Boston Beer: Truly Hard Seltzer Out of Stocks to Continue, But Capacity Could Double in 2021; 8% ABV Truly Extra Testing in New York

Even amid persistent out-of-stock issues, Boston Beer Company’s Truly Hard Seltzer helped drive the company’s depletions (sales to retailers) growth to 46% in Q2.

Boston Beer founder Jim Koch conceded Thursday that those inventory issues will last for the rest of the summer.

“Basically, the retailer out-of-stocks will continue through the summer, but post Labor Day — that’s sort of the hand-to-mouth existence,” he told investors and analysts Thursday evening. “We’ll be able to rebuild wholesalers’ inventories and start building again, a significant pre-build for 2021.”

By this time next year, Truly could be flowing much more freely, thanks to additional canning lines at the company’s Cincinnati brewery and enhanced contract brewing agreements.

“We’re kind of looking to more than double our capacity a year from now,” Koch said.

Reliance on third-party contract brewers is expensive and drives down the company’s gross margin, which declined to 46.4% in Q2 from 49.9% in the same quarter last year.

“We have significantly higher growth than what we had expected,” CFO Frank Smalla said. “As we’ve said before, we’re servicing the demand as much as we can, at any cost, because we want to build the brand, we want to build the category.”

CEO Dave Burwick added that Truly Hard Seltzer Lemonade, which launched earlier this year, has driven the brand’s growth and is generating high repeat purchase rates.

“Lemonade has been terrific for us,” he said. “The repeat rates are actually very high — 50% higher than any of the other new products that were launched this year. The velocity is also very high.”

The Truly Lemonade variety pack has been the brand’s second best selling SKU, earning $68.4 million year-to-date through mid-June in multi-outlet food and convenience stores tracked by market research firm IRI. Only the Truly berry variety packed topped the lemonade pack, with $95.4 million in sales year-to-date.

Truly Lemonade rolled out in January, ahead of the spring resets at off-premise retail chains, which never came to fruition due to the COVID-19 pandemic upending the industry. Couple that with the out-of-stock issues, and it’s easy to wonder how much bigger the brand extension’s launch could have been.

“We still haven’t fully realized the potential, for example, Truly Lemonade which didn’t come out and cut into our shelf sets because of COVID,” Burwick said. “In Q2 versus Q1, we’re seeing penetration growth actually more than double.”

In a sea of hard seltzers that combine a seltzer base with hints of fruit, Truly Lemonade stands out because it delivers more flavor than a traditional hard seltzer, Koch said.

“We just happened, with the lemonade, to hit a flavor profile that people really enjoy,” he said. “To be totally honest, the volume surprised us as well, and the only thing I can attribute it to is we just hit the bullseye of flavor for the space between seltzer and lemonade.”

Since Boston Beer reformulated all 13 Truly flavors late last year and introduced Truly Lemonade earlier this year, the brand has gained share points and narrowed the gap between it and segment leader White Claw (Mark Anthony Brands), from 41 share points to 15 share points, Burwick said.

With successful innovations driving growth, the company has launched a test of Truly Extra, an 8% ABV seltzer offering. Truly Extra is available in two flavors (peach mango and black raspberry) only in New York. Other higher ABV seltzer offerings in the segment include Pabst Stronger Seltzer (8% ABV) and Four Loko Hard Seltzer (12%).

White Claw filed a trademark for a product called White Claw Surge last year, which is rumored to be stronger than the brand’s standard 5% ABV offering, but it has not yet been released. Earlier this summer, White Claw launched two new flavors — clementine and pineapple — at 70 calories and 3.7% ABV.

Burwick expects Truly to continue launching new products at a regular clip over the next few years, but he cautioned that innovation isn’t equivalent to brand building.

“When you innovate there’s sometimes an assumption that just innovating and putting a brand out there means you’re building a brand, but innovation and brands — and strong brands — are not necessarily the same thing,” he said. “We want to make sure we’re building something that’s strong, that can last.”

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