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.
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.
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 InBev NV (ADR) (NYSE:BUD) and Molson Coors Brewing Company (NYSE:TAP) can dominate the North American market largely with just two beers — Boston Beer Co Inc (NYSE:SAM) 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 InBev NV (ADR) (NYSE:BUD) and Molson Coors Brewing Company (NYSE:TAP), 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 Co Inc (NYSE:SAM)? 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.
The article Craft Beer Might be Getting Too Popular for Sam Adams originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends Boston Beer and Molson Coors Brewing (NYSE:TAP) Company. The Motley Fool owns shares of Boston Beer. Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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