Adding SAM to Best Idea Short list
The share prices of most companies negatively impacted by COVID-19 have been gaining since the early November news of effective vaccine candidates. Conversely the share prices of the companies that benefited from the pandemic, restrictions on leaving the home, or other adaptations made for the current environment have had more varied performance. In consumer staples most companies were beneficiaries and most of the share prices have been in a trading range in recent months. The market can project recoveries in demand more efficiently than it can separate one-time benefits from new secular demand changes.
COVID-19 beneficiary
Boston Beer has been a beneficiary through its Truly Hard Seltzer brand during the pandemic. Truly represents over half the company’s overall sales, less than half the profits, and the majority of its growth. Truly has benefited from the pandemic’s shift to off-premise alcohol consumption, less competitive intensity in shelf placement, and a tight supply situation. We are moving Boston Beer from the short bias list to the best idea short list ahead of it cycling the benefits.
Confirmation from a distributor
White Claw has been on allocation since September 2019. Last week we held a call with an executive at the largest independent beer distributor in the country. He quantified the shortage in hard seltzer inventory levels and confirmed that Boston Beer’s Truly was one of the beneficiaries of White Claw’s inventory shortages. White Claw, owned by Mark Anthony (private) is the brand consumers associate with the category, but Truly benefited from having the category’s second largest presence.
Click Here for a replay of our call. At 2:40 we discuss hard seltzer inventory levels and who could have sold more. At 28:50 we discuss what type of beverage lost share to hard seltzer.
Shortage to excess supply
White Claw is rapidly expanding its production. Mark Anthony completed a 1 million square foot plant in Glendale, Arizona for $250M this year. Last week it began construction on another facility in Columbia, South Carolina that will be one of the largest breweries built in the U.S. in more than 25 years that will cost more than $400M. Truly is planning on doubling its capacity by the summer of 2021. Molson Coors is planning to increase its hard seltzer production by more than 400%. Corona Seltzer plans to more than double capacity in 2021. Bud Light Seltzer is investing $150M to expand its hard seltzer capacity. The production growth plans represent an unprecedented speed in consumption change in alcohol beverages. Previous shifts for light beer and craft beer occurred over decades in comparison. Anheuser Busch InBev said it expects to be a U.S. market leader over time by using its marketing muscle like it did in light beer. There are numerous new entrants for 2021 headlined by Michelob Ultra and Topo Chico.
Aluminum can shortage will ease
The shift to off-premise demand from closed bars and restaurants shifted keg packaging to cans and bottles. The demand for the skinny 12-ounce aluminum can popular with hard seltzer quickly went into shortages after the stay at home orders were issued in the spring. Ball Corp. is the largest aluminum can manufacturer in the U.S. The company has said it will add more than 6 billion cans of manufacturing capacity in 2021 with its expansion plans. Can shipments per capita have been in secular decline for years as seen in the following chart courtesy of Hedgeye’s Industrials team. Hard seltzer’s packaging growth reversing a twenty-year trend would suggest it had some help from an unprecedented shift in demand from the pandemic.
Jay Van Sciver is hosting a black book presentation on Ball on Dec. 15th, contact for access.
Competitive intensity will increase in 2021
Share dominance (~75%) of a category like hard seltzer is a rarity in the alcohol and consumer goods space, let alone for two companies to share and maintain. While White Claw and Truly were launched as separate brands distinct from their parent companies, the large domestic brands and craft brewers have opted to sell their hard seltzers as brand extensions. Brand name extensions likely increase trial, but cannibalize the core brand. Mark Anthony and Samuel Adams had the foresight to see the category’s potential but misjudged how popular it would be for the past several years. Now, with everyone hopping on the bandwagon to ride the category’s momentum, the competitive entrants are increasing, the manufacturing process is no longer a competitive advantage, and the marketing/distribution competitive intensity will continue to escalate.
International is not part of Truly’s TAM
Management is not pursuing international growth for Truly which significantly limits its TAM. Once the U.S. market is saturated hard seltzer growth will be similar to craft beer currently.
Risks and headwinds
The market is not discounting Boston Beer’s risks and headwinds ahead of cycling the pandemic, the off-premise shift, and the inventory shortages. Alcohol demand has been robust during the pandemic. When people return to the workplace and commutes, alcohol consumption trends will likely reverse.
