The hard seltzer debate (SAM)
Nielsen reported hard seltzer sales in the off-premise channel grew 29.3% YTD through May 29. In the four weeks ended May 29, hard seltzer sales slowed to 3.6%. Truly has grown 62% through the first five months while White Claw was down 1%. Bud Light Seltzer grew 36.3%, Corona Hard Seltzer grew 17.1%, and Smirnoff Spiked Sparkling Seltzer has fallen 33.8%. IRI reports hard seltzer has grown 42.3% YTD through May 16. In the four-week period ending May 16, growth decelerated to 9.6%
Boston Beer’s expectation for this year is hard seltzer to grow 60-90%, with Truly growing faster than the category. That growth rate looks difficult to achieve with hard seltzer growth through five months of the year, less than half the low end of the range. Bulls point to easing comparisons for the remainder of the year, leading to a reacceleration in the growth rate. Other factors to consider are product shortages last year, further competitive activity, the recovery of the on-premise channel, and returning to the office. With the numerous headwinds and significant changes to consumer behavior seen during the pandemic, two-year stack comparisons are not likely to be reliable predictors.
We expect hard seltzer to continue to gain share in the beer category for years to come, but at considerably lower rates than in the past. Boston Beer is on our shortlist as market expectations will be reset, in our opinion. Hard Seltzer’s rapid churning of flavors and innovation provides less visibility than beer categories. New hard seltzer launches capture significantly more share than other beer launches, which could lead to more market share movement or disruption by other categories like liquor-based seltzers, wine-based seltzers, or canned RTDs. Now that the growth rate has slowed, the multiple should be lower based on lower visibility.
Forecast is more inflation (CPB)
Campbell Soup reported EPS of $.57, missing consensus expectations of $.66. The shortfall was in weaker gross margins, which were down 290bps. Management said higher transportation costs drove a third of the gross margin contraction. Cost inflation was 4% in the quarter, driven by higher freight rates, accelerating 3% sequentially. Another third of the contraction was due to transitional COVID-19 related costs like lower operational leverage, labor challenges, and higher cost co-manufacturers to return supply levels back to normal. The remaining gross margin headwind was from changes implemented in the snack division, including systems, logistics, and capacity.
Total organic sales declined 12%, lapping a 17% increase last year. The Meals & Beverages division had a 15% organic sales decline. The Snacks division had an 8% organic sales decline. Management lowered EPS guidance for the year to $2.90-2.93 vs. prior guidance of $3.03-3.11 and consensus of $3.07. Organic sales growth is expected to be down 0.7% to 1.2% from down 0.5% to 1.5%. The company expects continued margin pressure in Q4 from pandemic-related costs and inflationary pressures. Adjusted EBIT growth is expected to be down 4 to 5% from down 1% to up 1% previously. Management expects pricing actions to flow through at the beginning of F2022.
Management said, “We did face a significant inflationary environment in the quarter, as well as shorter-term increases in supply chain costs. We anticipated the vast majority of these drivers, but in certain areas, the pressures intensified, especially around inflation and some of the transitional costs moving out of the COVID-19 environment.” Inflationary pressures and higher supply chain costs will surprise no one in consumer staples. The sustained pressure seems to have surprised Campbell Soup. Many companies are planning on price increases, but the response from customers and consumers is even more difficult to predict.
Canadian beer sales (TAP)
Total beer volumes in Canada were flat YOY in April, slowing from the 5.6% increase in March. Canadian domestic beer volumes increased 3.7% in April, slowing from the 10.5% growth in March. Imported beer volume fell 22.1% in April, slightly lower than the 20.8% decrease in March. Export beer volumes fell 21.8% in March, the first YOY decrease since September. Canada continues to have more restrictions for the on-premise channel than the U.S. Some restrictions on restaurants are easing in parts of the country, but Toronto has not allowed sit-down meals for a year. Indoor dining has been banned in Toronto for longer than nearly every other major city in the world. The NHL Stanley Cup playoffs highlight the difference with nearly no spectators in the Canadian stadiums while the U.S. stadiums have almost full arenas.
