All right, good afternoon, everyone, and thank you for joining us today. This is our last fireside chat, and it's such a pleasure, as always, to introduce Jim Koch, who is the co-founder and chairman of The Boston Beer Company. So thank you again for joining us, Jim. Appreciate it. I always enjoy this part of the day.
So do I.
I know, right?
It's a really exciting year.
I'd have to pour me one. So it's been another exciting and challenging year for Boston Beer. The company really has been driving growth and innovation and beyond beer, the blue ocean of alcoholic beverages, as you like to say, which I love. It's really been led by your iconic Twisted Tea brand while navigating a return to long-term growth and sustainable, you know, from stabilizing Truly.
Now, not forgetting your roots, Boston Beer also sees areas of opportunity to drive growth behind its core Samuel Adams, Angry Orchard, Dogfish Head brands, which do remain an important part of your portfolio and ultimately the, you know, your craft legacy. So with that, very pleased to welcome Jim back to our event.
So, Jim, I wanted to kick things off with a big picture question, really on the landscape in beer, really given, you know, the indication that, you know, the industry trends have softened, especially in April and May. Also in the context of that, thinking with your Q1 results when you kind of touched on this with your depletions, decelerating a bit in April. So what's going on? You know, what are we seeing with demand, elasticities? Love to hear your perspective.
Well, I'll start out with, April was a weird month.
No.
It was a bizarre discontinuity. I mean, you see in our earnings release, we were flat in our depletions in the first quarter, and obviously then we started out negative, so obviously we crossed into growth to get to that number. And then, for the year, we were two. So you can do the arithmetic on that. It's a striking and very sudden discontinuity. I don't have full explanation. I guess I'd point to some of the same things other people talk about. Obviously, Easter moved.
Easter moved.
Easter's a pretty big holiday for high-end beer and surprisingly big for beer in general. Apparently the weather was bad. Bad. I, I don't know. I've never used that excuse in my life.
Oh, yeah.
So, but.
It's funny how.
Other people have. And then there was the AB, you know, the Bud Light controversy.
Yeah.
Recycling that. My guess is, I mean, 5% of beer consumption is suddenly, as a result of that event, became unmoored from the biggest brand in the industry.
Mm-hmm.
Some of them left beer.
They did, didn't they?
Yeah. And we see that a little bit in our numbers. So, who knows? Is it 1% of the, you know, out of those 5 points? I don't know, but that was, again, a Black Swan event. So, you know, it's still early. We haven't even gotten to Memorial Day, so I'm kinda not drawing any long-term implications from a three-week period. Longer term, my view is that beer probably has more upside than people give it, because and we're starting to see it, you know, for the whole century, beers lost share to spirits and wine.
Yes.
Okay, that stopped. Wine is losing share to beer.
Mm-hmm.
You know, spirits numbers are tricky because it's not all reported. You have control states. You know, some stuff's not covered by IRI, but it looks like beer has stopped losing share to wine, particularly if you consider a broader definition of beer. 'Cause we all think about it. We've been trained to think about it. There's beer. There's liquor. There's wine. And they have different tax regimes and, you know, channels of distribution and different competitors and so forth. And what is not getting enough attention is what I think of as a fourth category that's not traditional beer, wine, nor spirits. It's in between.
Okay.
and it combines elements of all three of those, and it's growing.
Yeah.
It's been growing for a while, but people haven't aggregated it properly.
Fair.
And the growth rate, I, I see a long-term growth rate there of, you know, somewhere between, call it, 2%-5%, while traditional beer is probably gonna be declining. I mean, I think I'm on the record as saying it will never grow again in our lifetime.
Yeah, I think you have said that. Maybe here.
I said that five years ago. It was in 2018, and that's proved to be true. And for two things. Beer is advantaged in this fourth category. It tends to be things that get sold out of the cooler. They generally come in, you know, cans or smaller vessels. They're low ABV. They're heavy. They're low margin. You have to make them efficiently on, you know, 1,200 cans a minute can lines. And so they wanna be made in a brewery, and they wanna be distributed through the beer distribution network.
Mm-hmm.
They look like beer: beer level prices, beer level margins. To me, that bodes well better for the beer industry because what everybody's looking at is traditional beer and a few other things. But if you look at it together, you couldn't convince yourself it'll get flat.
Yeah.
I think there's headwinds for alcohol. We're all just starting to look at, I mean, maybe we've sort of dodged the weed bullet.
Yeah. Right.
So far. We've dodged the Ozempic bullet, so far. We've dodged, you know, the World Health Organization and their work, but, you know, those things are. They didn't go away. And then second, Boston Beer is very, very well positioned against the overall opportunity in alcoholic beverages. That's 80% of our volume is in that fourth category. And it's where our skill set is. It's how our breweries are configured to make those kinds of products. It's how we work with our distributors. So it's an opportunity that we recognized many years ago.
Yeah. Okay.
That's my overall picture of the beer industry, alcoholic beverages in general, and the opportunity.
Optimistic about that fourth category. I'm thinking about in the context whether it's Twisted, Truly, that's the sweet spot as you see it over the next, I don't know, five years.
It could be lots of it. It could be Surfside.
Surfside. Right. All the other innovations.
Some of the other innovations.
Right.
It's, it's the blue ocean.
Yeah. Yeah.
Where there's opportunities to create new products that haven't all been picked over, where the consumer is open to new things, in fact, embraces, you know, new, meaningful innovation like, say, Sun Cruiser, that meets a need that isn't met yet.
Okay. As you think about, we're heading into another nice summer, I hope, with Memorial Day around the corner. Do you have, you know, as you, I don't know, how much visibility you have into that peak holiday right now. Do you feel pretty good heading into this Memorial Day versus even if when you and I were sitting here last year, you know, how do you think about that?
I mean, I don't think that much about it. It's only.
I am.
One event in a whole, you know, quarter and one quarter in one year. I guess I'd say I see no reason why it's gonna be much different than last year.
Otherwise, just the April, May timeframe, like we talked, you mentioned earlier, you're seeing some slowdown, but nothing that you're drawing a conclusion to at this point, just given some of the noise, especially in April and so far maybe in May.
Yeah. I don't wanna ignore that noise.
I hope.
But until it turns from noise into signal, I'm not gonna pay that much attention to it.
Well, and then in the context of that, you know, thinking about your business and guidance, you know, you, you reported Q1 results I think it was a couple weeks ago, and you had a stronger than expected quarter. And you, you even mentioned that, that it was better than your expectations. But despite that, you did maintain your full year guidance in some pretty wide ranges on whether it's volume, gross margin, and, and EPS.
So trying to understand, is that more prudence, you know, from on your part? And, you know, if so, you know, what areas or, you know, where are you cautious? And then, you know, so maybe just start with that. You know, why did you maintain those wide ranges although one quarter's behind us?
Well, it was one good quarter, but three bad weeks. So where does that come out? And, you know, it's, I would pick up on your word prudent. I think, I mean, totally honestly, we missed a lot of guidance in the last four years, and that's embarrassing. And I don't wanna keep doing that. So that's I wanna make sure that we meet guidance and reestablish our credibility.
Fair enough, honestly. And then in the context of that, Truly volumes maybe versus contribution from Twisted—I mean, if I remember right, the guidance does not contemplate, certainly, any growth for Truly. I don't think you're expecting that to necessarily, even though your hope is still to return that.
Yeah. We're not expecting it.
Right.
We are, I think, optimistic that the total of the two has certainly, you know, we saw the numbers in the first quarter. Given that those two are 80% of our volume, we pretty much had to cross the line from negative to positive. So, I would hope that would continue. It's, you know, it's noisy.
Mm-hmm.
When you got two countervailing variables, so, two noisy countervailing variables. But, you know, looking at 13-week moving averages, the trends are, have crossed into positive territory in the first quarter. But then you got, you know, the first three weeks of April.
That, yeah, unfortunately went backwards, right? So to be clear, Truly, you did see some growth in the quarter, right? The.
Truly didn't see growth.
No, the.
Twisted Tea did.
Yeah.
More than offset.
Yes.
Truly declined.
Right. Okay. Maybe asking and sticking with some of the guidance and thinking about gross margins, you know, how much of the gross margin improvement is dependent on hitting the high end of your shipment guide? You know, you're guiding negative low single digits to positive low single digits. So.
Yep.
Just trying to think about that.
I would, I'll give you a rough number. I mean, it's just a ballpark number, but it's maybe 20%-25%. I mean, you could think of it in the gross margin improvement, i.e., you know, taking out waste, in three buckets. The first one is, broadly speaking, procurement.
Yeah.
That's a whole gamut of things from, you know, we buy a lot of flavors. They're a big part of our cost structure to make things like, you know, Truly and Twisted Tea and so forth. Those have very high gross margins, like 80%.
Yeah.
So, as you move forward, you know, you get a couple other vendors. Our general principle in developing a product is we don't constrain the product developers as in cost. It's make the absolute best product. I don't care what it costs. We can, you know, we'll figure out how much we have to charge, and we'll go back and, you know, over the next couple of years, get it in line, but no compromises on the quality and flavor of the product, even if it's exceptionally expensive and it's got terrible gross profit. If it's a great product, eventually, we'll work it out.
So procurement, and then there's things like can prices, which, you know, we signed contracts at peak, like three years ago. Those are rolling off. Other packaging. We're moving volume from bottles to cans. There's savings there. So procurement, broadly defined, is one large bucket. The second would be system savings, things like freight rates, what brewery we ship from, truck utilization, service levels. So, you know, it contributes to reducing out-of-stocks, which generates gross profit dollars, warehousing costs 'cause we double and triple handle a lot of stuff, and we're working on eliminating that.
And then the third bucket, which is what you're sort of focused on, is utilization in the breweries. And that's certainly very relevant. I mean, breweries are very capital-intensive, and, you know, your variable if you can get higher, if you can get 70% uptime on your line instead of 50, that's all free.
Yeah.
You know, you're staffed with it. You got the same number of operators, maintenance people, indirect labor. So that's, that's very helpful. It's for us, it's getting more production out of our lines because we can pull in-house product that we're making outside at City Brewing, which is our primary contract producer. So that's, that's relevant, but it's, it's one of three pieces, and it's not 100% of that third piece.
Yeah. And you're not gonna pull it all back in. You're just gonna only maintain.
No.
I think 90% would be max, I thought?
Max. I would be very.
That would be big. Yeah.
You know, we have some disagreement in the company. If I had to guess, the number's more like 20%.
Oh.
Because of the freight. I mean, the locations, right? Just look at our map. We have a brewery in, you know, in eastern Pennsylvania. We have a brewery in southwestern Ohio and Cincinnati. We have a brewery in Milton, Delaware.
But that's.
Then there's a whole big country out there. So with City, we have production sites in Memphis and in Irwindale, California. So that's a big part of the country. And then secondarily, one in Latrobe, Pennsylvania, and even La Crosse. So if you put all those breweries together, we have a super freight-efficient system, six shipping points. So utilizing that gives us, you know, the kind of cost structure, and they're all efficient breweries. So that gives us, you know, the same kind of competitive cost structure as a big brewer.
What percentage is outsourced right now behind us?
I don't know if that's public. Looking at Diego, outsourced right now? I mean, I know.
Yeah. Yeah.
There you go. So 79%.
Okay. And then as you pull in more, it's, it's you're gonna wait till some of these contracts expire, right? Or you're not gonna.
Well, we have a.
The timing.
Again, honestly, we have very long-term contracts with City. We've, I mean, we've been their biggest customer for 20-some years. We've been with them through like four owners. So they're a unique production opportunity.
So really, as we're, you know, sticking with gross margins and I think you came up on the quarterly call, you know, you have this expectation to get your gross margins back to the high 40s and maybe low 50s. And it's sort of some of the items you just mentioned or maybe was it next three years?
Boy.
What's really?
I don't have a total crystal ball on this. I can tell you that it's slower than you think, for a bunch of reasons. Three years would be great. I mean, my personal goal is to get it over 50% in the low 50s in the next five years, but I'm also very impatient. I don't, it bothers me when I see how much money to me is leaking out of the business unnecessarily. It's just waste, and it's just a lot of it.
During Truly, we basically, it was a once-in-a-lifetime opportunity. We said there's gonna be two competitors. We wanna be a survivor. And it was kind of, you know, make sure we are one of the two who remain standing at all costs. So now we're, and we did at all costs, and now we're taking those costs out.
Yeah. Okay. Well, let's talk a little bit about Twisted if, if we could. And, you know, it's been a great success, Jim. Honestly, congratulations. That brand, the sustainable growth that we've seen coming out of it, you know, what do you see as ultimately the opportunity for the brand? And, you know, how big do you think this brand could ultimately get, especially I'm even thinking the next year or two.
And I'm also thinking that in the context of more and more is coming, you know, in terms of competitive products. And I know you've had great success over the years fending off competition. But, you know, we've got more recent or most recently, High Noon now is coming. You've got Arizona, Lipton, Nasty Beast. The list goes on.
Voodoo Ranger.
Voodoo Ranger. Yep, yep.
I mean, honey, we got everybody. We got Dunkin' Donuts with.
Right. Right. See, is it starting to sound like something else?
Yeah. I'm waiting for, like, Jiffy Lube to come out with or National Geographic or God knows where it's gonna come from.
I mean, as you know, we're thinking about that and laughing, it feels a little familiar to.
Yes, it does.
Right. So how do you not have what happened, you know, with, with Truly or Hard Seltzers happen here? I feel like you can think of this, but.
Well, I sort of hope that what happened there happens here.
Well, part of it, yeah.
In that, there's—I mean, it's basically, to me, it looks like this. We've got, like, 85%-86% share of Hard Tea from the, you know, publicly available data. And the nearest competitor has been around for like six years. I think it's Arnold Palmer. And they have 3.9%. And then you've got a couple of others that are, you know, 2%-3%, Arizona, like you said, and Stateside. Voodoo Ranger is a couple of points. Then you've got, and so that's another, call it 10%. So now you're at 85-95, 96%. And after that, you've got 100-150 long tail of, you know, just you name it, Peace, Hoop, 2 Hoots , Happy Dad, on and on and on.
My view is, that you can kinda write off that long tail. They're not gonna be around in three, four years, 'cause the volume just won't hold shelf space. They're on there as a trial 'cause we used to have maybe 90%-95% of the shelf space for Hard Tea. With all this competition, I don't know. It's anecdotal, but what I'm seeing is maybe we're down to 70% of the space but 85% of the volume and a whole bunch of meaningless, undifferentiated brands that just have why would a consumer buy them? Why would a consumer, you know, even remember them?
So my projection would be, you know, there's some strong brands in there. But 150 of them that are called Peace and Hoop and 2 Hoots and you name it are not among those. They will get washed out 'cause the Hard Tea category isn't that big that a retailer can devote a lot of space to it. And how much space are they gonna devote? I mean, if we're 85% of volume, eventually, we're gonna be 85% of the space. And that doesn't leave a lot of room for other people. So we're very aggressively investing in Twisted Tea.
We in the beginning of the year raised our advertising and promotional budget by 35% just to make sure that we would be able to maintain our dominant position as this tidal wave of clutter rolls over the category.
When you mentioned in the beginning, you know, you stepped up spend behind Twisted. That's the plan for this year, 35%. So in the context of that, your guidance is assuming Twisted grows. I mean, is this how fast can this brand continue to grow?
I mean, we don't know. We will see. It's 'cause it's, you know, it's had—we are now 25 years in with Twisted Tea. It started small. It failed. Then we relaunched it. It failed again. But we thought we had something, and we grew it from a core of—it was basically states that started with M and weren't Mississippi. So its core was in, like, Massachusetts, Montana, Michigan, Missouri, Minnesota. I mean, there's a lot of M states out there. And it was a blue-collar but upscale blue-collar drinker. And so we've grown it. I think it's had like 23 years of straight growth, from a small base.
So I don't know how fast it'll grow, but I foresee it growing for the next three years. We're kinda putting shoulders on it with Twisted Tea Light and Twisted Tea Extreme. So, and it's starting to get more traction in Hispanic markets. So we see a continuing runway. You maybe describe what do you think the answer to the goal is ultimately. And I mean, ultimately, we're all dead. So I mean, I don't know why I can't answer that question.
Okay. And then to the point about the innovation, it's been predominantly incremental, or has there certainly been some cannibalization as you've innovated behind Twisted Tea?
It has to be cannibalization. But our role is go ahead. If there's an opportunity to take volume from Twisted Tea, we'd rather keep it in our own portfolio. So we don't really constrain our sales and brand development people. I don't cannibalize. Keep going. If there's an opportunity, go take advantage of it.
Wanted to spend some time on Truly, right? You know, I know and I think about us sitting here 3-4 years ago. What a difference. But.
Don't remind me.
Well, okay. All right. All right. But.
That's seared in my mind.
I know. No, but.
Your comment on the earnings call.
Oh, I trust.
If you do, you remember that?
Maybe.
Okay. We can talk about it afterwards. That's seared in my mind.
Yes. Okay. Well, sitting here today, I mean, you've done a lot to refresh the brand and worked on it. So, you know, as you focus on continuing to stabilize it, how are you feeling right now? I mean, I myself am tracking some of the different SKUs within Nielsen and seeing some of the green shoots. But it is only, I think, on about 20% of the volume. So are you feeling good about some of the changes you've made in trying to stable this brand, stabilize this brand?
Yeah. I think I'm probably more optimistic. I would it's to me, it's probably a much bigger percentage of volume. The things that I'm within the portfolio that where I would call, you know, that are long-term defensible would be, you know, Berry Variety Pack, singles of strawberry lemonade, Wildberry itself, Truly Unruly, which seems to be doing quite well, and Lemonade, as a category.
So those are the and there may be some other I went Party Pack and the Variety Pack Rotator, which all of which are kind of, you know, have a unique position that's differentiated from White Claw. And to me, long-term, it's us and White Claw. The rest just does not.
Still playing out.
Has a meaning. I mean, if I'm setting a retailer shelf, there's no point in putting anything other than those two because a huge percentage of the volume buys either White Claw or Truly, during the course of a year. It's like 96%. So the people who don't drink either one of those, they're not really in the category. So, and I, I see, you know well, we have, defensible areas.
White Claw has their areas where they dominate. And so my long-term view is, you know, over the next year or two, Truly will stabilize and then at a viable level where it deserves shelf space and where we can afford to support it. And if we can win in innovations going forward in that category, we can reclaim market share.
Okay. Return it to growth.
In a stable category. The category is slowly stabilizing.
Yeah. The challenge is the definition of the category and how it's blurring, you know, in the eyes of the consumer, right?
You can define it really easily by saying it's, it's Truly and White Claw. That's the category.
Right. But yeah. All right. We only have a few more minutes. I definitely wanted to talk to you about Sun Cruiser and then certainly, you know, the opportunities you see for Hard MTN DEW, especially with some of the changes. So what are you most excited about? Or, you know, Sun Cruiser's been a fairly recent launch, vodka-based Hard Tea. So curious, you know, to hear how the consumer reception has been. You know, you're saying trial, repeat, etc.
Yep. Well, I'll start with Sun Cruiser. It's really too early to tell. I was reading the trade press, you know. Early signs are encouraging. Somebody put two pallets on the floor in Texas and things like that. I don't know. It's too early. It's only been out for a little, you know, matter of weeks. So we'll see. Long-term, it's to me very interesting. Fruit tea is an interesting flavor base. When you think about tea, it's kind of, you know, if you look at non-alc tea, most of the volume is in tea with fruit flavors on it. And tea is a nice base for that. It's tannic. It's phenolic.
So it has a drying, kind of character in your mouth, which is hard to get from anything else. But that tends to be refreshing used right. So I like the flavor base. Obviously, Twisted Tea has shown that it has broad appeal. The vodka base positions it differently. And, you know, and I think there's long-term upside with vodka-based flavors. I mean, High Noon has shown that to everybody. I mean, High Noon is now I mean, who would have ever thought five years ago that the largest spirits company in America would be Gallo?
Exactly.
Huh?
I know.
Gallo? But they are. So to me, that's, you know, a nice blue ocean. And where Sun Cruiser will go, don't know. I mean, it took High Noon like seven years to get to where it is. So one needs to, you know, be persistent and have a great product and be patient. So it's early days, but there's a strategic rationale for it, and the margins are good. So, and then your second question was.
Oh, just thinking of Hard.
Hard MTN DEW. I mean, we're going through this disruption of distribution, you know, was through the Pepsi, the Blue Cloud. And now it's transitioning to a beer network, which, you know, as we were talking at the very beginning, is advantaged with this kind of product. They know how to deal with things in the cooler that sell at scale, and where you need efficient distribution.
So we're not gonna see much first half of the year. It'll be the second half where we're gonna, in our expectation, rebuilding distribution 'cause it's kind of been abandoned in the transition. And the real test will be 2025 when we can actually get it in the sets on a national basis.
We'll stay tuned for both, right? You're optimistic, it sounds like. All right. We just have a couple.
I'm always optimistic.
I know, which I like. We just have a couple minutes left. So, Jim, maybe in closing, you know, when you and I are sitting here next three to five years, I put it out there, okay? Hopefully, we'll both be here. You know, what is your vision for Boston Beer? And as you think about your business, you know, a couple things. Do you think, you know, you will have struck lightning in a bottle again or and/or? You know, what do you think ultimately is the, the real long-term growth for your company?
Yep. Well, I'll answer the first question 'cause it's easiest. The lightning in a bottle thing, having done it multiple times, it's not predictable. And there are, I mean, a lot of failures. I gave a talk at the Beer Marketer's Insights a couple of years ago, and Benji asked me to list all our failures, and I got to like 25. It was so depressing. And I knew there were lots more. So you have a lot of failures. We're kind of okay with that. But it's hard to predict when the next you know, we started with Boston Lager. That was a foundation.
Then we had seasonals, and that got to be and then we did I mean, our, our mission as a company, we wrote it down 32 years ago. We haven't changed a word of it. It's to seek long-term profitable growth by offering the highest quality products to the U.S. beer drinker. That's our mission. We wrote it in 1992. We have stuck with that. Growth is the core of it. The sandbox we play in is the highest quality products in the United States, because I believe and always have this is there's great opportunities in the U.S., huge, huge profitable, you know, alcoholic beverage business.
So let's play in that sandbox. And your second question is, what's the fundamental algorithm? And I was listening to Martin, and he was very clear about it, about his at Vita Coco, which I think is a great company. And ours would be roughly this, that, you know, we are focused in a growing category, the fourth category, unrecognized even as a category. But I believe it's coherent and consistent. That category has been growing. You can make up a number, but it's low to high low to mid single digits. So call it 3%-4%. That's 80% of our volume.
Just, inherently, you know, that should generate growth for us even if the other 20 is declining 2% a year. We've got a large amount of cost to be taken out of our system. And we can and will take those out. Half of them will go to the bottom line. Half of them will go to increasing our brand support, advertising. We have this very large sales force. Over 500 people are out on the streets every day, which is a unique advantage and allows us to penetrate in places that, you know, where retail execution matters.
And you can't just drive it with advertising. So, that gives us, you know, to simplify it, a greater share of voice than we have share of market. And you ought to, if your share of voice is greater than your share of market, you ought to be gaining market share. That's a pretty simple algorithm. So you add that on top of the underlying growth, and that's the base growth.
And then, you know, if every once in a while, we have an innovation that adds, you know, 5% or 10% to our volume, you can get to mid- to high-single-digit volume growth. You put pricing on top of that, hopefully offsets inflation, maybe a little more, generates cash. You buy stock back. And that's—I'm the biggest shareholder, and I'm very optimistic.
A win-win. All right. Well, thank you so much. I appreciate it. Wonderful having you.
My pleasure.
Thank you, everyone, for joining us today. Appreciate it.