Boston Beer Company’s top priorities in 2023 are sustaining double-digit growth for Twisted Tea and stemming the losses for Truly Hard Seltzer, executives shared during the company’s Q4 and full-year earnings report.
Those objectives will have the company’s “full attention” and receive “significant investment,” Boston Beer president and CEO Dave Burwick said.
Boston Beer leadership laid out their 2023 plans to investors. Here are some of the highlights of Thursday’s call with investors and analysts.
Maintaining Twisted Tea’s Momentum
Twisted Tea was the top growth brand in the beer category and the top-selling flavored malt beverage (FMB) in 2022, Burwick said. The brand’s off-premise dollar sales accelerated in Q4 (+33% compared to full-year +31%), and it’s off to a hot start in 2023 with year-to-date growth rate at +36%. Driving the accelerated growth was effective marketing, a college football tailgate program, increased 12-pack distribution, and improved service levels, Burwick added.
The expectation in 2023 is “mid-to-high teens” growth for Twisted Tea, chief financial officer Frank Smalla said. The company expects to gain 25% to 30% more shelf space for Twisted Tea this year.
Boston Beer sees a “significant opportunity” to introduce Twisted Tea to a wider audience and grow its drinker base in 2023, Burwick said. Although household penetration and brand awareness for Twisted Tea are lower than its competitors, “its brand consideration and purchase intent remain the highest in the category,” he added.
Last year, Twisted Tea’s household penetration increased +20%, while its buy rate increased +7%, Burwick said. Twisted Tea original 12-packs have achieved 50% ACV (all commodity volume), while there is an opportunity to grow distribution of 12-packs of Half and Half and the Party Pack. Single-serve packages also present a growth opportunity on the heels of Twisted Tea’s 24 oz. package being the No. 3 single-serve in the beer category.
Boston Beer also believes Twisted Tea Light, a 110-calorie offering, is a vehicle to recruit new drinkers and win back lapsed Twisted Tea drinkers, Burwick said. Launched in key markets last year, Twisted Tea Light has 9% ACV.
Growing brand awareness of Twisted Tea in underdeveloped markets and with multicultural consumers are also among Boston Beer’s plans for 2023. Burwick pointed to California and Texas as underserved markets that are beginning to “catch fire.”
Boston Beer increased its investment behind Twisted Tea in Texas, which led to the Lone Star State becoming the brand’s largest volume state in one year, accounting for 10% of all Twisted Tea volume, Burwick said.
Burwick believes Latino and African-American consumers also present an opportunity to grow the Twisted Tea brands, as only 24% of the hard tea’s households are multicultural but the brand is growing +18% with multicultural consumers.
Once Twisted Tea reaches consumers, the brand’s repeat purchase rate is “in the low 30s,” which was similar to 2021, Burwick said.
“That’s pretty significant given that we added 20% more households, so we think that the repeat is holding up very strongly for this brand,” he said.
Reversing Truly’s Negative Trends; Hard Seltzer Segment Projected at -10% to -15%
Boston Beer executives are projecting malt- and sugar-based hard seltzers to collectively decline between -10% and -15% in 2023, while spirits-based seltzers are forecasted to grow around +3%, Burwick said.
Boston Beer laid out plans on Thursday to turnaround Truly Hard Seltzer’s negative trends, unveiling new packaging and announcing plans for a new advertising campaign to increase consumer awareness of the 2022 reformulation with real fruit juice concentrate.
Burwick noted that Boston Beer learned several lessons in 2022. Among them, the launch of Truly Margarita-style hard seltzer showed that future bolder seltzer releases would not be successful as consumers were overwhelmed with new offerings. Additionally, consumers began seeking more lightly flavored seltzers, while Boston Beer had put too much emphasis on bolder flavors, Burwick said.
Boston Beer chairman and founder Jim Koch admitted the company’s projections for “Truly and some of our new brands” in 2022 “were too high.” The company produced product and sourced materials “at the upper end” of those projections “to avoid out-of-stocks,” but it ultimately resulted in costly waste.
“We’ve also had an expansion of product offerings that has introduced more complexity into our supply chain and we planned our cost structure at higher levels of volume,” Koch said. “This has resulted in financial performance that is below our expectations.”
Boston Beer is “working to simplify” its Truly business in 2023, refocusing on its reformulated core packs, such as Citrus, Berry and Tropical.
“The reformulated Truly products that we launched in the fourth quarter have been well received by those consumers who know about the change,” Burwick said. “But we did not do a good enough job communicating those improvements on our packaging and in our advertising so that more people will learn about the change.”
The reformulation proved costly for Boston Beer, as the company recorded significant scrap from old cans and out of date ingredients from the previous formulation – “a relatively big” write off, Smalla said.
Boston Beer’s total obsolescence in 2022 was “close to $40 million,” but the company is “planning a substantial reduction in 2023,” Smalla said.
Opportunity for Truly to Gain Share as Competitors Bow Out
Hard seltzer’s share of shelves is expected to continue to decline as retailers make room for FMBs and RTDs. Burwick predicted that hard seltzer’s about 11% share of beer shelves would decline to about 9%-10% in 2023. However, he reminded investors that the top five brands in the segment hold about 98.5% share, and “there will be a lot of brands that will go away.”
“So while the hard seltzer category space will shrink, Truly space within hard seltzer, based on what we know now, would increase slightly,” Burwick said. “Therefore, Truly’s total space of beer was gonna be about the same – to be really precise, like 2.7%”
In Q4 2022, hard seltzer accounted for 7.4% of beer category dollar sales at off-premise retailers tracked by the market research firm NielsenIQ – the lowest share the segment has held since the beginning of the COVID-19 pandemic. Mark Anthony Brands’ White Claw maintains the largest share of the segment (46.3%), increasing dollar sales +10.9% in the last four weeks, through January 28, and +6.9% in the last 12 weeks.
Truly claims the second largest share (19.1%) in NielsenIQ-tracked off-premise channels, with dollar sales declining -21.5% in the L4W and -19.1% in the L12W. The next 46 brands, “including Bud Light Seltzer,” equal the share of Truly, according to Burwick, “so there’s a lot of brands to steal from and a number of them will be going away.”
“And of course you’re going to want to steal share from the No. 1 player as well,” Burwick said. “We expect to source from anybody, from all consumers who are interested in the seltzer category or buying any other brand within that space.”
Any potential growth may be slow at first, particularly in the first half of 2023, as Truly faces year-over-year comps from the Q2 2022 release of its Truly Margarita pack. Truly Margarita was the “No. 1 new brand launched in beer in 2022,” but was “not as incremental to the Truly trademark as prior launches,” Burwick said. He added that 60% of Truly’s declines in Q1 2023 is attributed to lapping Truly Margarita’s launch.
Burwick also reminded investors that Truly grew share “every year until last year, when this whole idea of innovate and innovate and having to lap the innovation finally collapsed on us.”
“We’ve innovated arguably a little bit too much and not built the core business enough,” Burwick said.
Now that Boston Beer is pausing its innovation “for now,” it can focus on gaining share back for its core lineup of Truly offerings.
“We’ve also learned over the last couple of years to be a little more cautious in how we predict the category and the brand,” Burwick said. “We’ll keep at it and if we don’t grow share this year we’ll find another way to do it next year, but we do feel like we don’t want to create too much change either with this brand.
“But again, we’re not letting any exuberance about our plans affect how we guide this year, honestly, we’re not,” he continued.
For Truly, Burwick sees an opportunity for growth in the convenience channel, where the brand is admittedly “less advantaged” than other channels. As such, the company is looking to increase its single-serve presence, including adding resealable 24 oz. packages.
Burwick also pointed to the 21- to 34-year-old age group, which he said has “stuck behind hard seltzer,” as an advantage for Truly, which has the “highest household penetration there among all beer brands.”
Boston Beer Confident in Truly Vodka Soda Despite Crowded RTD Market
Analysts questioned how Truly Vodka Soda (the renamed Truly Vodka Seltzer) can make room for itself in an already crowded spirits-based RTD market, but Burwick expressed confidence in Boston Beer’s ability to compete in the segment.
“Our consumers have asked us for a long time to get into the vodka seltzer or vodka soda space,” Burwick said. “We’re not expecting it to be something that’s going to be hugely material right away, but it’s an area where our customers want us to go, where consumers are sourcing their occasions from hard seltzer anyway, and we need to be there.”
Leaders in the spirits-based RTD category – such as E. & J. Gallo’s High Noon Sun Sips and Anheuser-Busch InBev’s Nütrl Vodka Soda – have a “five or six years head start” on Truly, but Burwick said Truly Vodka Soda is on their tails with the third largest share of spirits-based hard seltzer segment with just over four months on the market.
“And we really haven’t even brought what we’re going to bring to the table yet,” Burwick said.
Coming to the table soon will be two new Truly Vodka Soda variety packs, announced Tuesday morning before earnings were released.
Boston Beer views the spirits-based RTD segment as two different “sides.” The first being higher ABV brands such as A-B’s Cutwater Spirits or Boston Beer-owned Dogfish Head canned cocktails, which have “fewer occasions, lower buy rate” and “lower frequency of consumption.”
The second side, which Boston Beer views as the most opportunity for the Truly brand, is focused on “refreshment, sessionability and variety” which have the “same occasions” and “same consumer” as hard seltzer, Burwick said.
“We’ve done a lot of consumer work so we’re not just making it up as we go,” Burwick said. “Consumers have given us permission to go there. Now we’re going there. We’ll see how it goes and will evolve accordingly.”
Burwick acknowledged that the RTD market is possibly more competitive than the hard seltzer space, with “150 more SKUs” – about 1,100 total – and “70 more brands” than hard seltzer, despite the segment’s share of bev-alc being about one-fifth the size of hard seltzer’s. Boston Beer has to “create presence on the shelf in order to compete in the space,” Burwick said of adding two additional variety packs.
Still, Burwick cautioned that the growth of the RTD segment could be temporary, and has been “three-quarters driven by retailers jumping on it and pushing it and one-quarter by consumers saying this is what it should be.”
“This wave could come crashing down a lot faster than hard seltzer in my opinion,” Burwick said. “I think it’s been propped up by wishful thinking.”
Despite this possibility, Boston Beer will continue to “compete very aggressively” in the RTD segment with both Dogfish Head and Truly brands, Burwick said.
Gross Margin Improvement Remains a ‘Moving Target’
Boston Beer’s gross margin for full-year 2022 was 42.2%, an increase from 38.8% in 2021. For 2023, the company is projecting gross margin to be between 41% and 43%.
Smalla admitted that Boston Beer is “behind from a timeline perspective” on reaching the company’s goal of low-to-mid-50% gross margins due to supply chain inefficiencies. Although there are plans in place to get there, Smalla said it would take a couple of years to achieve.
Bernstein Autonomous analyst Nadine Sarwat, in downgrading Boston Beer’s stock (SAM) to underperform, wrote that Thursday’s earnings report “changed our view on the potential for meaningful gross margin expansion.”
“Supply inefficiencies run deeper than we initially thought,” she wrote. “Management’s initiatives to combat this are sound and will lead some to still hold on to the elusive 50% long-term gross margin target. But until Truly stabilises, it’s like trying to hit a moving target. This, in combination with weaker volumes, leads to meaningful cuts in our estimates.”
Goldman Sachs’ Bonnie Herzog reiterated her “sell” rating, writing: “Overall, we continue to believe a lot is riding on Truly’s recovery, and we’re not convinced that the continued strength of Twisted Tea will be enough to offset Truly’s losses based on our analysis.”
RBC Capital rated the stock at perform, while Jefferies set its rating at underperform.
After market trading of Boston Beer stock hovered around $350, after closing at $392.91 on Thursday.
Hard MTN Dew to Expand into 25-30 States, Depending on Distribution Regulations
Hard MTN Dew – Boston Beer’s FMB made through a partnership with soft drink-giant PepsiCo – ended 2022 with distribution in 11 states, Burwick said. The 5% ABV offering, available in 12 oz. can 12-packs and 24 oz. single-serve cans, has been slow to expand due to regulatory hurdles, as it’s distributed through PepsiCo-owned Blue Cloud Distribution, rather than Boston Beer’s existing wholesale network.
Burwick expects Hard MTN Dew will be in 25-30 states by the end of 2023, but the final number will come down to the “approvals” that Blue Cloud gets from states. The brand is expected to be in 15 states in the “next couple months.”
In the 11 states Hard MTN Dew is already in, its 12-pack is the No. 1 FMB in sales-per-point-of-distribution, “ahead of Twisted Tea, ahead of Mike’s [Hard Lemonade], ahead of everything,” Burwick said.
“The repeat rates are as high as anything we’ve seen in beyond beer launches in the last couple years,” he continued. “So on a below-average distribution footprint, the brand is performing well.”
Beer, Other Brands Get Cursory Mentions
Boston Beer’s beer portfolio received little attention during its Q4 2022 call. Burwick mentioned the “remastered” Samuel Adams Boston Lager brand being the focus of the company’s regional Super Bowl ad. He added that Samuel Adams’ seasonal program, including Summer Ale and Oktoberfest, will receive increased investment in 2023.
Boston Beer is also adding a second non-alcoholic beer, Gold Rush golden ale, to its portfolio.
Meanwhile, the expansion of Dogfish Head’s spirits-based canned cocktails and the Hard MTN Dew FMB and the launch of Jim Beam Kentucky Coolers FMB are expected to be “small volume contributors in 2023 as they ramp distribution and find their audience,” Burwick said.