting efforts to attract a broader and more diverse set of candidates, which led to a +3% increase in diverse hirings last year.

Boston Beer’s board of directors consists of seven men and two women. One director self-identifies as a member of an underrepresented minority group. Three of the company’s 11 executive officers are women and one executive officer self-identifies as a member of an underrepresented minority group.

Slightly more than one-third (34.6%) of Boston Beer’s “professional population” is female, and 17.1% self-identify as part of an underrepresented minority group. Of new employees hired in 2021, 37.7% were women and 26.56% self-identified as part of an underrepresented minority group.

Competition: Under the heading of competition, Boston Beer lists usual suspects such as Anheuser-Busch, Molson Coors, Heineken and Constellation Brands. However, in a sign of the times, the company has added Pepsi, Coca-Cola and Monster Beverage as competitors, as those companies have entered the alcoholic beverage industry “through licensing agreements with alcoholic beverage companies.”

Wholesalers: Boston Beer’s distribution network includes more than 400 wholesalers in the U.S., the largest three of which accounted for a combined 5% of the company’s gross sales.

The company noted its distribution consolidation in New York, although not by name, in which it moved its rights from Oak, Boening, Dana, Dutchess, and Gasko and Meyer – which sold its Samuel Adams, Angry Orchard and Twisted Tea brands on Long Island and north of New York City – to Manhattan Beer, which sold all of its offerings in New York City’s five boroughs and Truly in the territories covered by the other wholesalers. Boston Beer said it entered into an indemnification agreement in March 2021 with “the continuing distributor.”

“As part of the agreement, the company is indemnified by the continuing distributor for the fair market value of distribution rights paid to the terminating distributors and all related legal fees,” the company said.

According to the filing, Boston Beer followed the notification process outlined in state regulations and the distribution rights transferred on December 22. Boston Beer received the fair market value payments of $39.5 million from the continuing wholesaler on December 19. Boston Beer paid the terminated wholesalers $39.5 million on December 28.

False Advertising lawsuit: Boston Beer is facing a class action lawsuit in the U.S. District Court Southern District of California in which two plaintiffs allege that Truly Hard Seltzer violates consumer protection laws in California and New York. The plaintiffs claim that Boston Beer “has falsely represented the true nature of its hard seltzers” by using “lab synthesized ingredients described as ‘natural flavors.’”

Other claims in the complaint, which was filed in August 2021, include false advertising, breach of warranty, unlawful business practices and unfair competition.

“The company intends to vigorously assert and defend its right in this lawsuit,” Boston Beer wrote in its annual report. “A range of potential loss is not estimable at this time.

Dogfish Head Trademark: Unlike other larger brewers who have acquired craft breweries, Boston Beer did not record an impairment charge related to the Dogfish Head brand. Boston Beer said it conducted its annual “intangible asset impairment evaluation analysis” during the third quarter and determined that the Dogfish Head trademark has “an indefinite useful life is not amortized.” The analysis determined that the fair value of the Dogfish Head trademark equaled 120.7% of its carrying value, which was $98.5 million as of December 25, 2021.

The company noted that its impairment review anticipates the pandemic’s effect on revenues will lessen during 2022 and “significantly improve by the second half of fiscal 2022.” However, if its estimates change, the company said it may be forced “to recognize an impairment loss for the Dogfish Head trademark.”