What’s Happening to Sam Adams?

As every day goes by and yet another brewery opens, things keep getting interesting for one of the stalwarts of the industry.

By now, you may have heard about the rough go Boston Beer (read: Sam Adams and brands) had over the first four months of 2016. Shipments are down, projections are off and that stock price took a Humpty Dumpty like tumble last week. But really, it’s all activity that was expected. Going back to 2014, Boston Beer leadership was candid that they “expect the competitive environment to be tougher” across beer.

Here we are, with that challenge front and center. Competition not just coming from the growing behemoth of AB InBev, but from the rapidly expanding craft beer base, increasingly comprised of the local and regional breweries that play such a pivotal role in customer choices. People want “craft” in their goods these days and beer is the place to find it. One Nielsen poll showed 56 percent of respondents see craft as a “small, independent company” while a Harris poll indicated themes of “handmade/handcrafted” and “limited edition” were the most likely sign of quality.

@CNBCBeerNews the problem is, we drinkers don’t look at SAM as craft. I see them and move along..

— Tim Taylor (@timtaylor22) April 22, 2016

At a time when consumers are looking for these kinds of connections across all kinds of goods, it’s no wonder Boston Beer is simply trying to tread water. From the company’s own admission of increased difficulty with distribution to drinkers’ localized tendencies, it’s only getting harder for Boston Beer.

Strangest of all, could these changes officially spell the end of Boston Beer as “craft”?

In a way, there’s some trickle down effect going on here. First, with distributors.

During the company’s most recent earnings call, Jim Koch made two important points about simply getting his beer into pint glasses and refrigerators:

• Retailers are reaching the point where adding more tap lines doesn’t mean that craft beer sales will follow.
• Distribution channels may “close up” as distributors and retailers run out of space for craft beer.

These problems are only going to get worse.

In a recent survey with distributor members of the National Beer Wholesalers Association, the trade group reported that 94 percent of distributors carry products from local, in-state craft breweries and carry brands of multiple local breweries. With today’s customers demanding more “hometown” brands than ever, “multiple local breweries” is constantly growing. As more breweries open and increasingly focus on the impact of local – just like the bigger guys, too – the volume of product carried by distributors is going to mean more choices for beer lovers and way more competition for Boston Beer. It already has.

Jason Notte recently reported that since 2008, the estimated number of beer brands available in stores has gone from 4,843 to 11,833. Craft beer brands went from 2,274 to 7,400 in the same span. Just look at the growth rate of the average number of brands carried by distributors, who are carrying an average of 35 breweries compared to nine two decades ago, according to Notte.

In response to their declining sales numbers for the Sam Adams brands, Boston Beer CEO Martin Roper said the company will have to “direct funds to the highest growth initiatives,” which means more diversification, but not necessarily on the beer side, where competition runs wild. In recent months, the company has pushed a hard soda line through its subsidiary, Coney Island, and still holds more than half of the cider market with Angry Orchard. Boston Beer is reaching out further with a new hard seltzer line, too.

As $SAM sees shift away from cider to things like hard soda, its @ConeyIslandBeer introduces…a hard soda mix pack pic.twitter.com/cGpX4vlANc

— CNBCBrewNewsman (@CNBCBeerNews) April 22, 2016

The key here, when it comes to “highest growth initiatives,” is to know where that success is coming from. According to estimates by Beer Marketer’s Insights reported in Craft Brew News, it’s not beer:

Boston Beer Volume Production in Barrels by 000s

	2010	2,011	2012	2013	2014	2015
Beer	2,010	2,096	2,150	2,325	2,550	2,510*
Tea	250	375	500	550	590	640*
Cider			75	530	950	1,100*
Total	2,260	2,471	2,725	3,405	4,090	4,250

As I pointed out last June, this change in production is important because if (or perhaps when) Sam Adams’ volume share were to dip below 50 percent, Boston Beer would no longer meet all criteria to be “craft” under the Brewers Association guidelines. Year by year, as the company is forced to make tougher decisions on how to best diversify in an ever-evolving marketplace.

Twisted Tea Original was up about 30 percent through mid-March, according to IRI numbers reported by Craft Brew News, which made it bigger in sales dollars and volume than Boston Lager or Sam Adams Seasonal during that time.

Boston Beer Production Volume Share by Percent

	2010	2011	2012	2013	2014	2015
Beer	88.9	84.8	78.9	68.3	62.3	60*
Tea	11.1	15.2	18.3	16.2	14.4	15*
Cider			2.8	15.6	23.2	25*

The silver lining is that the Beer Marketer’s estimates include Boston Beer’s Alchemy & Science brands, like Travelers shandies, and Coney Island, maker of hard sodas. If those alternatives really start to pay off, it’s less about a title of “craft” as it is what to do with Sam Adams itself. Certainly, that product line will never go away, nor will it lose its luster as one of the beacons of craft beer, but as we saw with the reluctant but necessary push into IPAs, change still needs to happen to be viable. Especially as AB InBev comes after Sam Adams’ flagship Boston Lager.

At the end of last year, AB InBev began a push of Blue Point Brewing’s Toasted Lager, notably going directly to Boston to film promotional materials. In a general sense, the competing brands match up well in flavor category, and AB InBev isn’t shy about trying to work Boston Beer’s home market.

This kind of competition is only going to get stiffer after AB InBev’s recent purchase of Virginia’s Devils Backbone, whose flagship beer is their Vienna Lager, the top-selling craft six-pack in the state. Once that deal is finalized and AB InBev’s resources can back ramped up production of that wildly popular beer, Sam Adams has two very strong competitors in key beer regions in the country.

This is nothing new, of course. Tensions between Anheuser-Busch and Boston Beer go back to 1996, and even include Jim Koch calling out AB making a “declaration of war” against craft beer. It was just last month when Koch said he never intended to “compete with the big boys like Anheuser-Busch,” but as his company sees the market tightening and competition coming from both large and small companies, it’s clear that’s not he case any longer.

Bryan Roth
“Don’t drink to get drunk. Drink to enjoy life.” — Jack Kerouac

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