Taking over the Beer Aisle — Without the Buzz
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All of a sudden you saw beer volumes, spirit volumes, wine volumes kind of fall off a cliff. Most of the major beer companies have lost about 10% of volume in three years.

Hello and welcome to the Barron Streetwise podcast. I'm Jack Howe and the voice you just heard, that's Bill Shufelt. He is the founder of a company that's selling a tremendous amount of beer right now and very little alcohol. The company is called Athletic Brewing and it is not publicly traded, but it's part of a broader trend that's affecting many publicly traded companies.

That trend is less boozing, especially among the young. We're going to touch on that this week and dig deeper into it next week. We'll also say a few words this week about earnings season and why the upside surprises, which are hardly ever really surprising, actually look this time around a little surprising.

I am drinking on the job. Mine is a non-alcoholic beer, which I guess means it has to be below half a percent. I know at the store, they still ask you your date of birth, even though it's non-alcoholic and I look 100.

So this particular beer from Athletic, this is called Witt's Peak, and it says it's a Belgian-style white. And I am not a beer reviewer. I'm not an expert. I couldn't tell you about the notes or the hops and the citrus and whatever. But it tastes like a crafty, serious beer that the beer people would be into, right? In other words, it doesn't taste like corn water like I feel like non-alcoholic beers in the past have tasted. This is...

kind of a new category and it's selling very well. And we're going to hear from Bill about how he had the idea and, and, you know, the market he was trying to serve and what the growth has been like and what he sees as the future opportunity. Jackson, have you tried one of these beers, athletic, athletic? Yeah. I mean, I was really surprised by them. I've, I've had their IPA. Um, it's pretty good. And you, you are a beer snob, right? Like you look down your nose. Yeah.

If you're out there and you're drinking a Budweiser, a Miller, a Coors, you know, one of these beers, just know that Jackson is, you know, sort of shaking his head at you. Go ahead, Jackson. Yeah, I'd say compared to the non-alcoholic beers I've had in the past, I'd say Athletic has them beat. You think it's the best non-alcoholic beer? Yeah.

Yeah, I've actually had athletic brewing before in place of times I'd drink a regular beer. Like say it's a weeknight. 8 a.m. at a bus stop. It's in a brown paper bag. Oh, I'm sorry. You were saying. Go ahead. Board games at 8 p.m. on a Tuesday. All right. Well, we'll hear from Bill in just a few minutes. Let's start off by touching on earnings season.

Earnings had better be good for the fourth quarter. Let's start there, right? Because the S&P 500, it's 25 times earnings. You can't have a valuation like that and not have decent growth to support it, I think. And the good news is that growth looks pretty strong. Now, look, earnings season has barely started. It's way too late for a preview and way too early for a review.

I show at the time of this recording, just over 70 companies in the S&P 500 have reported.

Among the companies that have reported, around 80%, just over 80%, have exceeded Wall Street's earnings estimates. I know that sounds like wonderful news, but on average, it's close to three-quarters of companies beat earnings estimates each reporting season. That's why I say that upside surprises are no longer that surprising.

One way you can tell that investors are not generally surprised by companies beating earnings estimates is that if you look over the past five years, on average, in cases where companies have beaten not only earnings estimates, but also sales estimates, the shares in response have risen less than 1%. No big whoop. But I would say the trend this earnings season is at least a moderate whoop. And here's why.

First of all, the magnitude of the upside surprises. They're pretty big. Earnings estimates for the S&P 500 have been pushing higher. If you look at a blended growth estimate, in other words, you take the companies that have already reported and you blend that in with remaining estimates for the other companies, you end up with just under a 13% earnings growth rate for the quarter.

That's peppy growth. That's what we need. And maybe we'll end up getting more than that if companies keep beating estimates like this. One other thing is that stocks are rising more than usual following these upside surprises. In cases so far where companies have beaten on both sales and earnings, the shares have responded with an average gain of 3.6%. I think those share price jumps are important.

There used to be a popular investment strategy of buying shares of companies right after they reported upside earnings surprises. There was a landmark study back in the 60s that found that shares of those companies tend to outperform the market, not just right away on the day of the report or the day after,

but over a period of many months after the report. And researchers came up with a name for that phenomenon. They called it post-earnings announcement drift. Jackson, are you familiar with Tokyo Drift? The Fast and Furious movie? Exactly. It's got very little to do with what we're talking about here.

Post earnings announcement drift just means that whatever it is that caused earnings to beat estimates, that good news does not get fully baked into the share price right away. It tends to play out over a prolonged period after the report, or that's the way it was.

Researchers have done follow-up studies over the years to see if this strategy still works, and they found that the effect has diminished over time. And then they came up with ways to try to get the effect working again. One was to look for cases where companies beat not only on earnings, but also on revenue. That was another widely cited study. And then in 2012, there was a study that found quite a bit of predictive power for cases where companies beat on earnings,

and their share prices jump a lot on the day of the report. Now, I don't think that that means that we should all develop an investment strategy of going out and buying shares right away after they jump on earnings day. In this age of automated algorithmic trading, I have to believe that findings like the one I just mentioned have already been exploited into oblivion.

But I do think investors should use price movements as a check on which companies are truly outperforming. Because sometimes upside earnings surprises are more about which companies and which analysts have carefully managed investor expectations lower to make estimates easily beatable. So when somebody says, hey, such and such a company beat expectations, I look at the share price. If the stock's not really moving, I think to myself, no, it didn't.

And so which companies have recently had big share price jumps on earnings day after reporting upside earnings surprises? In the S&P 500, there's a company called Amphenol, ticker APH. They make electronic components. There's Netflix, which had blowout subscriber growth.

There's Charles Schwab, Truist Financial, a bunch of the financials, in fact. We've also got Walgreens, Boots, Alliance, the drug chain. And if we dip back into the very end of last year, we've got Carnival, the cruise line. There are not as many big stock spills after earnings, but there are a bunch. One of the biggest that happened earlier this month, Constellation Brands.

That stock fell 17% after earnings. Remember we talked about how they had the hot hand in beer, about how they have a perpetual license in the U.S. to sell Corona and Modelo, and Modelo had recently become the top-selling beer in America? Well, along with all that growth comes high expectations, and when you fail to meet those expectations, your share price can plunge. That's what happened there, and I think it's related to what we're going to talk about with falling alcohol consumption, but there'll be more to say on that next week.

One last point on earnings season if you're looking for something to poo-poo Here's one thing you can say that among the top 10 companies that are expected to contribute to growth for the fourth quarter reporting season three of them are names from the usual big tech crowd Nvidia Amazon and alphabet and another seven are companies that had weak earnings a year ago that left them with easy comparisons and

But I don't think those things explain away the positive trend. It's decent growth. And if you look at the upside surprises, which, as I've said, genuinely are a little surprising this time around, they are also, as Evercore ISI writes, quote, surprisingly broad.

In other words, it's not just tech and banks. There are airlines, entertainment, some consumer stocks, and so on. So if you're looking for a reason that the stock market is worth its extended valuation, I don't know if we've made an open and shut case, but I think there's a box here that needed to be checked. And I think so far we're checking it. And that's earnings season. How about we move on to beer? Oh, yeah.

Jackson, Bill Shufelt has said that he was not a brewer and not an entrepreneur. And that might make him seem like an odd choice to have started an enormously successful beer company. Surprising. But he had a hunch that there was a market that no one was really seeing. And he acted on that hunch. And as you'll hear him say in a moment, he started brewing beer in Gatorade jugs.

Jackson, have you ever invented anything? No, but my great-grandfather apparently invented the sneeze guard for salad bars. Are you being serious right now? Yeah, I'm 100% serious. Apparently, buffets before the sneeze guard, you know, all that. Oh, must have been a wild west of... I gotta look into it. He's long dead, but... This is a bold claim. How much research have you done on this claim?

None at all. But as far as I know... This is your great-grandfather? Great-grandfather. Atticus Sneezeguard. Yeah, apparently before then, salad bars were just 1% sneeze. Was that part of his marketing at the time? He would just roll it in his hand and say, Did you know, see that sniffly man over there? His sneeze could travel 30 feet.

My favorite thing about that story is that you have no specifics whatsoever, right? Where and when did this happen? What did it look like? What were the circumstances? You just need further research. Yeah, that's fair. Now, enough sneeze talk. Let's get to beer and my recent conversation with Athletic Brewing founder Bill Shufelt.

Bill, I'm a new customer. I tried your beer for the first time this week, and it was with successful results. Oh, thank you very much. The one that's called Run Wild. Is that your biggest seller? Yeah.

It is our biggest seller. It's kind of our flagship, but we have a pretty balanced portfolio. We have nothing over like 35% of sales, but that's run wild. It's kind of like our really approachable IPA. And right back at you, I've been a very, very long time reader of Barron's. I spent 12 years in the financial world, both on the sell side and buy side before coming here. Investing is still an enormous passion of mine. So it's really fun personally to be interviewed by Barron's.

Oh, glad to hear it. Thank you. So give us a milestone or something like that. What were some company goals? What have you seen lately that you've said, wow, we're that big now? Because I...

I kind of knew that you guys were big in the, you know, over at Whole Foods and, you know, maybe Trader Joe's and these places. But I go to my local rinky-dink grocery store right now, like a no-name store. And, you know, you're all over the shelves there in a full assortment. So you're everywhere now. What have you seen there that made you say, wow, we've really arrived?

Oh, thank you so much. It's funny for me to hear that because we have been so brick by brick, everything we've built at Athletic. On the wall behind me in my office, there's pictures of me and John homebrewing on Gatorade jugs. And we really reinvented how non-alcoholic beers made and we built all our breweries out ahead of our production needs. So it's every scale we've built from like one barrel tanks to three and a half barrel to seven to 20 to 200 to 300 barrel brew houses.

which is really fun. Last year, we sold well over 100 million cans, which it's hard to wrap your head around that many cans. And out of all, there's 10,000 great craft breweries in this country. And last year, Athletic drove more dollar growth than any other craft brewery, alcohol or non-alcoholic. So it's really fun as the category gets to this stage.

That's amazing. There are some stores where you're the biggest seller, not just among non-alcoholic beer, but just for beer. Have I got that right? Yeah. In Whole Foods nationally, athletic brewing is the number one adult beverage, period. Non-alcoholic beer is over 15% in that retailer. In a number of retailers nationally, non-alcoholic beer is now over 10% of total beer sales nationally.

where it was basically zero when we started seven years ago. And even at the biggest, most mainstream retailers, non-alcoholic beer is passing 4%, 5%, 6% of beer.

Non-alcoholic beer is not new, not particularly new. I mean, I remember seeing brands like O'Doul's and there was something that was like Miller Sharp. I don't know if they're still around, but there have always been some non-alcoholic beers. They weren't a big thing. You had this idea to make a beer that tastes like alcohol.

beer, like good beer, craft beer, and to make it non-alcoholic on the, on the hunch that people who they no longer drink, but they go out to bars and they're hanging around, they might like a good beer while they're hanging out at bars. So the question is, how do you test then that theory? You got this idea for a business, you know, maybe it'll work, maybe it's crazy. What gets you to the point where you're willing to make a go of it?

So my life was like many of your readers. I was in the financial world for 12 years prior to starting athletic, and I just knew so soundly out of my own life that this was a need. So you hit the nail on the head. Non-alcoholic beer got its start in prohibition and was immediately launched as this lesser than sacrificial product.

product that you drank when you couldn't have the real thing. And for 80 years, there was almost no innovation on that. There was less than 10 products on the market. There was no marketing attention, no R&D on the category. And it just existed in these dusty bottles on the side of the shelf.

until Athletic Brewing really recognized that, hey, this actually fits the modern, busy, productive life really well. And for the first time, we approached it from a love of beer, not just a replacement product. And so we reinvented the way it's made. We reinvented the marketing, not as a designated driver, compromising social product, but as a positive lifestyle, inspirational type category. I think that's what it all stems from.

There are different kinds for people who aren't familiar. I had never really had a non-alcoholic beer, but I'm used to thinking of it as that's the kind. The kind is non-alcoholic. But with your beer, you've got maybe a couple of IPAs. I saw a Belgian wheat beer. You've got

The assortment that you would think of from craft brewers all in, what is it, less than a half percent alcohol. When you think of your ambitions now for the company about how big you can become, what goes through your mind? If you're sort of dreaming for the next five, ten years for the company.

Like you said, the shelf was all lagers when we entered the category. And from day one, we've offered variety the category had never known. IPAs, dark beers, sours, Hefeweizens, wheat beers, everything. On athleticbrewing.com, we've sold over 250 beers since we started in a category that had no innovation. And we also launched on D2C, which made it instantly available everywhere.

which was also different for beer. Beer is usually, if something's really popular, you go to the brewery and wait in line for it for hours. And so that was a big difference and helped us during the pandemic.

Our long-term plan is kind of really consistent with that. We're looking to surprise and delight our customers. We want to be the best part of every day, not just their drinking occasions. And yeah, we're trying to change the way the world drinks. We think non-alcoholic beer is going to easily 10 or 20% of the beer category. And so we're ready to have a lot of fun with that.

Thank you, Bill. Jackson, let's pause here for a quick break. We'll come back with the rest of my conversation with Athletic Brewing founder Bill Shufelt. Imagine what's possible when learning doesn't get in the way of life. At Capella University, our game-changing FlexPath learning format lets you set your own deadlines so you can learn at a time and pace that works for you.

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They say a man named Johnny Garneau invented the sneeze guard in, well, he filed his patent in 1959. Is that, uh, that's not the guy that's not the grandpa, right? No, no. I actually am looking it up right now and I was wrong. It's in a patent for an improved sneeze guard. Uh, so it's the one with an upper section that's fixed and a lower section mounted on a hinge. Um,

So it was an improvement on this. And what was the year of the patent? This is 1973. Well, the timeline sounds... And that's your grandfather. And are you sitting on a sneeze guard fortune right now? It's my great-grandfather, and unfortunately not. Well, look, that's something. That's more than I've invented. But you got to wonder...

We're spending way too much time on this. These guard here, but I just, is there, is there any, does your family have any story? Like,

There has to be a story where, you know, grandpa went to a buffet and they had the regular sneeze guard that was invented by this guy Garneau. And there was some kind of mishap. And it just wasn't it just it wasn't taking care of business with all the sneezing that was going on. And he said, you know what? Something has to be done here. One of these sections is going to have to be angled. Look what's going on with the peas. Look what's going on with the carrots. Something like that. I mean, do you want me to call my great aunt right now?

We knew he could get to the bottom of this. All right, well, let's hear more now about athletic brewing from my recent conversation with its founder, Bill Shufelt. One thing I'm wondering is, like, are you the chicken or the egg here with what's going on in drinking? Because one thing we've been seeing is...

rates of alcohol consumption are in decline. There are some categories. I read that spirits in the U.S. had their first decline in 30 years a couple of years ago. Some of the publicly traded alcohol companies have seen sales declines, share price declines, and it seems to be driven by young consumers more than anything else. They're out in front. We had the Surgeon General warning on alcohol, talked about the link between alcohol and cancer, but I

I feel like, unlike when this Surgeon General warned on tobacco in the 60s, this time around, it almost seems like he's...

He was following the behavior of young people. So young people are drinking less. And part of that has to be that there are other choices around like your beer. Maybe it's not the main thing. What's your sense of that? Do you feel like your company has contributed to the decline in alcohol consumption? Or do you feel like that was already a thing that was happening and you caught it at just the right time? So I do think on timing, athletic brewing wouldn't have worked had we launched 10 years before we did.

But I also think because athletic brewing exists and has reinvented the image of this category and quality and perception, that now the availability is there and the option is there for people to make those choices. So people wouldn't make those choices without the availability, but they also might not have made those choices 10 years ago. So I think it's the right time with information, health trends, everything for the availability to present itself.

But I think this is going to be a major sea change when we look back on it in 25 years. I think this five-year period where all of a sudden you saw beer volumes, spirit volumes, wine volumes kind of fall off a cliff. Most of the major beer companies have lost about 10% of volume in three years. And that's not all going to non-alcoholic beer. It's going to a wide range of things. And hopefully the adult beverage category can keep those occasions in whatever form people are looking for them. But...

I think one of the most common misconceptions is that everyone all of a sudden is sober. It's actually people are just making more moderate choices because it is possible and socially acceptable for the first time. Ten years ago,

You couldn't go to a bar and restaurant and get a great beverage that wasn't judged and stigmatized. So it is largely driven by availability and marketing, I think. A lot of your customers still drink alcohol. You know, they have a beer with alcohol and mix in one of yours to sort of keep the average level down throughout the night. Is that the idea?

So like everything, there's a whole range of experiences. We do estimate that probably about 80% of our customers drink alcohol with some regularity. And there is everything from people using non-alcoholic beverages to moderate. People are using them as substitutes. People are using them as compliments. We hear about accidental quitters all the time. People who realize, oh, now that I've actually had a good non-alcoholic drink, I realize I don't want the functional ingredient of alcohol nearly as much as I used to have it.

These beers of yours are around, I want to say around 60 calories in a can, maybe some a little less, some a little more. Where a typical beer is...

closer to 150 calories. So is it just that much of the calories was alcohol? Yeah. So generally the rule of thumb with non-alcoholic beers, it's typically 25 to 30% of the calories of the equivalent alcoholic style. So our light beer is 25 calories, no grams of sugar up to some of our dark beers are more like 100 calories.

but like a heavily alcoholic stout could be five or six hundred calories so our IPAs tend to be around fifty to seventy calories which is

A great calorie point for IPAs. Yeah, the general rule of thumb on calories and ethanol is 20 calories per 1% ethanol. So like a 4% light beer has like 80 plus calories of alcohol calories. Is there a profile of a typical customer of yours? I just had it for the first time. I liked it. I'll drink more of it. I'm a 52-year-old man.

When people describe me, your company is called Athletic. Athletic is probably not the first word. I looked for one of yours that was maybe called formerly Athletic, but I didn't see one. So I had to take the Athletic. What would you say? I'm guessing your typical customer doesn't look like me, though, or do they? Yeah.

So non-alcoholic beer used to be generally an older and very male population that had lapsed out of drinking. And now it's gone younger and younger. Our customer base is about 50-50, male and female. And it's so flexible on occasions. It's for parents chasing their kids around. It's people who want something delicious to pair with their weeknight dinner. It's for people who are out with colleagues and just want a beer, but then get back to work or whatever after. I saw that non-alcoholic spirits...

had grown like crazy over the past five years. I mean, from a small base, right? But the growth rates have been tremendous. Would you ever consider branching out beyond beer into non-alcoholic spirits? So I'm very excited about the spirits category, really.

Right now in the adult non-alcoholic beverage world, it's about 90% beer and the other 10% is wine, spirits, mocktails, or canned cocktails. So I think all those categories will eventually grow to be a significant part of their alcohol equivalent styles. At Athletic, we're really excited about the long-term future of non-alcoholic beer, and that's our core focus. But

Me and our co-founder, John Walker, who's kind of our technical co-founder and brewmaster and kind of reinvented the way non-alcoholic beer is made.

We're definitely tinkerers. We love a lot of categories. I would love there to be better and better spirits in wine and non-alcoholic form, for sure. There's a spirits brand called – a non-alcoholic spirits brand called Ritual that was snapped up this past September by Diageo. That is the distiller of Johnny Walker, and they make Guinness beer. And so they bought this non-alcoholic spirits brand. What if one of the big beer companies –

Anheuser-Constellation, one of these, comes to you and says, Bill, we love what's going on with this athletic. We'll offer you guys a skajillion dollars for it. Would you – are you –

Would you be interested in doing a deal or do you want to stay on your own or do you not think about it? There has to be someone out there that's looking at you right now saying, oh, we would love to have that. Yeah, I think so. The Ritual brand is a great brand and I think super highly of the people behind it. They're good friends. In many ways, we've had parallels with our building stories. I'd say in general with athletic, you know, there's a lot of pathways we could go. I come from a capital markets background myself.

And, you know, on the right day, I'm very excited about an IPO. I could be excited about running Athletic as a private company forever. There might be a time where it makes sense to team up with a strategic who has more resources and reach.

So any pathway could make sense and catch me on the right day. I could be excited about any of them. And of course, I'm a fiduciary for over 100 shareholders and all of our teammates are equity owners as well. So I'm looking out for everyone's interest there as well. But at the end of the day, also, non-alcoholic beer is still only 1.5% of beer. And in my head, I know it's going to over 20% of the beer category.

Whatever form the capital structure takes, athletic is my life's work and my passion and excited to lead that charge. With that kind of share for non-alcoholic beer, you must anticipate that alcohol consumption is going to be, and although people will continue to drink, there must be some kind of long-term decline for it. The people will drink less than they once did. I mean, is alcohol going the way of tobacco or is it not on that steep of a decline? Do we have a future that is

more sober or more moderate than our past. I actually don't think athletic really has to have a view on that. It's, it could go either way. And, you know, alcohol has been around for 5,000 years. And I, I think it's probably premature to call it an abrupt end to alcohol in any way. And we're certainly not cheering for that, but, um,

I think just out of occasion and population growth, non-alcoholic beer can get to 20% of the beer market. Like just by adding new occasions, new days of the week and everything. I think that's easily up for grabs there and we're excited about that. Thank you, Bill. And thank all of you for listening. Jackson Cantrell is our producer. He's Sneeze Guard Royalty. I feel a sneeze coming on. Quick, the lower slat. Get the angle just right.

You can subscribe to the podcast on Apple Podcasts, Spotify, wherever you listen. If you listen on Apple, go ahead and write a review. If you have a question you'd like answered on the podcast, you can record a voicemail on your phone. You can email me at jack.how, that's H-O-U-G-H, at barons.com. Thanks, and we'll see you next week.