Investors were warned Boston Beer (NYSE:SAM) was the stock that had the most to lose if the hard seltzer market had peaked. Because the brewer has gone all in on the flavored malt beverage, producing more seltzer than beer at this point, its stock was at risk if the once-hot drink had reached maturity.
Those fears were realized last week after Boston Beer admitted it badly misjudged how frothy market demand for its Truly hard seltzer was. Second-quarter profits were hurt and full-year guidance was slashed, causing the brewer's stock to plunge 26% on the news.
This is a worrisome development, because it is one that's not likely to correct any time soon, if at all.
The higher they fly...
Hard seltzer has been a rocket ride and Boston Beer was expecting that trajectory to continue. In the first quarter CEO David Burwick said there were tailwinds that "validated" the expectation the beverage category could rise by as much as 90%, if not more, but that did not happen and now it's expected the increase could be as low as 20%.
Considering the rapid rise in sales since hard seltzer was introduced, it wasn't necessarily obvious the crash was coming, at least not so quickly, but it was plain to see the market for hard seltzer was maturing, and some analysts were seeing signs we were then.
...the further they fall
Bank of America analyst Bryan Spillane said social media mentions are an important component of higher sales volumes, but he was noticing a decided dropoff in discussion around hard seltzer.
Boston Beer thought it was just the result of running into an "S-curve" of comparables, since last year there was a large stock up in seltzer due to the lockdowns brought on by the pandemic. Yet demand never came out of the downturn.
The other problem is that hard seltzer has largely been an off-premise beverage, one you buy at a packaged goods store and take with you to enjoy with friends at an event. On-premise sales at bars and restaurants is a lesser driver of sales, and with bars and restaurants reopened now, consumers apparently buying as much.
Boston Beer thought it had addressed that issue by putting Truly into thousands venues, and while that may ameliorate some of the decline it will otherwise experience going forward, it might not be enough to overcome the trough in demand.
Seltzer is everywhere
Competition is another concern. Because hard seltzer became the hot drink of the moment while beer continued to fade, every brewer began introducing its own brand -- or two or three brands -- to catch the wave.
Anheuser-Busch InBev has one for just about every price point or brand it owns. Molson Coors had three, but it just killed the Coors Hard Seltzer version to focus on the other two.
Burwick pointed out that the industry analysts at IRI have identified 220 separate hard seltzer brands with thousands of SKUs between them, and retailers are trying to accommodate as many of them as possible. Although Boston Beer is gaining shelf space, the market has simply been inundated by a tsunami of hard seltzer that it can't absorb.
Waiting for the next new thing
Make no mistake: Truly hard seltzer is not in decline, sales are rising faster than the market itself, and it is stealing share, which now stands at 28%. But with the market awash in choice, and opportunities to drink in settings that have been closed off for a year now open again, it's clear why Boston Beer missed the mark so badly.
It's possible the S-curve upturn the brewer was expecting will materialize again, but it is also just as plausible we've reached peak hard seltzer and shipments and depletions will never regain those heights.
That explains why Boston Beer is entering the hard liquor market with Truly, looking for the next new thing consumers will turn to. It may be a while, though, before the brewer's stock exhibits any signs of life.