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Will Omission Beer Bubble Over or Fizz Out?

Calla is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The number of breweries in the United States has exploded from a few hundred in 1980 to over 2100 in 2012 – and the craft segment has enjoyed years of 15% growth while the overall beer market declines. But as craft offerings increase exponentially, commentators remark that the segment is saturated with options. Those comments are increasingly directed at Craft Brew Alliance (NASDAQ: BREW) and Boston Beer Co (NYSE: SAM), companies who focus exclusively on the increasingly competitive craft beer market. Both companies have released new beers in an effort to retain customers as sales of their core beers decline. CBA’s newest product is a new brand of gluten-free beers named Omission.

Heavy competition

With hundreds of breweries springing up in the last few years and home brewers entering competitions and local pubs as well, the market for niche and specialty brew is crammed. As the only publicly-traded craft companies, investors have poured money into Boston Beer and CBA over the last four years. The two companies’ share prices are up 375% and 420%, respectively, since December 2008.

Worryingly, sales of their top beers, Samuel Adams Boston Lager and Widmer Hefeweizen, have declined while sales of privately held companies’ flagship beers, such as Lefthand’s Milk Stout, Rogue’s Dead Guy Ale, and New Belgian’s Fat Tire have bounded ahead. Growth in other categories has offset core losses over the past two years, but the trend reveals fierce competition chipping away at CBA and Boston Beer’s bottom lines.

The gluten-free market

Gluten-free products are on track to net over $7 billion in 2012 but breweries have largely stayed out of the market. While there is constant competition for the best nitro stout or spiced IPA, few gluten-free beers exist, and those rarely earn even a passable rating from gluten-free beer drinkers. Anheuser-Busch’s (NYSE: BUD) Redbridge, brewed with sorghum and one of the main gluten-free beers on the market, has been praised simply for tasting like an American lager.

Omission has won awards for tasting like good beer and for offering more than one flavor. Two other award winning gluten-free beers from Belgium’s Brunehaut brewery offer additional flavor options, but retail around $4 a bottle, while Omission beers run about $1.50 a bottle. Clearly, CBA managed to find and target an underserved niche in the saturated craft beer market.

Omission and Brunehaut beers taste like regular beer because they are brewed with barley and the gluten is removed afterward. Unfortunately for the brands, any product made with an ingredient containing gluten cannot be labeled gluten free, no matter the post-facto procedures and tests. Thus, Omission is relying on word of mouth for marketing. The tactic works for lululemon, but few other companies have had much success with nationwide word of mouth campaigns.

Forging forward

How big is the gluten-free niche? Is gluten-free just another diet fad? Recent studies estimate that 1.8 million Americans are celiacs and another 5-10 million have some kind of gluten sensitivity. A Mayo Clinic study that tested blood samples from different decades found that the prevalence of celiacs has increased fourfold since the 1950s and that the disease is underdiagnosed.

However, the study also estimated that half of people on gluten-free diets have no diagnosable gluten-related condition. As Yale’s Dr. Katz puts it, “gluten sensitivity still only affects a minority in the general population -- but gluten preoccupation appears to affect many more.”

Gluten sensitive consumers are no fad, but the size of the current market may be. CBA’s CEO Terry Michaelson has had a celiac diagnosis for 12 years, making CBA more committed than most breweries to offering high-quality, gluten-free beer after the fad, if the Omission brand can build a loyal consumer base. But even with excellent recipes and outreach, gluten-free beers stand to lose half their potential consumers and a lot of growth potential when gluten leaves the diet limelight.

CallaMarie owns shares of Craft Brewers Alliance. The Motley Fool owns shares of Boston Beer. Motley Fool newsletter services recommend Boston Beer. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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