Does This Spell Trouble For Craft Brewers?

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Brewer Molson Coors (NYSE: TAP) recently announced it will buy a small Irish craft brewery, Franciscan Well. At first blush, the move seems rather inconsequential, considering that Franciscan Well brews only about 1,700 barrels a year for beer drinkers on the Emerald Isle, while its new owner brews some 50 million barrels of suds annually. But it could prove important in the company’s strategy to further tap into the fast-growing craft brew market, which is still small at just 6% in the U.S.

Among Molson Coors’ plans for Franciscan Well is a sizable expansion in brewing capacity – from 1,700 barrels to more than 62,000 – as well as the exploration of the export market for Franciscan’s beers, an opportunity Molson Coors sees as “significant.”

The company’s move is the latest by the megabrewers in their ongoing efforts to gain a bigger share of the craft market. And who could blame them? Americans are drinking less beer overall – U.S. beer consumption was down every year from 2007 through 2011. And the country’s largest brands like AB InBev’s (NYSE: BUD) Budweiser and SABMiller’s (NASDAQOTH: SBMRY) Miller Lite have been in decline.

Yet craft beer sales bucked the trend. Indeed, craft sales grew by as much as 15% a year over that time. And the trend continued through at least the first half of 2012, when craft sales were up 14%, according to the Brewers Association.

AB InBev, the world’s biggest brewer, has made similar strategic moves, buying the small, Chicago-based brewery Goose Island in 2011, and starting its own line of megacraft beers under the Shock Top brand.

Molson Coors has partnered with SABMiller to produce beer under a few different crafty names, like Leinenkugel, Henry Weinhard and perhaps the best-know megacraft, Blue Moon.

As a drinker of craft brews, I’d long been a skeptic about whether the megabrewers could succeed in the craft market. Anecdotal evidence would lead you believe that drinkers who prefer craft beers shun the brewing behemoths and all their products. What’s more, strong consumer trends of “buying local” fly in the face of megacraft beers. And in most places, there are ample choices, both local breweries and regional brands, like Pennsylvania’s Yuengling.

Brewing big gains
But other facts tell a different story. Blue Moon’s shipments grew by 50% between 2009 and 2011, according to statistics from Beer Marketer’s Insights. Leinenkugel grew by 20%.

But maybe the single most shocking evidence of megacraft success came during AB InBev’s last earnings conference call, in October. There was a lot of discussion about the struggles of flagship beer Budweiser. But there was also a brief but very interesting nugget from CEO Carlos Alves de Brito about the company’s forays into the craft market: Shipments of its Shock Top beers grew 70% year-to-date, Brito noted.

“The brand has good momentum ... proving that strong craft brands are scalable,” Brito said.

That could spell trouble for companies that brew quality craft beers on a smaller scale and have their eyes on expansion. Boston Beer (NYSE: SAM) has been faring well in recent years, and it’s been rewarding investors with tidy gains. But its growth paled in comparison to Shock Top’s, with SAM’s shipments in Q3 2012 growing some 17% over Q3 2011. Craft Brew Alliance (NASDAQ: BREW), maker of Widmer Brothers, Redhook, Kona and Omission brands, saw shipment growth of just 4% when comparing its last quarter to the comparable quarter from 2011.

The fight for shelf space
The megabrewers may not be able to rival true craft brewers in terms of quality or innovation. But they can win on another field that is just as important, if not moreso: availability.

The real threat that these megacrafts pose to brewers like Boston Beer, Craft Brew, and more than 2,000 privately owned small brewers lies in the brewing behemoths’ distribution clout. All these beers fight for shelf space at stores and tap handles at bars and restaurants. The big brewers have far greater influence over distributors in deciding which beers win those spots. Remember that the bulk of the 94% of the beer market that is considered non-craft is owned by just three companies.  (AB InBev even owns a number of distributors.) It’s easy to see how they can wield such influence over distributors.

So as AB InBev, Molson Coors and SAB Miller continue to grow their lines of craft-style offerings, those beers crowd out beers made by the smaller craft brewers, leaving them at a disadvantage to grow their brands and enter new markets. That’s what makes brands like Shock Top, Goose Island, Blue Moon and, someday, Franciscan Well, a real threat to companies like Boston Beer and privately held brewers.

A trend to watch
While growth of these brands is important long-term to AB InBev, Molson Coors and SAB Miller, it will hardly move the needle on their revenue and earnings numbers in the near future. But for smaller brewers -- even the country’s biggest craft brewer, Boston Beer -- the expansion of megacrafts is a real threat to expected growth.

Investors would be wise to keep tabs on how well those megacraft brands continue to perform in the U.S. market.


jekoslosky owns Boston Beer. The Motley Fool recommends Boston Beer and Molson Coors Brewing Company. The Motley Fool owns shares of 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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