Boston Beer Steadfast in Its Innovation and Brand Investment Amid Seltzer Consolidation

Equity Analyst

Dan Su

We award a narrow economic moat rating to Boston Beer based on brand awareness and close distributor relations built over decades, thanks to the firm’s commercial success in various on-trend categories including hard seltzer, hard cider, and flavored malt beverages, which make up 85% of total volume. 

Though much smaller than the beer behemoths, Boston Beer has thrived as a result of a sharp focus on high-end malt beverages benefiting from premiumization trends. In addition, the firm has demonstrated the ability to augment its portfolio with offerings that best align with demand tailwinds and participate early in growth categories to extract a high level of economic profits ahead of competition. This is exemplified by the string of successes with the Truly, Twisted Tea, Angry Orchard, and Samuel Adams brands building and maintaining top volume shares in their respective categories over extended horizons. The strong unit economics and cash flows that have resulted enable the firm to quickly pivot its portfolio and distribution focus as new growth vectors emerge. Its 2016 launch of Truly ahead of the hard seltzer volume takeoff is a case in point. While we acknowledge a lack of switching costs in beverages, we expect Boston Beer’s focus on flavor varieties and healthier ingredients will continue to resonate with consumers’ evolving preferences and support volume expansion. 

Even though Boston Beer faces a number of challenges, chief among them the recent hard seltzer slowdown, we believe it has prudently managed the situation with continued investments in branding, a refreshed product set in Twisted Tea, and strong distributor relationships. While we see the proliferation of malt beverages driven by the competitive inroads from premium distillers and soft drink giants as a risk, we expect Boston Beer to defend its competitive edge by differentiating its brands with consumer-centric innovations (based on its category expertise), combined with targeted marketing through digital and traditional media.

Business Strategy & Outlook

We believe Boston Beer has carved out a narrow economic moat, thanks to strong brand prowess and to a lesser extent close brewer-distributor relationships that the firm has established and maintained. The brewer has had a slew of successes as a first mover in on-trend categories, including flavored malt beverages, hard cider, and hard seltzer, in past years. The intangible assets-driven moat has helped the firm deliver returns on invested capital (including goodwill) that exceeded its 9% weighted average cost of capital in all but two years since 2013, and we project excess investment returns to continue over the next 10 years. That said, the proliferation of new alcoholic beverage offerings and intensifying competition from larger rivals constrain our confidence in the firm’s ability to deliver excess returns for more than 20 years. We therefore are reluctant to award the firm a wide moat rating. 

Boston Beer’s intangible asset-driven moat is premised on its strong brand equity in several on-trend alcoholic beverage categories where the firm has been a pioneer in commercialization, with internally developed brands built on distinct tastes and smart marketing that maintain leading share positions. Boston Beer’s initial success was with Samuel Adams, which ranks as the number-two brand by volume in craft beer (6% volume share, per Euromonitor) behind privately held Yuengling (16%). Boston Beer then launched Twisted Tea in 2001 (26% volume share of the flavored malt beverage category in 2022, behind number-one Mark Anthony’s Mike’s Hard Lemonade brand at 29%), Angry Orchard in 2009 (leading hard cider brand with 53% volume share, 7 times larger than number-two Crispin Cider by no-moat Molson Coors), and Truly hard seltzer in 2016 (30% volume share, behind only Mark Anthony’s White Claw with 41% share). 

We attribute its ability to amass such outsize share positions in multiple categories to its foresight to invest heavily in innovation and market research in categories that, at the time, made up a small fraction of overall beer volume and thus flew under the radar of larger brewers. As a result, the firm was able to zero in on the flavor profiles and consuming experiences (including optimal temperature for the beverages and types of food to consume together) that resonated well with early adopters. Building on the favorable initial response, the firm followed up with targeted media campaigns, extensive consumer sampling, and eye-catching packaging to keep the brands top of mind for consumers, which is crucial in the early stages of an emerging category. In addition to consumer-facing initiatives, we believe Boston Beer’s in-house sales team (around 500 representatives, a rarity in the alcoholic beverage industry in the US because of the three-tier distribution requirement) also plays a key role in cultivating and maintaining ties with distributors, retailers, and restaurateurs.

A reputation for consumer-centric innovation, high-quality ingredients, and refreshing and flavorful tastes has enabled Boston Beer to angle for premium positioning. While the firm does not publish category-specific pricing data (inhibiting our ability to conduct peer comparisons), we’d point to the 50%-plus gross margins it maintained between 2012 and 2018, close to the mid-50s level at wide-moat Constellation’s beer segment, as an indication of the premium the firm has been able to fetch for its offerings. While cost inflation and the hard seltzer slowdown resulted in an erosion in gross margins to the 40s the past few years, we expect sharper marketing messages on key differentiations (flavor varieties and real fruit juice) in malt-based and spirits-based ready-to-drink beverages, as well as an expanding portfolio with the launch of 30-plus flavors (including berry, citrus, tropical, lemonade, margarita, and punch) should help support Boston Beer’s volume share and competitive position. As a result, we forecast a gradual margin recovery over the next 10 years to 50% by 2033.

As flavored malt beverages, hard seltzer, and hard cider collectively generate volume equivalent to 15% of traditional beer in the US, and Twisted Tea, Truly, and Angry Orchard are top-ranked brands in these categories, we believe Boston Beer has become an important driver of traffic and purchases in the alcohol aisle alongside traditional premium brands. The popularity of Boston Beer's brands is exemplified by the strong volume share gains in their respective categories. For instance, Twisted Tea controlled 26% of the flavored malt beverage market (in volume terms) in the US in 2022, up from just 9% in 2012, versus the 29% held by leader Mike’s Hard Lemonade (up from 22% in 2012). We believe Boston Beer’s expanding presence positions the firm favorably in negotiations with the 400 individual distributors that carry its products across the country. 

We don’t see a cost advantage moat source for Boston Beer. In the flavored malt beverage, hard seltzer, and hard cider categories (roughly 86% of 2023 volume), the firm primarily competes for the same premium beer drinking cohort currently served by likes of Anheuser-Busch InBev, Constellation, and Heineken. Given that these operators have significantly deeper pockets, we don’t think Boston Beer has amassed commensurate scale efficiencies in procurement, manufacturing, and distribution. In the craft beer business (14% of company volume), we don’t expect Samuel Adams’ aggregate scale to translate into any material cost advantage at the local level against thousands of small craft brewers. On the contrary, craft drinkers’ preference for locally sourced and brewed fare over national brands might put Boston Beer at a competitive disadvantage.

Narrow

Economic Moat

Boston Beer Company

Boston Beer Co., Inc. engages in the production of alcoholic beverages. Its brands include Truly Hard Seltzer, Twisted Tea, Samuel Adams, Angry Orchard, Hard Cider and Dogfish Head Craft Brewery. Boston Beer produces alcohol beverages, including hard seltzer, malt beverages (“beers”), and hard cider at company-owned breweries and its cidery, and under contract arrangements at other brewery locations. The company was founded by C. James Koch in 1984 and is headquartered in Boston, MA.

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Boston Beer Company reports Q1 declines in Truly sales

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SAM's Q2 performance reflects mixed results with strong growth in Twisted Tea but challenges in Truly's performance. The company is focused on sustaining growth, improving volume trends, and modernizing the supply chain. Despite facing challenges in the hard seltzer category, SAM is confident in its plans to address share loss and invest in innovation for long-term success.

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Boston Beer Company's Q3 2023 Earnings Call highlighted the company's strong performance in Twisted Tea, ongoing operational improvements, and a 45.7% gross margin. The call also addressed challenges such as the decline in Truly's performance and lower fixed cost absorption, while emphasizing opportunities for expansion and growth.

Boston Beer Company reports solid Q4 performance amidst market challenges

Boston Beer Company's Q4 2023 earnings call highlighted improved depletions, strong gross margin growth, and strategic plans for brand investments and leadership transitions. Challenges include a slowing beer category and expected declines in the hard seltzer market, but opportunities exist in product innovation and portfolio expansion.

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Boston Beer Co., Inc. engages in the production and sale of alcoholic beverages. Its brands include Truly Hard Seltzer, Twisted Tea, Samuel Adams, Angry Orchard, Hard Cider and Dogfish Head Craft Brewery. The company was founded by C. James Koch in 1984 and is headquartered in Boston, MA.

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The Boston Beer Company, Inc. (NYSE:SAM ) Q1 2022 Earnings Conference Call April 21, 2022 5:00 PM ET Company Participants Mike Andrews – Associate General Counsel and Corporate Secretary Jim Koch – Founder and Chairman Dave Burwick – Chief Executive Officer Frank Smalla – Chief Financial Officer Conference Call Participants Nadine Sarwat – Bernstein Kevin Grundy – Jefferies Vivien Azer – Cowen Kaumil Gajrawala – Credit Suisse Rob Ottenstein – Evercore Steve Powers – Deutsche Bank Eric Serotta – Morgan Stanley Bonnie Herzog – Goldman Sachs Laurent Grandet – Guggenheim Brett Cooper – Consumer Edge Research Operator Greetings and welcome to The Boston Beer Company's First Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode.

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BOSTON, Feb. 16, 2022 /PRNewswire/ -- The Boston Beer Company, Inc. (NYSE: SAM), today reported financial results for the fourth quarter and full-year fiscal periods ended December 25, 2021. Key results were: Fourth quarter depletions increased 15% and fourth quarter shipments decreased 24.5% compared to the quarter ended December 26, 2020.

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