3 Beers—I Mean Stocks—You Should Avoid
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
You can't ask for a better investment find than one in which you not only believe in the company's growth potential, but you also believe in the company as a whole. Unfortunately, in today's world, such an investment is truly a rare find. I'm not simply talking about a company you like that happens to be on a growth track. I'm talking about a company that you REALLY believe in—A company that you follow, stalk, and buy from religiously just because its product/service is that GOOD. I'm talking Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG) kind of good. Apple and Google didn’t get to where they are today because of decent products/services that consumers just happen to stumble upon. Apple and Google products are heavily sought out and tracked down by consumers who practically crave them.
You may be thinking that’s the case for every successful company out there. I mean, they wouldn't be successful and growing if the products/services offered weren’t great, right? Wrong! You see, there's a huge difference in a company that dominates a market because its product/service simply can't be beat and a company that dominates (if only temporarily) a market because it is good at marketing. And if you ask me, this is where the CURRENT (I honestly cannot emphasize the word current enough) top three players in the beer industry come into play. Anheuser-Busch InBev NV (NYSE: BUD), SABMiller PLC (NASDAQOTH: SBMRY.PK), and Molson Coors Brewing Company (NYSE: TAP) are practically household brands when it comes to beer, but would I go for a buy-and-hold strategy with their stock? Absolutely not!
These companies are great at three things: marketing/building brand loyalty, mass production, and distribution. Don’t get me wrong here. Great marketing, mass production, and distribution are necessary ingredients for any business to do well, but can you build a sustainable business on these ingredients alone? Of course you can’t. A red flag should automatically go up anytime we find a company whose success is completely dependent on these three elements. A great business with a quality, consumer-oriented product/service will find a way to be great at the above items, however the core element that makes it successful will always and must always be the product/service the company offers. Is Apple great at marketing and distribution? Absolutely, it is. Is that why Apple just brought in roughly $108 billion in revenue last year and is seemingly unbeatable in its industry? No, not even close. And the same can be said of Google. These two corporate giants dominate their respective industries because they care immensely about each and every product/service offered, and they do everything within their power to produce quality, life-changing (yes, the Google search and Apple iPhone were life-changing) products.
Some may disagree with me when I say that marketing, mass production, and distribution are the only things that Anheuser-Busch, SABMiller, and Molson Coors are good at. However, if we take a step back and consider the products offered by all three companies, differentiation appears to be a foreign concept. If we strip all of the major products distributed by these companies of their brands/labels, then we strip them of their very identities.
Even if you agree with me that these three companies are only good at the above items and aren’t necessarily producing “life-changing” products, what’s the big deal? It’s just beer after all, right? And who cares if these companies are only good at creating brand loyalty and selling lots of beer? The companies have done very well (top three players in the industry at least) AND they pay dividends! They clearly don’t need to differentiate their products and create quality, “life-changing” beer, right? Wrong again!
From Commodity to Crafty
You see, this would not be such an issue if the products being sold were simply commodities, but today’s beer consumers demand so much more in their beer. Don’t believe me? Then let’s take a little stroll down the numbers park and do some exploring. Let me start by introducing you to my good friend, craft beer. The Brewers Association defines craft brewers as smaller brewers whose hallmark is innovation. According to the Brewers Association, the craft brewing industry grew 13% by volume and 15% by dollars in 2011, whereas the overall U.S. beer sales by volume decreased by 1.3% in the same year. According to a recent article in The Huffington Post, all of the top 25 craft breweries experienced increases in revenues during 2011. Additionally, the article noted a staggering 1,900 craft breweries are in operation across the U.S., with 900 more in the planning stages.
The Foolish Bottom Line
This must be a huge wakeup call to traditional breweries such as Anheuser-Busch, SABMiller, and Molson Coors—and an even bigger wakeup call to anyone holding stock in these companies with a buy-and-hold strategy. Beer drinkers are no longer satisfied with your typical, run-of-the-mill beer. Demand for quality and innovation within the beer-making process is high and steadily increasing. If Anheuser-Busch, SABMiller, and Molson Coors hope to maintain market share and continue providing a return on your investment dollars, then a major overhaul in their business plan is called for, but I wouldn’t hold my breath.
mattmcmichen has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple, Google, and Molson Coors Brewing Company. 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.