Boston Beer Faces Shipment Declines as Hard Seltzer Continues to Struggle

Business Strategy & Outlook:
Though much smaller than the brewing behemoths, Boston Beer is well positioned in malt categories, boasting a meaningful growth profile that mainstream beer lacks. The firm has shown a remarkable proclivity to not only augment its portfolio in alignment with the latest growth vectors but to also capture a disproportionate share of the economic rents generated from this growth by being one of the first movers. One can see this exemplified in the company’s participation in the initial rises of craft beer, cider, and more recently, hard seltzer. While seltzer trends have slowed significantly, its surmise sales at Boston Beer will continue to be supported by secular consumption shifts (such as the desire for a low-sugar footprint and varied flavor profiles, and as evidenced by the success of Truly Margarita and the launch of Truly Vodka Seltzer).

To admit Boston Beer’s growth trajectory is not without risk. Due to the torrid growth that hard seltzer had achieved in prior years, a slew of new entrants led to dizzying saturation that has had a discernible impact on category growth (an issue creeping into other RTD areas). Additionally, U.S. craft beer remains oversaturated as per view, with peers spanning from local upstarts to large multinationals. Microbreweries have been taking share from established players like Boston Beer, as parochial preferences seem to be driving many consumers toward locally produced beers with small and homely essences. Nevertheless, the firm has meaningful scale advantages over the thousands of small craft breweries operating in the U.S., driving superior unit economics and stellar profitability that allows it to pivot its portfolio and go-to-market approach as necessary. The 2019 Dogfish Head acquisition is an example of this, as the firm had the resources to add a fast-growing, locally resonant family of brands to its mix. Its stalwart positioning also funds fruitful innovation, from incremental initiatives such as its custom beer can, to blockbuster breakthroughs like Truly. Ultimately, to see Boston Beer as a well-run and high-quality operator and believe it has the tools to succeed in a landscape that is in flux.

Financial Strengths:
To assign Boston Beer an Exemplary capital allocation rating, as the firm stacks up admirably against two of the three pillars of framework: Its balance sheet is pristine, and its organic investments have unequivocally been value-accretive in view. While to take a mixed view of its distribution philosophy, to expect investments to be the pre-eminent driver of future shareholder returns, and the company’s suboptimal corporate governance, while worth highlighting, has not had a demonstrably adverse impact on capital allocation up to this point. Regarding investments, as per view on the management team is constructive, and to see as particularly impressive the brewer’s innovation track record across multiple categories and consequent ability to align its portfolio with this century’s malt growth vectors. Boston Beer’s current CEO, Dave Burwick, joined the firm in 2018 following an equivalent role at Peet’s Coffee & Tea as well as senior executive positions at Weight Watchers International and PepsiCo. Burwick’s tenure was preceded by Martin Roper, who announced plans to retire in 2018 after 17 years at the helm. Towering over these operational leaders has been Jim Koch, who founded Boston Beer in 1984, chairs its board, and remains integrally involved in the company’s strategic direction. To believe Koch, his CEOs, and their respective teams, have done a commendable job providing rudder for a firm competing within a dynamic brewing landscape. This is evidenced by the brewer’s consistent positioning as an innovation bellwether within the U.S. malt space, having been at the forefront of high-growth categories like craft beer, cider, and hard seltzer. Innovative efforts into categories like hard seltzer should provide economic value ahead, as the favorable secular dynamics (chiefly health consciousness and premiumization) underpinning the category’s robust adoption (over half a decade of triple-digit growth) should persist at a more normalized level ahead. Despite being number two in the space (behind White Claw), management has fended off a deluge of competition from giants like AB InBev and Constellation Brands, maintaining or growing share. Being at the vanguard of innovation has been core to this success, and this favorable category should continue to offset challenging dynamics in craft and hard cider. The firm was all but inactive on the M&A front prior to 2019, when it consummated its largest acquisition to date of Dogfish Head, a Delaware-based craft brewery, for roughly $330 million in cash and stock.

As per the strategic rationale for the deal is prudent, as the smaller scale and local essence of Dogfish Head’s brands (which resonate more deeply with many craft drinkers) augment the growth profile of Boston Beer’s craft portfolio. However, the over 3 times forward sales multiple that was paid was a bit rich, as evidenced in the $27.1 million impairment of intangible assets the firm took in 2022 as forecasts for brand performance were below those made on the acquisition date. While ostensibly stepping back from the operational helm in 2001, one believes Jim Koch continues to wield unencumbered authority over decision-making at the company. This is so because, within the dual share class structure that the firm operates, Koch owns substantially all the class A stock, giving him the preponderance of voting rights as well as the power to elect the majority of board directors. Koch’s carte blanche is evinced not only by his voting rights but also his wife’s position as a long-standing member of the board. From the vantage point, these realities not only give rise to material key-person risk, but also a heightened probability of misaligned incentives between Jim Koch and class B common stock owners. Still, until this reality manifests in clearly injudicious capital allocation, we’ll place qualms here on the back burner. Regarding distributions, Boston Beer has never paid a dividend, instead deploying its free cash flow toward share repurchases. To take a dim view of the firm’s indiscriminate approach to share repurchases, but this view is countervailed by the fact that internal reinvestment takes precedence over cash returns in management’s capital allocation priorities. Additionally, given the company’s long-term commitment to share buybacks, to believe there have been times when buybacks have been executed at prices above intrinsic value, as well as prices below, ultimately netting to a value-neutral impact. One does not expect the company to pay a dividend throughout the explicit forecast, but continue to model meaningful repurchases, which should average around $170 million on average over the next five years.

Bulls Say:
Boston Beer competes exclusively at the high end of malt beverages, which are seen as secularly advantaged relative to mainstream and value segments.
The firm is one of two market incumbents in hard seltzer, which offers it an easier route to grow the top line through innovative product offerings.
Thanks to historical successes across the FMB and RTD products, Boston Beer has a unique ability to elevate category innovation through a well-established distribution network.

Company Description:
Boston Beer is a leader in U.S. high-end malt beverages and adjacent categories, with strong positions in craft beer, hard cider, and hard seltzer. The firm sells an array of flavor variants and package sizes, predominantly centered around four priority brands: Samuel Adams, Angry Orchard, Twisted Tea, and Truly Hard Seltzer. Its drinks are produced in both company-owned breweries as well as through third-party contract arrangements, and while the company primarily goes to market through independent wholesalers (as mandated by law), it operates a fairly large salesforce to induce demand across the value chain (distributors, retailers, and drinkers). The preponderance of revenue is generated domestically.

(Source: Morningstar)
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