Industry News

Boston Beer Loses Its Edge

Sales of craft beer have slowed in the last few quarters, and Boston Beer has been hit particularly hard.

Boston Beer Loses Its Edge

Boston Beer (SAM), maker of Samuel Adams Lager, helped pioneer the craft brewing movement more than 30 years ago. The rest of the world eventually caught on to the trend, but Boston Beer’s seasonal brews and specialty drinks like ciders helped keep it ahead of the competition.

In the last few quarters, however, sales of craft beer have slowed, and Boston Beer has been hit particularly hard.

Boston Beer announced on Wednesday that it had posted its first annual sales drop in 13 years. Its earnings per share of $6.79 were 6% below 2015 results. For 2017, the company projected $4.20 to $6.20 of EPS, a “staggeringly wide range” that indicates a drop of anywhere from 9% to 38%, according to Cowen analyst Vivien Azer. Despite the wide range, the company added that the actual results could “vary significantly from the current projection.”

Early 2017 results aren’t promising. The company’s first spring brew, called Hopscape, has been declared a dud by the company, and Boston Beer sales slipped 3.9% at convenience stores in the first four weeks of the year, data shows.

Boston Beer shares fell 5.3% on Thursday, and are down 16% in the past year. But the stock still looks too expensive given the company’s uncertain prospects. It trades at 29 times 2017 earnings expectations. Even supposing Boston Beer hits the top end of its earnings guidance, shares are still trading at 26 times earnings. For a company with so much uncertainty in an industry that appears to have hit a plateau, a multiple more in line with the overall market makes more sense. At 18 times the optimistic $6.20 projection, shares would trade at $111, a 30% drop from their recent $159.

The problem for Boston Beer is that craft beer appears to have reached a saturation point. Everybody and his brother now has a special brew with a cool label and a hint of cocoa. Sales of craft beers grew 22% in 2014, but growth had slowed to an estimated 6% as of the middle of last year. And people are drinking beers in new ways, including at a growing number of “tap rooms” attached to breweries. Boston Beer has been slow to exploit that trend.

When Boston Beer was founded in 1984, there were just 97 breweries in the U.S. Now there are more than 5,000. The number has more than doubled since 2012, according to Bart Watson, chief economist at the Brewers Association.

Meanwhile, the fridge at the convenience store is still the same size, and consumers only have so much patience when they browse. Jim Koch, the chairman and founder of Boston Beer, said on the company’s conference call that consumers might actually be suffering from a “paradox of choice, where if you have too much variety, it actually depresses consumer purchases in that category.”

In fact, all these choices might be forcing consumers into the arms of (cue scary music) Big Beer.

“I’ve heard speculation from a couple of retailers that perhaps the fact that there were too many choices has in fact turned consumers away from craft with its extraordinary variety and category clutter and confusion and pushed them to something simple,” Koch said.

“When they can’t figure out what craft beer to have, they just say, ‘I’ll have a Corona.’”

The big brewers already have substantial advantages. Anheuser-Busch InBev (BUD) and MillerCoors produce more than 80% of the beer consumed in the U.S. Those companies have also been buying craft brewers and distributing them to larger retailers. That makes craft beer less “special,” potentially hurting the brand identity of brewers like Boston Beer.

To stand out, Boston Beer will probably have to ramp up advertising, and that’s going to cut into profit margins. Its promotions budget could rise 10% or more in the coming year.

That said, don’t count them completely out. “Advertising works in beer,” Azer notes. “It’s going to come down to the quality of the ads.”

By: Avi Salzman

Shared from: Barron

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