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Morningstar | Boston Beer Poised for Margin Improvement and Decelerating Volume Growth Over the Long Run

Boston Beer is one of the largest craft beer producers in the United States, and we think its brand intangible assets have allowed the company to secure a narrow economic moat. In recent years, intensifying competition in the craft beer segment has weighed on the company's volume, as Boston Beer has faced stepped-up competition from local microbreweries as well as the largest beer producers, which control the lion’s share of the domestic beer market. We think this positioning can be viewed as a strength, rather than a disadvantage, for several reasons. For one, Boston Beer has established long-standing relationships with distributors and on-premises channels over decades (its flagship beer, Samuel Adams Boston Lager, was first introduced in 1984) that would be difficult for smaller brewers to replicate. Compared with these breweries, the company also has substantially more resources with which to invest in its brands. Although the number of craft breweries has been increasing at a rapid clip, and Boston Beer’s top line has slowed, we believe scale and brand-building activities will become increasingly important as retailers and on-premises establishments rationalize the brands they offer on shelves and taps.Though Boston Beer’s growth has slowed from the steady clip enjoyed over the past decade (averaging 10% between 2009 and 2018), we think the company now has the ability to focus on its bottom line. Efforts to improve brewery capacity and efficiency should support profitability, particularly after revitalized volumes in 2018 led to increased production by third-party brewers. We believe Boston Beer’s continued profitability will provide the resources needed to invest behind its portfolio (with advertising and promotion costs averaging 13% of sales over the past five years), return its flagship brands to growth, and maintain its competitive edge over craft rivals. We expect Boston Beer will post low-double-digit sales growth in 2019, but expect mid-single-digit levels on average over our forecast (with a roughly 1% average contribution from price/mix) as volumes decelerate.