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02 September 2011

Fresh beer is better ...

A great gem of wisdom by Boston Beer, the maker of Samuel Adams. “I want Sam Adams to be the freshest beer in town, whether you’re in Boston or Quincy or Los Angeles or Seattle,” Jim Koch, the founder of Boston Beer, boasted last November. While consumers enjoying the benefits of Boston Beer’s “Freshest Beer Programme” blew Jim a kiss, investors rolled their eyes. Especially, when Boston Beer released its 2011 second quarter earnings in August 2011. They were not bad, but they did not meet analysts’ forecasts either. Several bankers have already told their clients to sell their shares in Boston Beer because they think its momentum is starting to flag.

Excuse me for asking: but wasn’t Boston Beer the toast of the town only last year when its share price doubled to USD 100?

How come this fall from grace?

Boston Beer reported second-quarter net income of USD 28 million (EUR 19.3 million), or USD 2.01 per share, but that included a benefit of 92 cents per share tied to a settlement. Excluding that figure, earnings of USD 1.09 per share fell short of analysts’ USD 1.19 estimate and were below year-ago levels. Revenue was USD 134 million, up 3.4 percent from the second quarter of 2010.

Part of this difference was a result of its Freshest Beer Programme which produced an earnings hit of 5 cents per share in the second quarter.

What is Boston Beer’s much touted programme all about? It’s basically a just-in-time distribution system, which gives Boston Beer an unusual amount of control over the distributors’ inventory systems. Whereas a typical distributor will place a beer order a month ahead of time, Boston Beer’s new replenishment system will send beer shipments from a Sam Adams brewery directly to the wholesaler based on the amount of beer that goes out the wholesaler’s door. That way the beers spend less time with the distributors. The company said the new system would reduce the wait time in the warehouse – on average three to four weeks – by at least two weeks.

The new just-in-time system of distribution has raised costs, as new tanks and other upgrades had to be installed. Still, Boston Beer expects that 50 percent of its distributors will be on the programme by the end of the year.

Consumers will be pleased to hear that the Freshest Beer Programme sets Boston Beer apart from its rivals. However, they will be less pleased to hear that Boston Beer is also pondering a price increase later in 2011 and in early 2012.

Investors were more concerned about Boston Beer’s revised earnings outlook for the rest of the year, which now calls for earnings per share (EPS) of USD 3.20 to USD 3.60, down from the prior call for USD 3.45 to USD 3.95, which the company warned “could vary significantly from the current projection.” In the worst case this means that EPS could fall even further.

As we have all learnt in the past few years: financial markets don’t give a toss about the past or the present. They are only interested in the future and future earnings. With Boston Beer’s future earnings in jeopardy, investors were left with little reason for confidence. Hence the “sell your shares” recommendation.

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