Anheuser-Busch InBev NV (ADR) (BUD), Molson Coors Brewing Company (TAP): A Rally Is on Tap for This Brewer

Big beer is in trouble. For decades, Amercians were content to drink watered-down beer so long as it was a brand they recognized. However, more and more Americans are starting to care what their alcoholic beverages taste like, thus giving rise to the domestic craft beer industry and lowering sales of past American favorites like Anheuser-Busch InBev NV (ADR) (NYSE:BUD)‘s Budweiser.

Although the craft beer industry poses a major threat to its business, Molson Coors Brewing Company (NYSE:TAP) is likely to thrive despite competitive pressures.

The company is the second-largest North American brewer, with operations concentrated in mature markets. As a result of its relative lack of explosive growth, the company has developed an efficient distribution system and economies of scale. This has allowed Molson Coors Brewing Company (NYSE:TAP) to earn double-digit operating margins in each of the last six years.

One reason investors have shied away from the stock is due to the controlling stakes of the Molson Coors Brewing Company (NYSE:TAP) families. However, closely-held companies often focus on creating long-term shareholder value rather than pursuing strategies that boost the stock price only temporarily; as a result, capital allocation will likely be in the best interest of long-term shareholders.

Competition on the horizon

Molson Coors faces considerable competition from big brewers and craft brewers alike. The company’s long-time rival, Anheuser-Busch InBev NV (ADR) (NYSE:BUD), has a dominant share of the United States market. In addition, Anheuser-Busch InBev NV (ADR) (NYSE:BUD) has a large share of the beer markets in Brazil and Argentina, in addition to most of the other countries in which it competes. This enables the company to spread out its fixed costs across a larger number of units, leading to a lower unit cost.

However, beer market economies of scale are mostly regional. Even though Anheuser-Busch InBev NV (ADR) (NYSE:BUD) has a nearly 50% share of the U.S. market, Molson Coors Brewing Company (NYSE:TAP) can still compete because its operations are concentrated in a relatively small geographic area. This affords it economies of scale similar to that of Anheuser-Busch InBev NV (ADR) (NYSE:BUD) in many of the markets in which it competes. Therefore, Molson Coors Brewing Company (NYSE:TAP) will likely continue to fend off competition from other large brewers.

Craft brewers, on the other hand, could pose a more serious threat to Molson Coors’ business. The industry is growing quickly due to greater consumer awareness of the niche. For instance, Boston Beer Co Inc (NYSE:SAM) expects to double its sales volumes over the next decade — an impressive feat for a company that already boasts $603 million in sales, which is extremely large for a craft brewer.