Goldman Sachs: ‘Incrementally More Negative’ on Boston Beer Outlook, Predict -5% to +1.3% Shipment and Depletion Growth in 2022

Goldman Sachs’ pessimism for Boston Beer Company’s 2022 sales performance and the company’s ability to reach its 2022 guidance continues, with analyst Bonnie Herzog downgrading Boston Beer to a “sell” rating in the financial services firm’s June Beverage Bytes retailer survey.

“Driven primarily by the broader slowdown in the hard seltzer category, cycling of tough comps, and an overall weaker pipeline of innovation,” Goldman Sachs has become “incrementally more negative” on Boston Beer, Herzog wrote. The company now estimates Boston Beer will end 2022 with shipment/depletion growth of -5% to +1.3% – a sharp decline from its previous estimate of +5.3% to +7.3% growth.

Boston Beer has maintained its guidance of +4%-+10% shipment and depletion growth for this fiscal year, despite a -25.1% year-over-year decrease in sales in Q1, reported in the company’s April earnings call with investors. CEO Dave Burwick doubled down during the call, noting that Boston Beer has the ability to “hit the top end” of that guidance, even if Truly Hard Seltzer is in decline.

Earlier this month, Cowen analyst Vivien Azer reported her financial service firm was becoming “increasingly skeptical” of Boston Beer’s ability to meet its guidance, and said a -1% decrease in revenue in Nielsen-tracked channels would “likely” be the “best case outcome” for Boston Beer this year. Bernstein analyst Nadine Sarwat recently cut Boston Beer’s rating to “neutral.”

Boston Beer initially projected Truly growth to be flat to +10% in 2022, but last month, founder and chairman Jim Koch said growth for the brand would likely be near the lower end of that estimate, Herzog reported. Herzog expects Truly shipments will decrease about 22% this year, “as distributors indicated that they plan to reduce their inventory levels further by the end of the summer.”

Goldman Sachs surveyed contacts representing 55 distributors, whose accounts represent about 205,000 retail outlets – roughly one-third of the total U.S. outlets that sell alcohol, according to Herzog. Those distributors expect Truly sales to decrease -12% in 2022 and -2% in 2023. The majority of respondents (>60%) said Truly has “been allocated less, or a lot less, shelf space” this year, while 67% said they are not seeing improvement to Truly’s momentum despite the summer selling season.

During Boston Beer’s Q1 earnings call, Burwick said “regardless” of where the total hard seltzer segment growth settles in 2022, the company is aiming “to outgrow the category for the full year,” driven in part by Truly innovations, such as Truly Margarita and Truly Poolside. Herzog said nearly half of distributors (49%) were “broadly less excited” about Boston Beer’s innovations.

In April, Boston Beer projected the hard seltzer segment would grow between zero and +10% this year. Distributors in Goldman Sachs’ survey estimate the segment’s growth to be about +8% this year, and +1% in 2023.

For Goldman Sachs to be “more positive” about Boston Beer, Herzog said the company “would need to see measurable signs of stabilization and/or improvements for the hard seltzer category, improved visibility on management’s ability to deliver on its guidance, and evidence that [Boston Beer] can continue to grow and thrive without Truly.”

Respondents and analysts were optimistic about Boston Beer’s Twisted Tea. Herzog estimates shipments of the hard tea brand will increase about +20% in 2022, and said Twisted Tea could become a $1 billion revenue brand. The brand now accounts for about $550 million in sales, about 37% of Boston Beer’s total revenue, according to Herzog.

Distributors were also positive about Twisted Tea, as “many distributors see a long runway of growth ahead for the brand with further distribution.” More than 80% of those surveyed said Twisted Tea has “been allocated incremental shelf space at retail this year.”

Still, Herzog said Goldman Sachs does not believe Twisted Tea, or Boston Beer’s other innovations, “will be enough to offset Truly’s declines this year or next.”

Twisted Tea recorded +15% volume growth and +20% dollar growth in Q1, Boston Beer reported in April. At the time, the company said it expected shelf space to increase +13% this year, with points of distribution increasing +19% in large-format stores and +67% in small-format stores.

For Twisted Tea to continue its momentum, distributors recommend Boston Beer:

  • Improve the availability of the brand;
  • Keep the brand simple and not “over-proliferate it with multiple SKUs” as it did with Truly;
  • Focus on expanding points of distribution;
  • Expand the consumer base beyond its blue-collar demographic, possibly by introducing a lower sugar alternative to reach health-conscious consumers;
  • Expand the brand’s geographic presence;
  • “Step up” marketing;
  • And expand the brand’s on-premise presence.

Total Beer Sales to Decrease -1% in 2022; Truly, White Claw and Bud Light Seltzer Struggle

Distributors expect total beer category sales to decrease -1% in 2022, facing tough year-over-year comps after +3% growth in 2021, according to Herzog.

Constellation Brands, referred to by one distributor as the “darling” of the beer industry, is expected to be the only big beer brand to grow this year, with distributors projecting +9% sales growth in 2022 and +7% growth in 2023, after +12% growth in 2021.

Sales for Molson Coors Beverage Company and Anheuser-Busch InBev (A-B) are expected to decrease -2% in both 2022 and 2023. Boston Beer’s sales are expected to decrease -2% in 2022, but recover slightly with +1% growth in 2023.

“For craft beer, respondents were broadly mixed, with some indicating that while craft beer is underperforming the broader category in off-premise, they are seeing it outperform the category in the on-premise channel, supported by local craft beer brands, and significant share gains for large-scale craft brands,” Herzog wrote.

Hard seltzer is expected to continue to struggle over the next two years, which distributors credit to consumer fatigue, a lack of innovation, and increased competition from spirits-based ready-to-drink canned cocktails (RTDs). Survey respondents also noted that, outside of the top brands such as White Claw and Truly, the competition for shelf space in the hard seltzer segment had started to be based on price.

Molson Coors’ Topo Chico is “one of the bright spots” in hard seltzer, with sales expected to increase +29% in 2022, due in part to the brand’s nationwide expansion, which began in January. However, distributors expect a -6% decrease in sales in 2023 following this year’s tough comps.

E&J Gallo’s High Noon Sun Sips is also expected to continue its growth, projected to increase sales +29% in 2022 and +8% in 2023. “Several distributors” noted that “High Noon sales would have been stronger, absent some production limitations,” Herzog wrote.

The largest hard seltzer concern came for A-B’s Bud Light Seltzer, with sales expected to decrease -12% in 2022 and -10% in 2023, after a -11% decrease in 2021.

“A few distributors mentioned they thought that Bud Light Seltzer will get pulled from the market, and noted they are dumping more than they are selling,” Herzog wrote.

Truly is also expected to have one of the largest hits in sales this year, projected to decrease -12% in 2022. However, its outlook for 2023 is slightly more positive, with sales projected to decrease only -1%.

White Claw, which still holds the largest share of the hard seltzer segment, is expected to see a -7% decrease in sales this year, followed by a -1% decrease in 2023. Distributors specifically called out White Claw as losing share to spirits-based hard seltzers, such as High Noon.

It has yet to be determined how Hard MTN Dew, Boston Beer Company’s collaboration with PepsiCo, will perform this year. However, distributors estimate the brand’s sales will decline -2% in 2023, with one retailer noting that “acquiring regulatory permits” for the brand “could continue to prove challenging.”

Out of Stocks Improve, But Not Resolved; Distributors Divided on Price Increases

While the majority of respondents (64%) said the out-of-stock (OOS) situation in the off-premise is “bad or very bad,” it is an improvement compared to last June, when about 84% of respondents were in that boat.

OOS problems seem not to discriminate against any particular segment, plaguing the entire beer category. However, the biggest OOS issue when analyzing package formats is glass bottles. As a result, Constellation has struggled with challenges across all of its core brands (Corona, Modelo and Pacifico), with nearly 60% of distributors noting that the company’s OOS are “bad or very bad.”

Other brands called out for OOS issues were Heineken (70% said the situation was bad or very bad), and Twisted Tea.

More than a third of respondents (36%) said they’ve seen “few or spotty” OOS. However, the majority (66%) predict the issues that persist will not be resolved until 2023 or later. Driving factors include continued “transportation challenges” such as driver shortages, and “shipping restrictions,” particularly for imports.

Some distributors expressed concern over “waning” consumer spending habits in beer, due to continued inflationary pressures on essential items such as gas and groceries. Respondents were divided on how beer price increases this year will also affect buying.

Just over half of respondents (52%) said they “welcomed” price increases, as they’ve had “little impact on elasticity” so far. Some went as far to say prices “have not kept pace with inflation” and there is more space for further increases, as the ones “already in the market are not sufficient to cover [retailer] operating costs.”

On the other side, about 48% of respondents said pricing “has already reached a tipping point, and any incremental pricing in the beer category could be detrimental.” With consumers facing inflation on other common goods, distributors are concerned that “additional price increases could start impacting sales, particularly in the peak summer season.”

Some respondents identified Constellation as “the only brewer that has the pricing power to take price increases without significant impact to volumes,” given the perception of its brands’ “good value.”

Continued inflation is also impacting the recovering on-premise channel, with growth starting to plateau, according to distributors, who said the gains made in the on-premise so far are not enough to offset year-over-year off-premise losses. “Several” distributors said the on-premise is at about 90% of where it was before the COVID-19 pandemic, and that the remaining 10% is “likely never to return.”

As we enter the July 4 holiday weekend, Goldman Sachs checked the temperature of sales during Memorial Day weekend. About half of respondents said the weekend’s trends were in line with expectations. However, some noted that they have gone into this year with “low expectations.” More than a third of respondents (38%) said the holiday performance was below expected, mainly citing weather conditions, while 13% had sales above expectations.