Truly Hard Seltzer Growth Comes at a Price for Boston Beer Company

Truly Hard Seltzer sales boosted the Boston Beer Company’s fourth quarter revenue to an all-time high of $301.3 million, but it wasn’t without cost, as profits took a hit due to expensive third-party contract production.

“Contract just comes in at a higher cost,” chief financial officer Frank Smalla explained during a call with investors and analysts.

Boston Beer, whose brands beyond Truly include Samuel Adams, Dogfish Head, Twisted Tea and Angry Orchard, is working to increase capacity at its breweries to accommodate the increased demand for Truly, as well as “a comprehensive program to transform our supply chain” that could last up to three years.

Additionally, the company is investing in improvements at third-party contract manufacturing facility City Brewery. However, Smalla said the high-cost contract production will continue as long as volume demand for the product is high.

“There will be a relatively high component in Q1 that’s going to contract at a higher cost, and that will negatively impact the gross margin,” he said. “What you will see at the same time is also that shipments will outpace depletions, because we’re building this up, and that will run into the middle of Q2, which is when we start decreasing this inventory again.”

Truly and Mark Anthony Brands’ White Claw were early entrants into the hard seltzer category, which topped $1.5 billion in off-premise sales last year. Those brands are now facing increased competition after Anheuser-Busch InBev launched Bud Light Seltzer with a high-profile marketing campaign in January, and Constellation Brands’ Corona Hard Seltzer is expected to launch next month backed by a $40 million budget.

“The first assault has happened,” Boston Beer CEO Dave Burwick said.

Asked how the segment has performed after Bud Light Seltzer’s rollout, Burwick ticked off declining market shares for several of Truly’s competitors, while noting that Bud Light Seltzer has already claimed about a 10 share of the seltzer category.

“What we’ve seen over those last six weeks is … White Claw’s share decline by 9.4 points,” Burwick said. He added that A-B’s Bon & Viv Spiked Seltzer and Natural Light Seltzer, as well as the catch-all bucket of all other seltzer brands, each declined by tenths of a point.

Truly, however, bucked those trends, gaining about half a point of share in the weeks since Bud Light Seltzer’s launch, Burwick said.

Burwick credited Boston Beer’s moves to support the brand in the fall, including a reformation of all 13 flavors, new advertising featuring actor Keegan-Michael Key and a sponsorship deal with the NHL.

“We feel like we put ourselves in a position to compete now that the bigger guys are coming into the market,” he said.

Samuel Adams Seasonal Performance and Boston Lager Challenges

Other product reformulations in the last year included revamped recipes for two Samuel Adams seasonal offerings, Summer Ale and Cold Snap.

“They both have performed extremely well, and we have more plans for that later in the year,” Burwick said. “The seasonals piece we’re actually quite pleased with.”

Dollar sales of the Samuel Adams seasonal family increased nearly 1%, to $92.9 million, for the 52 weeks ending January 26, according to market research firm IRI. By comparison, in the same time period, Boston Lager dollar sales declined 7.6%, to $54.5 million.

In an effort to boost the challenged Boston Lager brand, the company is continuing to develop its new “Toast Someone” campaign.

“We need to make this brand relevant to 30-somethings,” Burwick said. “The campaign that we launched a couple years ago, we found that it really reinforced what Sam stands for in the minds of our current drinkers, but [it was] … not persuasive enough with non-drinkers or new drinkers to bring them in.”

Boston Beer founder Jim Koch reiterated that the company remains committed to its flagship beer brand and the craft beer industry.

“Yes, the growth is very strong and attractive in hard seltzer, but we are the Boston Beer Company,” he said. “Beer is our middle name, and craft beer is the foundation and heritage of the company, so we continue to invest behind Sam Adams at kind of historical levels.”

Sales Headcount Addition

To support all of Boston Beer’s brands, Burwick announced plans to add 120 people to its sales organization to focus on “making more calls on bigger customers.”

“With the Dogfish Head merger, we took a hard look at how we go to market, who are the customers we’re calling on,” he said. “As the world shifts to a more off-premise world and a hard seltzer world, we saw a bunch of opportunities to change how we do things.”

The news sales jobs amount to a 30% increase in “feet on the streets” and hiring is underway, director of communications Jessica Paar wrote in an email to Brewbound.

“We’ve already begun interviewing and hiring candidates across all divisions, for both the on- and off-premise channels and all classes of trade,” she added.

Twisted Tea Investment

Although Twisted Tea garners less attention than Truly, the brand continues to grow double-digits, with its household penetration rate growing by 31%, to about 1.1 million households last year.

In 2020, Boston Beer will increase spending behind Twisted Tea by 50%, with a new ad campaign, updated packaging and geographic programming.

“We’ve got a lot of investment, a lot of support, so all those things together, we feel really confident that we can continue to grow Twisted Tea at the same rate, if not better,” Burwick said.

Wall Street’s Reaction

After Boston Beer reported earnings Wednesday, the company’s stock (SAM), which finished the day at $429.92, began to fall in after hours trading. As of press time, the stock price was down around 6% or 8%.

Analysts who cover Boston Beer noted its strong revenue growth of 34% and depletions growth of 25% in Q4, pushing revenue to $1.25 billion, as Brewbound reported Wednesday. However, the increased demand and capacity has added gross margin pressure for capacity constrained Boston Beer.

As Credit Suisse’s Kaumil Gajrawala put it, “growth stories often lead to lumpy margin results,” which was definitely the case for Boston Beer. However, the view from Credit Suisse is that “category growth overwhelms short-term margin contraction or market share shifts.”

RBC Capital’s Nik Modi noted that although the company continues to drive top-line growth, its capacity constraints have weighed on profitability. Modi lowered RBC’s full-year earnings per share estimate due to third-party contract production’s drag on Boston’s gross margins, which is unlikely to subside until Truly’s volume stabilizes.

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