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Boston Beer Still Can't Meet Soaring Demand for Hard Seltzer

By Demitri Kalogeropoulos - Feb 20, 2021 at 12:22PM

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It's a good problem to have when many peers are struggling with flat sales.

Investors had a lot to look forward to in Boston Beer's (SAM -2.38%) fourth-quarter earnings report. The company's growth trounced most alcoholic beverage rivals through September as people enthusiastically loaded up on its Truly and Twisted Tea brands. Demand was so high, in fact, that the company had to bring in outside brewers to help it satisfy the soaring volume pressures.

Those trends carried through into the fiscal fourth quarter, which paired industry-leading growth with another drop in profitability.

Let's take a closer look.

Sales were sparkling

There was no sign of a slowdown in Boston Beer's key growth niches. The Truly hard seltzer franchise ended the year with more than a 100% boost in depletions, a measure of consumption. Demand was especially strong for the new lemonade flavor that helped Boston Beer significantly grow market share in the competitive hard seltzer niche.

A man drinking a beer at home.

Image source: Getty Images.

Overall, growth in depletions landed at 37% for the full year. That metric sat at the low end of management's forecast, but shareholders shouldn't worry about demand weakness. Boston Beer's growth still more than tripled the expansion rate of Constellation Brands (STZ -0.94%), which had its own popular introduction in the category.

"[Truly] was the only national hard seltzer not introduced in 2020 to grow [market] share," CEO Dave Burwick said in a press release. Boston Beer estimates that the franchise accounted for 26% of sales in the niche, up from 22% in 2019 .

Costs are surging

The news around costs and spending was less encouraging. Boston Beer again failed to meet demand entirely through its own brewery network, relying instead on other brewers to close the production gap. This move pressured margins, as did increased spending on marketing and the supply chain.

SAM Gross Profit Margin Chart

SAM Gross Profit Margin data by YCharts.

All those expenses can be tied to the runaway growth in the Truly franchise and management's choice to satisfy that pandemic-fueled growth. "We have invested to increase our ... capacity, but these ... increases keep on getting eclipsed by our depletions growth," Burwick said.

Looking ahead to 2021

Management believes the right strategy is to keep prioritizing market-share expansion at the cost of profitability, which means margins won't rebound until growth stabilizes. The company is doing everything it can to protect the newfound sales momentum, including introductions this year that combine Twisted Tea and Truly Hard Seltzer, the brewer's two most popular franchises. Boston Beer is also aiming for the Samuel Adams brands to return to growth in 2021 as the pandemic slowly winds down.

A new cost-cutting program that is ramping up now should boost efficiency while ending expensive manufacturing bottlenecks like the one that hurt earnings in 2020. In a few years, Boston Beer might close the widening profitability gap with peers like Constellation Brands. But for now, the company is focused on locking down as much of the hard seltzer niche as it can, even if it means sacrificing a few years of profitability.

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Stocks Mentioned

The Boston Beer Company, Inc. Stock Quote
The Boston Beer Company, Inc.
$329.17 (-2.38%) $-8.03
Constellation Brands, Inc. Stock Quote
Constellation Brands, Inc.
$234.83 (-0.94%) $-2.22

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