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Boston Beer Co Inc (SAM): 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 Co Inc (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.

Boston Beer Co Inc (NYSE:SAM)

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 NV (ADR) (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 Brewing Company (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 Co Inc (NYSE:SAM) 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 Co Inc (NYSE:SAM) isn’t one of momentum, or of demographics. Rather, the issue I have is with the company’s increasing competition.

Boston Beer Co Inc (NYSE:SAM) 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.

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