SAM's Hidden Gem

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Boston Beer (NYSE: SAM) has become too big to be considered a craft brewer. This has raised doubts whether it can continue to grow beyond its 1% market share, as the brand is increasingly considered mainstream, closer to Anheuscher-Busch (NYSE: BUD) and Molson-Coors (NYSE: TAP), further away from the novelty of microbreweries. The craft brew consumers, who were the reason for Boston Beer’s initial success, have now mostly turned their backs on them due to its size. Boston Beer must focus on capturing market share from the big boys. Given its track record, one should not doubt Boston Beer’s capability to do just that. 

Despite Boston Beer’s brand becoming more mainstream, it should continue to do all it can do keep the craft brew consumer on its side.  This has to do about evidence that Boston Beer has not forgotten its microbrewery heritage. Craft brewing is about a culture and commitment to quality, variety, creativeness, and innovation educating the public about the art of brewing.  Adhering to those principles will drive success -- sometimes in the most unexpected ways. 

Introducing apple cider
In October 2011, Boston Beer made a brilliant strategic move that could pay off tremendously: It launched its Angry Orchard Cider product line. Its Traditional Dry in particular is very comparable to some of the most well-known ciders in the world: Bulmers and Magners.  Entering the cider market is a slightly unexpected but very “crafty” move by Boston Beer, which has opened up a severely underestimated opportunity. 

Let’s have a look at some numbers:

  • The cider market is expected to generate $2.6 billion by 2015. 
  • In 2011, over 85% of cider sales were generated in Europe and Asia-Pacific. 
  • The UK represented 17%.
  • Ireland represented 12%.
  • The US represented only 0.3% of global cider sales.  That is well under $10 million per year based on 2015 forecasts.
  • However, in 2011, cider consumption in the US grew by 25% compared to craft brew growth rates of 13%-15%.

To illustrate the potential of the opportunity in the US market, let’s look at Ireland:

  • In 2011, cider sales were reported to total $175 million. 
  • Ireland has a population of 4.5 million people (compared to 315 million in the USA).
  • On average, that is $40 of cider sales for every resident in Ireland per year. 
  • If the US market grows to 1% of the average per capita spend in Ireland, or just $0.40, the US cider market would be worth $126 million.

Is the US going to be as obsessive about cider as Ireland?  Unlikely.  However, as shown by the 25% annual growth rate of cider consumption in this country, the American public is getting increasingly exposed to cider, they like it, and word of mouth is promoting the product. 

This story becomes even better if you look at the impact cider can have on earnings. Cider has better margins than imported and craft beers.  On average it is sold at an average of $35 a case versus $29 for imported beer and $33 for craft beer. 

Finally, cider is popular among women.  Women only represent only 20%-25% of the beer consumption in the US.  This has remained consistent over the past decade.  It is a segment breweries continue to struggle with.  They have not found a way to increase sales to women.  Cider will draw in this segment of the market opening up new revenue streams.

The US cider market is a hidden gem within the craft brew market that continues to fly under the radar.  Boston Beer has recognized it and it is very quietly tapping into this niche, while it continues to be ignored by its big competitors.  Sounds very similar to the craft-brewing story that started Boston Beer’s national success in the first place, two decades ago. 

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

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