Craft Brews are the Life of the Party, But are Investors Invited?
Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I'm a beer snob. There, I said it. You'll sooner find me leaving the bar than drinking the dreck that the folks at Bud Lite dare to call beer. If you find that statement unbearably pretentious, I've got bad news for you: there are more people like me every day. According to the Brewer's Association, craft beer sales were up in 2011, 13% by volume and 15% by sales, continuing a strong trend. This is while overall beer consumption is flat or down, as the craft brewers have been stealing market share from the big boys. Since 2006 the craft brewers doubled their share to 6%.
While the craft movement is great for American beer drinkers, it's not obvious that American investors can partake of the good times. Any temporarily successful public craft brewer will likely face strong pressure from the major brewers on one side, and even smaller, more local operations on the other.
A Lackluster Lager
Boston Beer (NYSE: SAM) produces the Samuel Adams line of beers, and its flagship brew, Boston Lager, is the most popular craft beer in the country. I believe the company is representative both of the great success craft beers have achieved, as well as the extraordinary challenges any individual brewer will face as the industry develops.
Over the last two quarters, while overall results have been positive, this was due to extremely strong sales of the company's alcoholic Twisted Tea beverage, as well as an increase in shipments of their seasonal brew as they rolled out Sam Adams Alpine Lager for the spring. More troubling is sustained weakness for the core Boston Lager brand. On the most recent conference call, management acknowledged this problem but offered no plan to solve it.
Why might this be happening? I look at the healthy performance of the seasonal brews, the anemic sales of the core brand, toss in the Brewers Association’s report that 250 new breweries opened in 2011, and I conclude that beer snobs like me are fickle and we're getting bored.
Part of what drives people to pay twice as much for a craft beer is the desire to try something new. The more ubiquitous that Boston Lager gets, the less consumers see it as a novel experience. It seems like every major city has at least one commercially successful brewery, and the more adventurous consumers will gravitate toward these ultra-local brands. Only Boston Beer's rotating seasonals offer much excitement, but they're more expensive to produce. Boston Beer does enjoy economies of scale over its local rivals, but can it compete for price-conscious consumers? Not since the brewing behemoths have decided to play.
A Craft Beer by any Other Name
Molson Coors (NYSE: TAP) and Anheuser-Busch InBev (NYSE: BUD) are not simply sitting on their hands. Molson Coors owns the valuable Blue Moon and Leinenkugel brands, while Anheuser-Busch InBev owns Shock Top and has recently stepped up its presence in the craft sector by buying the popular Goose Island brewery in Chicago – though you would never know it by looking at the beer or reading Goose Island's website. Anheuser-Busch seems to have caught on that simply being associated with Bud Lite is enough to repel the self-styled connoisseurs, and it's keeping a low profile. Purists may complain that a Budweiser beer can't possibly be a craft brew, but they can't make a fuss if they have no idea who really produced it.
As the major brewers expand into the craft space, Boston Beer will find itself under pressure not just from craft competitors with cooler cachet amongst customers, but from brands backed by brewing big boys with major cost advantages. Anheuser-Busch's strategy of buying up a brand and leveraging their distribution network to add value seems both reasonable and familiar: Diageo (NYSE: DEO) is using exactly this tactic to break into emerging markets for spirits.
So are the big brewers a good way to play the craft revival? Well, no. The major difference between Diageo's strategy and Anheuser-Busch's is that the spirit market is growing, whereas the developed beer market is not. Diageo pioneers new markets with its regional offerings; the major brewers just cannibalize their own North American sales.
A Better Bitter?
The Craft Brew Alliance (NASDAQ: BREW) might be a better investment for those thirsty to get in on craft brewing. It operates the Red Hook, Widmer Brothers, and Kona breweries. The company's small footprint and many diverse brands provide the opportunity for a long growth period before hitting the kind of ceiling that Boston Beer is up against. Craft Brew Alliance has grown fast, with gross profit expanding from $5 million in 2007 to $48 million over the past twelve months. However, with only a $137 million market cap – less than a tenth of Boston Beer – it still has a long way to go before it begins saturating the market.
As a lover of great beer and great returns on investment, I'm going to be taking a closer look at Craft Brew Alliance – their product and their stock.
Daniel Ferry owns shares of Diageo, and though he has quite a bit of interest in every other company mentioned, none of it is financial. The Motley Fool owns shares of Boston Beer. Motley Fool newsletter services recommend Boston Beer and Diageo plc (ADR). Daniel Ferry recommends Widmer Brothers' Citra Blonde Summer Brew. A bit on the fruity side, but very refreshing on a hot afternoon. 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.If you have questions about this post or the Fool’s blog network, click here for information.
