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Bill Smith
Bill Smith
Articles (43) 

Boston Beer Co. (SAM) Broadens Brand Portfolio and Opportunities

January 11, 2012 | About:

Boston Beer Company (NYSE:SAM) doesn't rest on its laurels. They've been quietly busy expanding their brand portfolio and access to opportunities. (Note: click here to read my previous company review).

Angry Orchard


As I scanned for differences between SAM's two most recent 10-Ks, I came across a new product added to their growing list, Angry Orchard Hard Cider. Their product line also includes over 20 beers under the Samuel Adams brand, in addition to the Twisted Tea and Hardcore Cider brands. You may have noticed it in the beer aisle not realizing it came from SAM's Cincinnati, Ohio plant. It's being positioned as a premium offering to HardCore Cider. There are currently three 6-pack offerings in the lineup: Apple Ginger, Traditional Dry, and Crisp Apple. So far, it's been sighted from New England all the way out to Colorado.

But SAM hasn't stopped there.

Alchemy & Science


There's a venture called Alchemy & Science (A&S), which is now a wholly owned, independently operated subsidiary of SAM, formed Oct. 28, 2011, as announced in this press release. It's a collaborative effort between SAM and Alan Newman, the founder of the renowned Magic Hat Brewing Co. Newman had left the industry, but at the urging of Jim Koch, founder of SAM, returned to form A&S as a "craft brew incubator." Their mission is to increase awareness of craft brewed beers around the country. As Newman put it, "Our job will be to find the opportunities in craft brewing--the blank spaces that exist. We'll be looking for unique brewing techniques and ingredients as well as hunting for ancient or new recipes and beer styles to develop and introduce to beer lovers." They are headquartered in Burlington, Vt., and will have a national scope.

Angel City Brewing


Additionally, SAM, through A&S, acquired Los Angeles, Calif., craft brewer, Angel City Brewing, for an undisclosed sum. This deal marks the first brewery for the A&S portfolio and includes the Angel City's founder, Michael Bowe, as an adviser for the next two years. Bowe founded Angel City in Torrance, Calif., in 1997 and relocated it to downtown LA recently. With the resources SAM/A&S will provide, the pace of renovations will accelerate and are scheduled to be brewing and open for business early this year with a full-service restaurant, a VIP lounge with pool tables, a special-event room, two stages for live music, a tasting bar, a beer garden and a gift shop.

Capitalistic Craft Beer Darwinism

In the grand scheme of things, the big fish are eating the little fish. More and more micro and craft breweries are being acquired. For instance, AB-InBev (NYSE:BUD) are actively acquiring established craft brands, such as Goose Island and Terrapin.

Why would mega-breweries care?

The reason is clear. In my previous article on the craft beer industry mid-year growth results, you'll notice that overall U.S. beer production has flat-lined for the last 30 years, with U.S. sales down 1%. However, the 5% market share for craft beer has been growing at double-digit rates. In 2010, growth rates were 11% by volume, and 12% by sales. In the first half of 2011, sales were up 15%. Acquiring craft breweries would presumably give the mega-breweries top-line growth.

What does this do for SAM?

Access to the Brewpub market: Brewpubs are a combination restaurant/brewery where the beer is sold on-premise only, which then means their market is local. As of November 2011, there are 1927 active breweries/brewpubs in the U.S., of which roughly two-thirds are brewpubs. Just six months ago there were 1700. The downside on brewpubs is a high (50%+) failure rate. However, by acquiring Angel City, an established brand (that also packages its beer), it looks to me like SAM is starting to tap into this growth by using A&S to focus on the best ones around the country.

West Coast footprint: SAM's breweries are dominant on the East-cost. To continue expanding production beyond their current 2.3 million barrels (and not resort to contract brewing), they'll need to either renovate and increase existing brewing capacity or buy other breweries. This purchase gives them a top craft brand on the West Coast.

Recipe Formulation Feedback: Craft brew customers are motivated by flavor, not by price, and are willing to pay for a good beer. Having a live brewpub will give them instant feedback from customers on new beer recipes under formulation. It should also shorten the time to market to produce packaged versions of the beer to reach a wider audience.

If you're following SAM, keep Alchemy & Science in mind as you scan their 10-K/Qs — their operations should be consolidated on the financial statements.

About the author:

Bill Smith
I'm an IT professional and a private individual value investor with degrees in electronic engineering and business economics. My major investment influence is Warren Buffett--finding "wonderful companies trading at wonderful prices".

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