Boston Beer tossed ‘millions of cases’ of Truly hard seltzer instead of discounting it, chairman says

Boston Beer Chairman Jim Koch told CNBC on Friday the company decided to throw away excess supply of Truly hard seltzer, instead of discounting it, in response to a categorywide sales slowdown.

“We were very aggressive about adding capacity, adding inventory, buying raw materials, like cans and flavors, and, frankly, we overbought,” Koch, who also founded the Samuel Adams parent, said in an interview on “Closing Bell.” “And when the growth stopped, we had more of all those things than we were going to be able to use, because there is a shelf life.”

“We want Truly to have that fresh, bright taste, so we’re going to crush millions of cases of product before it goes stale,” he said, offering an explanation for the company’s third-quarter earnings miss.

Boston Beer reported an unexpected loss of $4.76 per share after Thursday’s market close, although revenue of $561.6 million topped projections of $531.5 million, according to StreetAccount. The company’s bottom line was hurt by $102.4 million in direct costs related to the hard seltzer slump, as well as $30.6 million in indirect costs. Both figures are before the related tax benefit, according to a financial release.

Asked by CNBC’s Sara Eisen why Boston Beer decided to toss the product instead of offering sales promotions to try spurring demand, Koch said the company had reservations about that strategy.

“You know, that’s just not what we do at Boston Beer Co.,” Koch said. “Our mission is to sell high-quality products and to build high-quality brands. So rather than take a chance of it getting out in the market and going stale and consumers having a bad experience, we decided to make the hard decision and eat a lot of product, just to make sure consumers didn’t get stale product and have a bad Truly.”

Boston Beer’s second-quarter results, reported in July, also were weighed down by weaker-than-anticipated Truly sales. However, the company is not the only alcoholic beverage maker to suffer financially from the weakness in hard seltzer, which had been a red-hot growth opportunity for brewers.

Constellation Brands took a $66 million obsolescence charge related to excess hard seltzer inventory in its quarter ended Aug. 31, prompting the parent company of Corona and Modelo to miss Wall Street’s earnings estimates.

Constellation’s Corona Hard Seltzer debuted last year, as did rival offerings from Molson Coors and Anheuser-Busch InBev. New brands also have launched this year, such as Anheuser-Busch’s Cacti Agave Spiked Seltzer.  

The hard seltzer category became a “crazy gold rush,” Koch said, but he added he expects it to “clean up” and evolve in a manner similar to that of energy drinks. That’s consolidated into a financially healthy space, with Red Bull and Monster Beverage serving as the clear leaders at a combined market share of around 70%, he said.

“I think us and [Mark Anthony Group’s] White Claw together are close to that 70%, and then there’s a lot of clutter, and I think a lot of that long-tail clutter will go away,” Koch said. “I think that will be very helpful for long-term growth of the hard seltzer category because consumers won’t get so confused.”

Shares of Boston Beer finished Friday’s session higher by 1.63% at $525.64 apiece. The stock is down about 47% year to date.