When Boston Beer (NYSE: SAM) CMO Lesya Lysyj describes the growth of her company's hard seltzer brand as being "like a runaway train," it's not just marketing hyperbole: During each week of this past summer, the brewer sold more of its Truly brand than it did during the entirety of summer 2017, Lysyj told financial news site Cheddar. Sales in the category as a whole, she says, have tripled.
Moreover, the alcoholic beverage has become more than just a light summer drink. While Boston Beer anticipated it would just be a seasonal niche beverage, it instead found sales remained elevated all through last winter. And the brewer recently reported its sixth consecutive quarter of rising depletions (sales to distributors and retailers) because of hard seltzer's strength.
Its popularity actually even hurt the brewer a little last quarter, because it needed to use third-party contract brewers to meet the demand, The company had to hire temporary labor to help load all of the shipments of Truly variety packs. Gross margins ended up falling 210 basis points because of those added expenses.
At 29% market share, Boston Beer's Truly is the second-biggest hard seltzer brand behind White Claw, which has a 54% share. But their surging sales are attracting more competition -- other brewers want a piece of what looks like a new beverage category with staying power.
Welcome to the big leagues
Perhaps the biggest concern for Boston Beer and White Claw is Anheuser-Busch InBev (NYSE: BUD) turning its attention to this market. The industry giant secured its Bon & Viv brand as the official hard seltzer of the National Football League, and it just introduced a second version under the Natural Light beer brand that will offer 6% alcohol by volume, compared to White Claw and Truly's 5%, while costing less than those brands.
With its vast distribution network, the megabrewer can ensure its products are the ones consumers see most prominently every time they enter a liquor store. Although Bon & Viv has only around 7% of the hard seltzer market, a renewed marketing campaign and budget could quickly tilt the field in its favor.
Nor is Anheuser-Busch the only beverage giant that wants in. Molson Coors' MillerCoors division has its Henry's Hard Sparkling Water; Constellation Brands' Corona recently introduced Refresca, a "premium spiked refresher"; Diageo launched Smirnoff Spiked Sparkling Seltzer; and Pabst Brewing, which may have redefined a category of its own with its Pabst Hard Coffee, is coming out with Pabst Stronger Seltzer at an 8% ABV (but Four Loko may win the title of hardest hard seltzer with its 14% ABV Seltzer Sour).
Can Boston Beer maintain the pace?
There just may be enough room for all of those brands to thrive in the marketplace, considering hard seltzer's tremendous growth rate. White Claw's sales volumes in 2018 surged by 289%, according to data from IWSR Drinks Market Analysis, and Truly was hard on its heels with 278% growth.
Moreover, unlike wine coolers, spritzers, and other light alcoholic fare, hard seltzer has not been categorized by consumers as a feminine drink -- it's equally popular among men. And Anheuser-Busch's move to secure Bon & Viv's sponsorship deal with the NFL will only expand its already broad appeal.
But Boston Beer investors need to consider whether hard seltzer's runaway train will wind up derailing the company's growth trajectory. More intense competition from rivals offering lower prices and higher alcoholic contents could siphon away its customers, and tastes can change quickly in this industry. If Pabst Hard Coffee were being sold nationally and not in just a handful of states, it might be a huge seller too.
Hard seltzer isn't succumbing to the "boom splat" phenomenon that hard soda did, because its lack of excessive sugar appeals to more health-conscious drinkers. On the other hand, Boston Beer, which trades at 41 times forward earnings, is apparently priced based on the assumption that hard seltzer's torrid sales growth will continue.
The hard seltzer market still has upside potential, but industry followers should know that Boston Beer faces a tough road ahead if it wants to hold onto its piece of the market.
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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Boston Beer. The Motley Fool owns shares of Molson Coors Brewing. The Motley Fool recommends Anheuser-Busch InBev NV, Constellation Brands, and Diageo. The Motley Fool has a disclosure policy.
This article was originally published on Fool.com