Boston Beer Company founder Jim Koch tackled several industry issues during a fireside chat at the Barclays Global Consumer Conference last week.
Koch hit on issues from beer growth and headwinds to opportunities in the on-premise channel and early returns on the company’s new premium vodka-based hard tea brand Sun Cruiser.
During the discussion, Koch called the on-premise channel “somewhat neglected” in the post-pandemic world. He outlined that the channel is not nearly as profitable as the off-premise, citing how costly it is for distributors to make smaller drops while the channel requires larger service demands, from cleaning draft lines, to keg trucks contributing to more workmen’s comp issues, to struggles to even fill those jobs.
Even though the on-premise isn’t profitable, it’s a piece of “long-term brand building,” Koch said. And he views bars and restaurants as an opportunity for Boston Beer due to the No. 1 draft handle in the market being “open,” meaning there are more empty draft lines than any one brand.
“To us, that’s an opportunity with someone with as broad of a portfolio as we have,” Koch said. “We’ve got something that can and should go on that line.
“Most on-premise places that have 10 handles,” he continued. “They should have a seasonal. We have the No. 1 seasonal. They should have a hard cider. We have the No. 1 hard cider. They should have a national IPA with their local IPA. Dogfish Head 60 Minute is one of the top national IPAs. And we now have Twisted Tea on draft. So we should have something that should be appealing to a lot of retailers.”
During Boston Beer’s Q2 earnings report in July, Koch admitted that the company took its “eye off of draft, along with our wholesalers.” The company is now dedicating more resources to building its on-premise draft business.
Koch: Beer Consumption Facing Several Headwinds; Traditional Beer Won’t Grow Again
Beverage-alcohol consumption per capita in the U.S. has remained “stable for a really long time,” Koch said, and he doesn’t foresee large declines such as “down -5%,” which “would be tectonic.”
However, there are “small things that are chipping away at alcohol consumption,” such as marijuana and Delta 9 beverages, moderation among Generation Z and GLP-1s, Koch said. He also believes that the narrative around health has shifted and is being driven by anti-alcohol groups as funding for alcohol-related research is no longer coming from beverage-alcohol producers, which he called a self-inflicted wound for the industry.
“I see more headwinds than tailwinds, but they’re relatively minor,” he said. “It’s a pretty, pretty stable industry in that respect.”
Nevertheless, Koch reiterated his belief that traditional beer won’t grow again and will be slower on a five-year moving average. Industry growth will come from the fourth category of beyond beer products, which Koch noted now make up 80% of Boston Beer’s volume, primarily due to Twisted Tea and Truly Hard Seltzer.
Koch restated that beer companies should “win” in the fourth category due to those products needing to be sold in the cold box, carrying beer prices and margins and being packaged in cans.
“To me, beer should get, call it 80%, of this growing category,” he said. “Even though alcohol is not growing, there is a very big segment that we are very good at and set up to access that is growing. So we’re able to defy the overall industry dynamics by focusing there.”
Asked about beer industry volume softness in the near term and the U.S. consumer environment, Koch called it “month-to-month noise” and people trying to pull meaning from “random data.” Koch offered no insights into the consumer environment, stating “the consumer is going to do what they’re going to do, our efforts are responding to and taking advantage of trends that we can’t control.”
Despite the volume softness in the marketplace, Koch said he’s not seeing a panicked pull of the price leverage that had occurred in the past, namechecking August Busch’s aggressive promotional tactics to reclaim lost share 20 years ago. He called the promotional environment “healthy” and anticipates Boston taking the high end of its guidance on price increases of around +2%.
Boston Beer’s Innovation ‘Sweet Spot’
Boston Beer’s “sweet spot” in innovation is smaller products that can develop into sizable and meaningful business drivers, Koch said. He added that a new offering that starts off as a million case brand and can grow is an ideal start for new Boston Beer products, while that might not be the case for larger brewers such as Heineken, Diageo, Molson Coors and Anheuser-Busch InBev.
“Except for Truly, all of our innovation started slowly and built over a timeframe measured in a decade or more,” Koch said. “Big companies generally don’t have that level of commitment and patience to do that. That’s kind of our niche.”
Koch cited the 25 years of building and reworking Twisted Tea and the ups and downs of Angry Orchard over a 14-year period as examples of brands that needed to be built over time.
“We have to be careful of not weeding stuff out too soon and being patient,” he said. “I see the future of our innovation is not big things that deliver huge numbers right away but more what we’ve seen historically of patient brand building.”
Boston Beer’s innovation strategy is to start new products in up to a handful of test markets to see if they can scale, Koch said.
“To the extent that our approach has changed, it’s more things smaller but a pipeline – a continual pipeline,” he continued. “Our objective would be four products a year every year but kill them if they’re not getting traction. I think that’s paying off.”
Koch said Boston Beer is “very happy” with the performance of its premium hard tea brand Sun Cruiser, Koch said.
“Twisted Tea is now a big number. Hard tea is a big market. Something that is 20% of that is meaningful. And maybe that’s the role of Sun Cruiser.”
Sun Cruiser is rolling out nationally. Koch credited Stateside Vodka’s Surfside with making headway in New Jersey, New York and Philadelphia. But he claimed Sun Cruiser has “overtaken Surfside” in the rest of the country.
“You strip out that core market where they’ve been for a year and Sun Cruiser is not only growing faster, but in volume is now the leader,” he said. “Again, that’s not going to be 20 million cases. We all got spoiled by the success of Truly. That had never happened before. The hard seltzer category took off faster than anything in my lifetime in the beer business.”
Unlike beer, which is an acquired taste, hard seltzer and other popular fourth category products such as BuzzBallz and BeatBox catered to consumers with fruity flavors, Koch said.
“It’s an easier entrypoint for young drinkers,” he continued. “It’s not an acquired taste to drink hard seltzer, tiny bit of sweetness and fruity. They’re just inherently likable, much less things like BuzzBallz and BeatBox, the alcohol is hidden, they are the ultimate sweet and fruity things.”
Truly Turnaround Harder than Expected
Koch admitted reversing Truly’s negative trends has been harder than the company anticipated.
“We would have thought we’d be closer to flat now than we are,” he said. “We have some pockets of success, but if I’m being totally honest it’s been harder than I thought.”
Boston Beer made missteps trying to “seltzerize” hard tea, punch and margaritas, Koch admitted. They were initially successful but those extensions didn’t have sticking power. The “core” for hard seltzer is “familiar fruit-based flavors,” and those products are doing “much better,” as well as 8% ABV Truly Unruly, which launched earlier this year, he said.
Asked if hard tea could face a similar implosion to hard seltzer, Koch said the segment is more established with a 25-year history compared to hard seltzer, which “”took off after 25 weeks.”
“So I’m not that worried about boom-bust,” he added. “But it has attracted an enormous amount of new entries.”
Koch said there are around 100 new hard tea brands on the market this year. Those products have cut into Boston Beer’s shelf space for tea. Boston Beer had about 90% of the shelf space and 95% of the volume in the segment, and that has been cut to 85% of the volume and 60% of the shelf space, he added.
“What I’m hoping will happen and I think retailers have gotten much quicker at cleaning out the clutter and crap in the category,” Koch said. “So I think we will get share of shelf space back and with Twisted Tea, we’ve slightly expanded the portfolio to fill all the niches.”
Those include Twisted Tea Light and Twisted Tea Extreme to close off competitive entry points, Koch said. So far, it’s worked as those new competitors haven’t claimed anything over 5% share.