The Irony of Boston Beer's Sagging Fortunes

These are interesting times for the Boston Beer Company, producers of Sam Adams beer, Angry Orchard Cider, Twisted Tea and several other fizzy drink brands. Once upon a time, Boston Beer was one of the hottest commodities around. These days, not so much.

If you watch stocks, you may think Boston Beer is fine. Its stock price rose 15 percent, to $190, last week, thanks mainly to a better-than-expected earnings report. As with all things, it sometimes pays to look a little deeper for a better understanding of what's happening.

Boston Beer financials aren't in great shape. Revenue and profits declined 3 percent and 11 percent, respectively, in the second quarter of 2016. But Wall Street was expecting even deeper declines. Instead of the expected $239 million in revenue and $1.95 per share profit, BB had nearly $245 million in revenue and $2.06 per share profit.

How they managed to generate revenue and profit is an interesting matter, which we shall soon get to. Because Boston Beer sales-to-retailers declined 5 percent in Q2. Shipments were down 100,000 bbls and operating income fell $16 million (23 percent) during the first half of the year.

The only growth in the BB portfolio is coming from outside Sam Adams and Angry Orchard, its best-known brand families. Sam Adams was down 6 percent by volume in IRI through July 10 and the on-premise picture is apparently worse. The Angry Orchard family, a significant growth driver in recent years, took a 20 percent hit. Meanwhile, the Twisted Tea family was up 13 percent.

How do you beat earnings expectations when your flagship brands are tanking? Simple. You cut advertising, promotional and selling expenses. Several reports say $8 million in cuts were spread between media/advertising/promotion and lower freight costs due to lower shipping volumes. Hey, fewer sales can be helpful!

These kinds of things obviously aren't sustainable. Sooner or later, they have to get the big brands moving again. And they know it. The plan, if you want to call it that, is to give Sam Adams a facelift with new packaging and advertising in the second half of the year. They'll also invest in Angry Orchard in hopes of returning that family to growth. At the same time, they expect to further reduce costs. You read that right. They plan to do more with less.

Their prospects are not good. You might say Boston Beer is the victim of its own success. Founded in 1984, it eventually became a national leader in the movement toward better beer. Sam Adams gained a following because consumers realized they were getting a product that was better than the swill sold by big beer. In effect, Sam Adams helped launch the craft beer revolution.

Ironically, the growing popularity of better beer helped spawn an explosion in breweries. Today, Sam Adams has to compete with more than 4,200 craft breweries around the country. Given the opportunity to purchase local beer, a growing number of consumers are doing just that. The result is that many large craft brewers are seeing significant declines. Sam Adams is one of them. I've mentioned this trend several times, most recently here.

The popularity of Angry Orchard Cider undoubtedly helped ease the pain associated with the escalating decline of the Sam Adams family. But the entire cider segment has lost momentum in recent times, thanks largely to the very fickle and promiscuous nature of younger drinkers who have moved on to hard sodas and other flavored fizzy drinks.

It's hard to see a way out for Boston Beer. Chasing the fickle and fast-changing tastes of Millennial drinkers is a sketchy proposition. Even if they reinvent the Sam Adams brands with a robust line of hoppier and seasonal brews, it's tough to see a viable way for them to successfully compete with the increasing number of well-made, local craft beers.

There is, of course, the possibility that Boston Beer could acquire smaller brands. They've bought breweries and brands before. Again, I'm not sure how that would work for them in the current context. They aren't in the same league as Anheuser-Busch, which has a vast distribution network. Boston Beer is a different kind of animal, entirely. Still, they could give that strategy a whirl.

Some of my industry friends have suggested that Boston Beer might be sold. That's a thought. But to whom? We're talking about a company whose most prolific brand families are in virtual free fall. And the challenges are not going away as more breweries open and other competition stiffens. Again, you wonder who would want to buy a collection of brands that are declining in value.

Please don't feel sorry for Boston Beer. The company has made oodles of money for its executives and investors. Founder and chairman Jim Koch has a number of quirky, nuanced views that make him a sort of lightning rod in the industry. But give Koch credit for helping start the revolution that is now squeezing his company out of the market.

You have to appreciate the irony, if nothing else.

The Irony of Jim Koch's Craft Beer Rant

I have to admit getting a kick out of seeing establishment types complaining about their lack of current success. Particularly when their lack of current success is fueled largely by their own refusal to accept the changing nature of their business.

Enter Jim Koch, founder of the Boston Beer Company. Koch helped launch the craft beer revolution when he founded the BBC in 1985. He's made more than a billion bucks on that enterprise, but he's frustrated by the changing nature of the industry today. Very frustrated.

Andy Crouch's story in the January issue of Boston Magazine describes Koch's reaction to the current craft beer scene. Upon entering a one of Boston's top-rated beer bars, Koch found not a single tap handle pouring Sam Adams. No bottles, ether. Not a drop of his beer in the bar.

Koch was incensed. He berated the owner and bar manager. According to Crouch, Koch's complaints were so intense that one employee was reduced to tears. The list, by the way, consisted mostly of specialty beers from around the country...the type of list you expect to find at respected beer bars everywhere, including here in Portland.

The basis of Koch's rage is the fact that young drinkers have turned away from Boston Beer in favor of beers with intense flavor profiles...hoppy, barrel-aged, sour, etc. Sam Adams beer, having attained mainstream status, is widely available in stores, but MIA in better beer bars. It just doesn't have traction with typically younger beer geeks who flock to those venues.

Clearly, the brands that started the craft revolution 30 years ago have been overrun by more aggressive styles and interpretations. In the same way that popular music, fashion and almost everything else has evolved (or devolved) over the years, so has craft beer. Out with the old, in with the new is a fact of life.

Don't get me wrong. Many of the early craft beers deserve recognition and respect. I have enjoyed revisiting some of Widmer's past beers, available as part of their 30 Beers for 30 Years series. Tasting these beers again is informative...suggesting where we once were and how far we've come. Times have obviously changed.

Koch's story reeks of irony. Here's a guy who capitalized on changing consumer tastes by offering an alternative to mass market lagers. He got rich along the way and Boston Beer remains America's top craft brewery. Yet here he is bitching about the fact that his beers have zero standing with today's beer fans who are looking for something new and exciting. Highly ironic.

There's more. To fill the hole caused by stagnating demand for its beers, Boston Beer has moved into other areas, quietly marketing the highly successful Angry Orchard cider and Twist Tea malt beverage. They have even entered the IPA fold, producing tepid beers that are no match for the aggressive and wildly popular West Coast styles of the moment.

Of course, it need not be this way. Koch, who owns all the voting shares in publicly held Boston Beer, could have pushed his company to evolve with the changing times by brewing IPAs and related styles that would compete with what smaller brewers are doing. But he didn't want to. Why? Because he personally doesn't like those beers. Seriously.

As Dirty Harry once quipped, "A man has got to know his limitations."

Craft Surges Ahead of Big Beer $ Market Share in Portland

Portland has been churning along as the nation's leading craft beer market for years. Yet craft always trailed the combined retail dollar market share of Anheuser-Busch and MillerCoors. For apparently the first time, that reality has been altered, quite possibly for good.

The basic story is this: With an overall increase of 3.8 share (16.3 percent increase in dollar sales), craft now owns a 45.8 percent dollar share of the Portland market. Anheuser-Busch and MillerCoors, down a combined 2.1 share for the quarter, dropped to 40.6 percent share. These are YTD figures for the first quarter of 2014, ending March 31.

These numbers were reported in the Craft Brew News and forwarded to me by an industry source. The Craft Brew News, published weekly, bases much of its reporting on data provided by Information Resources, Inc., a global market research organization headquartered in Chicago. The IRI provides its clients with retail market intelligence and analysis on consumer packaged goods. It collects data from grocery stores, convenience store chains and other retailers. All products are fair game: beer, wine, food items, candy, toothpaste, etc. A mess of data, for sure.

There are some big winners in the report. Boston Beer doubled sales and gained 1.6 share to finish at 3.5. That's not beer, though. The Craft Brew News says BB gains are mostly attributable to Angry Orchard Cider, up 73 percent and 2 share. Portland's cider market is raging. Gains by Boston Beer and Ninkasi, up 25 percent to 3.4 share, allowed both to pass Heineken USA, down 3 percent to 2.8 share.

Some of the crazy gains came among breweries that are building momentum. 10 Barrel's dollar sales were up 131 percent and it gained a full share to finish at 1.8. New Belgium (up 15 percent), Lagunitas (up 10 percent) and Sierra Nevada (flat) together accounted for nearly 5 share of the market. Bridgeport (2.6 share) and Full Sail (2.2 share) held steady.

Then there's Laurelwood  It seems the decision to put six-packs of Workhorse IPA and Free Range Red on store shelves in Portland (and around the Northwest) is paying off in a big way. Laurelwood sales jumped 133 percent and it doubled dollar share from .3 to .6. A full share seems imminent. This surely could not have happened without the six-packs and aggressive marketing efforts.

Of course, you can't have winners without losers. It was a difficult quarter for large suppliers. Anheuser-Busch, MillerCoors, the Craft Brew Alliance, Deschutes, Crown and Pabst lost a combined 3.9 share. The CBA saw sales decline 13 percent and lost 1.4 share to 6.2. Deschutes sales were up .7 percent, but it lost .4 share to 6.1. Significantly, AB and MC lost market share even though combined dollar sales were up 1.5 percent.

What do the numbers mean? First, keep in mind these are retail numbers. If draft numbers were incorporated, craft's position would look even stronger. It seems likely the growth trend will continue and that big beer will lose more share to craft in Portland. San Francisco and Seattle, both mature and rapidly growing craft markets, will likely see craft pass AB/MC share in the next year or so.

Volatility is another issue. If your sales numbers aren't strong, you're likely losing dollar share (see Deschutes). Big beer increased dollar sales mainly via price increases, not volume, and lost share. That may put them in a bind going forward. We'll see. The point is, there is massive pressure from newbies and fast-trackers who want to tap this hyper-competitive market.

If you're looking for a connection between these numbers and last week's OLCC figures, you'll see some parallels. But remember the OLCC tracks beer brewed and sold in Oregon in any form. The data tracked here is strictly for packaged retail sales in Portland without regard for where the product is produced. A big difference.

The takeaway? Hang onto your hat regardless of your position in this crazy market. These are unchartered, wild waters. Nothing is sacred and no one is secure.