Good Beer Hunting

Sweet Success Among Bitter Dividends — FMBs Shine in Boston Beer’s Latest Financial Report

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Boston Beer announced its latest quarterly earnings this week, showing continued hardships for one of the country’s genre-defining craft breweries. Revenue (-5.3%) and shipment volume (-6%) were both down compared to the same year-to-date timeframe of 2016.

It was more of what investors have heard over the last two years: since the company’s stock price hit a high of $320.83 in January 2015, its value—and consumer interest—has been riding a slow decline. To start 2015, Boston Beer was coming off a successful previous year in which the company grew shipment volume by 20% and raised revenues $12.4 million. Since that time, however, things have slowed and put Boston Beer’s stock on a downward trend. It’s gone no higher than $181.20 in 2017.

During the announcement, it was revealed Boston Beer doesn’t expect their slide to stop during the rest of the year, noting difficulty for the company’s flagship beer and cider brands. 

“We remain challenged by the general softening of the craft beer and cider categories and a competitive retail environment with a lot of options for our drinkers,” founder and chairman Jim Koch said in a press release.

The latest financial update comes on the heels of a recent discussion about whether Boston Beer should sell, raised just a month ago when Credit Suisse suggested a change in ownership structure might benefit the company. This has become an annual refrain after it was posed in 2016 whether a Constellation Brands takeover would make sense.

For the past year, CEO Martin Roper has said the exact same thing regarding an effort to change Boston Beer’s fortunes, literally and figuratively. First, the company must return its Samuel Adams and Angry Orchard brands to prominence, while also focusing on “cost savings and efficiency projects to fund the investments needed to grow our brands.”

That’s yet to fully come to fruition.

Since 2010, Boston Beer has had to redefine itself away from its namesake product. The percentage of beer produced as part of its overall portfolio has declined more than 30% in that timeframe, hovering around 57% at the end of last year. That trajectory threatens the company’s "craft" designation from the Brewers Association, which requires that a “craft brewer” have a majority of its total beverage alcohol volume produced in beer.

Angry Orchard, while holding around half the volume in U.S. cider sales, is still the lead dog in a declining category. Overall cider sales were down almost 10% through the first half of 2017, and the only reason it wasn’t worse was because of consumer shift from mass to “craft” cider, which has seen fast growth.

Across the board, the brands on which Boston Beer built its nationwide empire are struggling. According to IRI tracked data comparing the first 39 weeks of 2017 against 2016 in multi-outlet and convenience retail channels, the whole Sam Adams family of beers was down 18.3% in dollar sales and Angry Orchard sales decreased 5.7%. Meanwhile, Twisted Tea (+20.1%) and Truly Spiked Hard Seltzer (+312.6%) are gaining plenty of attention from drinkers. Flavored Malt Beverages typically see quick rises and falls among brands, but there’s some reason to think these two brand families may extend beyond a flashy trend.

The Twisted Tea family of brands has long been on a run, doubling in IRI-tracked sales over the past five years, and is on pace to surpass total dollar sales from grocery, convenience, and other off-premise stores compared to the packaged collection of Sam Adams beers. Truly Spiked Hard Seltzer, getting a boost from a national rollout and being a new product, is part of the overall cache of hard seltzer, which has essentially gone from nothing to 1.5% of the FMB segment in the past two years.

This has left Roper and Koch in a difficult position where their company continues to release new beer products, hoping one sticks. Notably, a new Lager-Ale hybrid, Sam '76, will be the next attempt, combining a collection of topical trends between a “sessionable” offering at 4.7% ABV with Citra, Mosaic, Simcoe, Galaxy, and Cascade hops packaged in a “bright, golden Lager.” During the earnings call, it was also announced the brewery will release a New England IPA (Sam Adams) and a rosé-inspired cider (Angry Orchard) in 2018.

The problem facing all of these new brands is maintaining relevance beyond their debuts. Recent releases by Boston Beer have seen great success initially, only to fizzle out. Rebel IPA, for example, had the biggest initial showing of any craft beer when it first arrived in 2014 ($26.2 million, per IRI), increased sales in 2015 ($30.8 million), but has lost ground since. Overall dollar sales in IRI-tracked outlets was at $20.7 million through the first nine months of 2017, which is nothing to be disappointed with, but also comes after a nationwide ad blitz to promote a completely reformulated recipe once sales started to slip last year.

A drastic—although perhaps orchestrated—effort has seen last year's nitro lineup of Coffee Stout, IPA, and White Ale almost disappear completely. The three brands sold more than $7 million in IRI stores in 2016 and accounted for just more than $1 million halfway through October 2017.

Meanwhile, the Twisted Tea family of FMBs already set a new personal record for IRI dollar sales through the first nine months of 2017 ($199.3 million), easily surpassing 2016's total ($166 million). And the Truly family of hard seltzers is a rocket ship, more than quadrupling last year’s debut in dollar sales through the end of September ($8.4 million to $35.6 million). Sam Adams has a sizeable amount of draft sales, but in grocery and similar stores, IRI shows that beer has been just 35% of the company’s U.S. volume through the end of September, with FMBs taking the plurality at 40%. Cider accounted for 25%.

It all feels so foreign coming from a business started with a malt-forward Vienna Lager, not to mention a business run by Koch, who long decried IPAs. The need to diversify offerings and spend more on advertising and promotions—another increase of up to $25 million is expected for 2018—seems rather un-Boston Beer as well. But that’s simply romantic thinking, not the necessity that comes with running a business that now competes with the world’s largest beer companies in addition to all the upstart craft brewers that enter the market on a daily basis—two things of which Jim Koch is fully aware.

In 2017, it’s becoming clearer that the goal of Boston Beer isn’t just to grow and keep investors happy, but also find ways to push back these tides a bit longer or find a way to ride them out. For now, that means releasing a New England IPA and rosé-flavored cider. What else might 2018 hold?

—Bryan Roth