Is Boston Beer Choking on its Long Tail?
Demitri is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Craft brewer Boston Beer (NYSE: SAM) has a drinking problem and it may be time for an intervention. The company just reported decent growth, with depletions up 4% for the fourth quarter, and 7% for the full year.
But the bad news is that that growth was not enough to keep regional operator D.G. Yuengling & Son from challenging SAM's title as the top producing American-owned brewer. And that 7% growth feels flatter still compared to global competitors. Anheuser-Busch InBev (NYSE: BUD) reported growth in its premium beer shipments of almost 30% in the US, a market it covets, calling it "by far the largest beer profit pool in the world."
SAM is being both pinched by a smaller domestic player and targeted by a Belgian behemoth. Maybe drinks are called for, after all.
It's Part of Who I Am
Jim Koch, SAM's founder, bragged in the company's latest earnings release that "we brewed and sold more than 50 distinct styles of Samuel Adams beers including Tasman Red, Griffin's Bow and Thirteenth Hour to name just three." Koch also announced a newly formed subsidiary, Alchemy & Science, which will operate as a "craft brew incubator," charged with creating even more styles.
The company expects Alchemy & Science to serve as a drag on 2012 earnings with a (hopefully) positive contribution later on. Koch then had to spend a good portion of the conference call parrying questions from analysts, most of which could be paraphrased as: "About all these beers, at what point is enough, enough?"
Koch's explanation was that innovation is in the company's DNA and that, while the effect of chasing after the long tail of craft brewing can't be quantified directly, it contributes to the SAM brand, and management indulges in it, fully expecting "to make money." Smaller batch quantities have higher average price points, a fact that may contribute to SAM's better gross margins, at 59%, than competitors like Molson Coors Brewing (NYSE: TAP), which books about 48% in gross profit.
And Boston Beer has had some recent success rolling out new brands to a wider audience. Twisted Tea is finally finding broad traction after five years of tinkering, with a national rollout scheduled for 2012. SAM is careful marketing these new craft brands, according to CEO Martin Roper, who said that the company will keep working on complementary brands, "provided that they do not distract us from our primary focus on our Samuel Adams brand." But if distraction is a risk, it seems like 50 styles and counting could be on the wrong side of that line.
We're All Here to Help
Boston Beer's situation brings to mind the struggles of another luxury retailer that -- until recently -- could be described as a niche player in a huge industry, seemingly content to produce high-quality, high-margin products for a small but loyal following. One of the keys to Apple's (NASDAQ: AAPL) success, though, has been its phenomenal ability to break out of its niche by introducing innovative and high-quality products at lower and lower price points. Before stepping down as CEO, Steve Jobs remarked that "the biggest lesson Apple has learned is price it aggressively and go for volume" (Video). That's a lesson that could be applied to beer as well as electronics.
As a customer of Boston Beer's, I enjoy the new specialty craft brews that the company keeps tinkering with, but as a shareholder I need the real focus of SAM's management to be on dramatically widening the reach of its flagship brands, Sam Adams Lager, and Sam Adams Light. In short, "SAM, I think you've had enough."
Motley Fool newsletter services recommend Apple, Boston Beer and Molson Coors Brewing Company. The Motley Fool owns shares of Apple, Boston Beer and Molson Coors Brewing Company. Fool blogger Demitri Kalogeropoulos owns shares of SAM and AAPL. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.