Boston Beer Co.: Winning in a World of Big Bad Beers

This article was co-published by Seeking Alpha on Nov. 22, 2015. 

After months of playing hard to get, SABMiller (SBMRY) has agreed to a $55 billion takeover by its biggest rival, AB InBev (BUD). AB InBev will offer most SABMiller shareholders $67.59, a premium of about 50% the share price before speculations of acquisition. If you thought the world’s biggest beer manufacturers couldn’t get any bigger, they just did.

Indeed, recent trends show that beer leaders believe bigger is always better. Driven by falling beer sales since 2009, the world’s largest beer companies have merged to cut costs and gain their competitors’ distribution networks. AB InBev, the world’s largest brewer with a 25 percent global market share, is the incarnate of beer mergers. It was formed when Anheuser-Busch, a brewery grown in St. Louis, Missouri, merged with InBev. InBev stands for the merger between Interbrew and AmBev, each of which was formed by a merger between the two largest breweries in Belgium and in Brazil respectively. AB InBev owns over 200 beer brands today, of which 16 each generate over one billion USD per year in revenue, including Bud Light, the most widely sold beer in the United States.

Although falling demand for beer is currently driving brew giants to huddle together, recent years have nevertheless shown a surprising rise in craft beer. Despite overall beer sales falling by 2.2 percent in 2009 in the U.S., craft beer sales grew a phenomenal 10.3 percent. One explanation is that as giant conglomerates immediately seek to slash costs for the beer brands they acquire, they shut down local breweries of old-time favorites, and move their facilities to cost-effective locations. But such a blunt relocation clumsily diminishes the brand’s original flavor, causing bitter disappointment among locals and losing hitherto loyal fans. In contrast, local microbrewers painstakingly oversee their crafts, ensuring top-notch quality; many deliver the beers personally to local bars. Beer connoisseurs would rather fork out a few extra dollars for the genuine flavor. For an increasing number, the beer experience is no longer the cheapest liquid you can find in a store; it is also about embracing subtlety, or a matter of community pride.

However, from the sheer number of craft beers that have come into existence, it is obvious that not every independent brewer can be a winner. Craft brews comprise only 25 percent of the beer market in the U.S., but there exists some 2,000 microbreweries in the country. The question is, which craft brewers will grow and succeed amid the ongoing craft beer craze?  One Boston Beer Company (NYSE:SAM), better known for its trademark Samuel Adams beer, looks set to move up in the race.

Founded in 1984 by C. James Kroch, Boston Beer Co. is currently the second largest microbrewer in the United States. It brews more than 60 styles of Samuel Adams beer, named after the American patriot, as well as Angry Orchard Hard Cider and Twisted Tea.  The Samuel Adams Double Bock and Samuel Adams Tetravis, both lesser known beers, have even won gold medals at the Great American Beer Festival. With a market capitalization of $2.81 billion, it combines the best of both beer worlds. The brewery produces unique labels home-grown in Boston, America (and marketed as such), and focuses on attuning its techniques to local patrons’ tastes; at the same time, it has sufficient capital to gain distribution channels, market its products, and diversify into other brands, all of which are crucial to its long-term growth. Its ability to capture and retain some market share will differentiate it significantly from smaller, weaker breweries, which may expire as quickly as they rise.

One critical weakness of the craft beer industry is its lack of access to distribution networks. Big companies such as AB InBev wield the trump cards in the distribution game, exploiting incentive programs to gain distributors’ loyalty. Some of these distributing companies purportedly work exclusively for just one beer master. Consequently, the tiny, emerging craft beers will find themselves mostly barred from making its debut on the larger market, let alone to retail stores. Recently, a distributor for Yuengling, another craft beer producer, was caught making bribes to Boston’s bars to feature Yuengling’s beers. The controversy merely reflects the larger behind-the-scenes deal-making scene between beer makers and distribution companies. The playing field is skewed toward the giant brewers, and the small newcomers struggle for a shot at a breakthrough.

Moreover, one reason why beer companies have grown so big is because particular brands tend to fall in and out of fashion. Thus, companies with a portfolio of multiple brands have a much lower risk of failing when the popularity star for one of its beers stops shining. If the sales of one label decline, there are other labels that serve as back up. Therefore, Boston Beer’s ability to diversify as a craft brewer is a huge asset that will contribute to its survival and longevity. Indeed, the Samuel Adams brand declined in Q2 2015, but declines were offset by increases in sales of Angry Orchard and Twisted Tea. In 2011, Boston Beer created a Vermont-based subsidiary called Alchemy and Science, focused on researching new brewing techniques to be applied in new geographic areas. The venture could yield new potential markets and target consumers. Indeed, Alchemy’s first project was to launch the Traveler Beer Co., which claims to “introduce American drinkers to the shandy (a beer mixed with a soft drink)”. The brand offers colorful flavors like Lemon, Grapefruit, and, just for the season, Jack-O Pumpkin. Traveler beers are available in all 50 states and enjoy a following of 11,100 on Instagram. The beer currently has more than 200,000 ratings on UNTAPPD (a new mobile web app that allows you to socially share the brew you are currently enjoying). Alchemy acquired Angel City Brewery, located in downtown Los Angeles, in 2012, and the Coney Island brand in 2013. Its latest project is Concrete Beach Brewery in Miami, which distributes beer locally and participates in the local beer festivals. Concrete Beach itself allows customers to be spoilt for choice, with both year-round and seasonal menus, ranging from pilsner to lager to ale and pale ale.

Craft beer is an exciting premium market that attracts many new entrants, but the market remains concentrated among the powerful few, and numerous new brewers will struggle to scale. Among the many hopefuls, however, Boston Beer shows the most promise, offering local flavor that has staying power.