Craft Beer Might be Getting Too Popular for Sam Adams

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If you're bullish on high-quality, craft beer, you might be inclined to purchase shares of Sam Adams-maker Boston Beer (NYSE: SAM). The stock has been a great growth story, rallying over 300% in the last five years, and 25% in 2013 alone.

The demand for craft beer is up, particularly among millennials -- the only group of beer drinkers that’s actually growing in number. But along with that demand has come a tidal wave of supply -- both the number of breweries in existence, and those in the planning stages, has exploded to multi-generational highs.

The craft beer revolution

The number of breweries in the US steadily declined for most of the 20th century. After bottoming out at less than 100 in the late 1970s, the industry has seen explosive growth in recent decades. Today, there are over 2400 breweries in the US -- a number not seen since well before the first World War.

Restaurants have taken to brewing their own beers, while bars use the number of different beers on tap as a selling point. “Beer Fests” (and other craft beer-centered events) have become popular.

The big beer companies have been forced to respond. Early last year, Anheuser-Busch InBev (NYSE: BUD) launched Bud Light Platinum -- an upscale version of its popular light beer clearly aimed at the craft beer market. The year before, it acquired Chicago-based, craft brewery Goose Island.

For its part, rival Molson Coors (NYSE: TAP) has championed Leinenkugel’s and Blue Moon. On the company’s last earnings call, management revealed that it was planning to push new versions of these beers later this year.

Overall, sales of craft beer grew 15% in 2012 -- well outpacing the larger beer industry, which grew less than 1%. Boston Beer has benefitted from this trend, as its sales have soared -- revenue jumped 20% in the first quarter of 2013.

Too many breweries

But the problem with Boston Beer isn't one of momentum, or of demographics. Rather, the issue I have is with the company’s increasing competition.

Boston Beer may be the country’s biggest, most well-known craft brewery. As avid beer drinker, I can personally attest to the quality of their products. And they continue to innovate; analysts at Goldman Sachs just upgraded the stock on the strength of their new brand, Angry Orchard.

But I believe it would be a mistake to view craft beers in the same light as the traditional, big name brands. As a fan of craft beer, and a bartender in a previous life, it is my observation that beer drinkers seem to fall into one of two categories: those who drink craft beer, and those who don’t.

Brand loyalty is low

For those that don’t, brand loyalty seems to run quite high. But for the craft beer drinkers, it is fundamentally the opposite. Part of the enjoyment of craft beer is the thrill of discovering something new -- hence the popularity of the aforementioned craft beer fests and the rise of craft beer rating apps.

Beer Pulse notes that craft breweries are struggling to retain loyal drinkers. This should come as no surprise. Some of the most hailed craft beers are highly alcoholic stouts unsuitable for regular consumption.

This fact is self evident in the offerings of craft breweries. Anheuser-Busch and Molson Coors can dominate the North American market largely with just two beers -- Boston Beer sells roughly a dozen different Sam Adams throughout the year (not to mention limited edition beers and other variations).

One might be inclined to believe that, by putting out a superior product, Boston Beer will be able to capture the customers of its rivals like Anheuser-Busch and Molson Coors, and in doing so, take the place of these beverage giants. This would be the best case for the company.

But I don't see it as a likely outcome. With the number of breweries nearly doubling in the last five years, the way in which beer is being produced and consumed is fundamentally changing.

While a craft beer drinker may prefer a Sam Adams over a Budweiser, they might take (or at least strongly consider) a Sierra Nevada Pale Ale or Bell’s Oberon or a Dogfish Head Midas Touch in place of a Boston Lager.

Playing the beer stocks

Craft beer is undoubtedly gaining in popularity. But is that good for Boston Beer? While demand for its products may continue to increase, investors shouldn’t expect the company to replace the big beer giants.

Breweries are at a multi-generational high, and more are in the works. Among craft beer drinkers (the kinds of people inclined to drink Sam Adams), loyalty is low.

Overall, investors might be served best by avoiding beer stocks altogether. It will take many years to play out, but an industry once dominated by just a few companies seems poised to shift to one controlled by a very large number of small, independently owned breweries. That’s great for beer drinkers, but not for shareholders.

Boston Beer's Samuel Adams brand helped to redefine beer and kick off the craft beer revolution in the United States. Success breeds competition, though, and while just a few years ago Boston Beer had claim over most of the craft beer shelf, today the field is crowded. Can Boston Beer rise above the rest, or will it be squeezed between small local breweries on one side and global beer giants on the other? To help you decide, we've compiled a premium research report filled with everything you need to know about Boston Beer's risks and opportunities. Just click here now to find out whether Boston Beer is a buy today.

Joe Kurtz has no position in any stocks mentioned. 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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