In Part 1 of 'Reading the Hop Leaves,' we looked at some macro-beer industry data. From the information, we saw how Big Beer (ie. non-craft beer) is having a tough go of it. It's been a continuous uphill slog for them in the US against not only wine and spirits, but against craft beer for decades.
I closed the last article with this chart that shows the continuous erosion of non-craft beer production by craft beer production in the US. In this part, I'll dissect this information.
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If You Can't Beat 'em, Join 'em
So as to not get left behind, Big Beer has been buying brands and brewing "craft-like" beers for years, using back of house assets and resources. One notable example is 10th & Blake, the craft beer incubator and producers of Blue Moon. You may be familiar with some of the other names out there: Leinenkugel, Henry Weinhard's, Shock Top, Red Hook, Widmer Bros., etc.
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Of the merger and acquisition data I've seen from Tully & Holland, only 3 out of the 12 transactions since 2010, were purchases by MillerCoors & Anheuser-Busch. AB-InBev has an approximate 33% stake in Craft Brewers Alliance (BREW, Financial), and they completely own Goose Island Brewery out of Chicago, Illinois (formerly Fulton Street Brewery).
However, that's not what I'd call a lightning speed sense of urgency to fix your US production deficit if your aim is to get back in the game in the US. By way of contrast, Boston Beer Company (SAM, Financial) is doing the same thing. Through their wholly-owned subsidiary and craft beer incubator, Alchemy & Science, they've acquired 4 craft beer brands in just the last 2 years.
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What's in the Numbers?
Understanding what the chart above means is about understanding terms and definitions, and what is included and excluded from the numbers. The production volumes you see eroding are everything that's considered "non-craft" beer by the Brewers Association definition of the term "craft beer."
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What does that list include? Generally it's this: everything Big Beer produces, to include all of the volumes produced at their partially-, or wholly-owned subsidiaries, and any non-craft, but privately-held companies, such as Yeungling. For example, the production volumes of Goose Island, and Craft Brewer's Alliance are included in the chart above. Beers like Shock Top, Blue Moon, Killians, Leinenkugel, etc., are also included in the eroding numbers above. Yeungling, which isn't considered craft but produces as much as SAM (roughly 3 million barrels), is also included in the chart above.
And now the picture comes into focus and looks a little worse for Big Beer...
It appears that even though Big Beer's entered the marketplace with their craft-like brands, they're unable to replace that eroding volume of just 13 million barrels (16 million barrels if you include Yeungling). This lost volume is a drop in the bucket for them--AB-InBev and SABMiller brew around 500 million barrels globally. So what gives? Ultimately, I think that says something about consumer preference for their craft-like brands which is manifesting itself in their current inability to gain traction in the US.
Which probably explains why...
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The Empire Strikes Back Across the Pond
If you can't get traction here, go elsewhere- and they've done that.
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Big Beer's current focus is higher returns across the pond. According to the Demeter data, the regions with the strongest expected growth rates through 2016 are Africa, South America, and Asia (4.6%, 3.5%, and 3.8%, respectively). The US, by the way, only clocks in at 0.6% in these estimates.
Global brewers have spent $195 billion in the last decade snatching up other brewers around the world. The beer map below illustrates which of the two giants makes your beer, and visually depicts what they've been up to globally. It's a testament to their global dominance--2 beer companies own 210 brands.
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Source: Planet Money Reporting
Who's Causing all the Ruckus?
So who are the companies that are causing this volume erosion ruckus...the 13 million barrels of craft beer (and growing) Big Beer just can't seem to get back?
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Each year the Brewers Association puts out a Top 50 list of craft brewers in terms of sales volume. In the last 5 years, the Top 10 of that list has remained roughly the same and looks like this:
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Source: Tully and Holland
These 10 brewers produce nearly half of the total craft beer volume. Beyond them, the field opens up into thousands of other breweries not only competing for shelf space, but for tap space. As I mentioned in Part 1, there are 2,538 breweries operating in the US. From this list, Boston Beer Company (SAM, Financial) nearly engulfs the next 3 in terms of volume. (Note: Yeungling, which produces as much volume as SAM, isn't included in this list as they don't meet the BA definition for craft beer).
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Even though craft brewers have small marketing budgets and sales staffs compared to the industry behemoths, according to Demeter's data, 5 of 10 of the fastest growing brands are craft beer. From that list, you'll see these names: Oskar Blues, Lagunitas, New Belgium, Sierra Nevada, and Gambrinus.
With the exception of SAM, all of these companies are privately held companies. To my knowledge, there are only three other North American, publicly-traded brewers: Craft Brewers Alliance (BREW, Financial), Big Rock Brewery (BRBMF, Financial) and Mendocino Brewing (MENB, Financial).
What are these breweries making that people can't get enough of, and is causing this erosion forcing Big Beer to look elsewhere? Well, that's in the third part of this article, where I'll continue to read the hop leaves, and dissect some more information from my point of view.
Until then, cheers!
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Summary
The craft beer industry continues to outstrip the growth of the aggregate beer market, by a torrid double-digit pace. This growth is marked by a consistency in both dollar sales and volume increases. For years now, Big Beer is seemingly unable to regain the market share taken by craft beer, and that shows no sign of abating. Big Beer, in response, has turned to look overseas for M&A to reinvigorate growth. Consumer demand for craft beer is strong in the US and has been met by the largest quantity of breweries in operation the US has seen in 126 years. This sub-industry show no sign of abating and is expected to double its market share by the year 2020, even amidst the overall beer market having seen flat-line growth for the better part of a few decades. However you look at it, tailwinds continue to fuel the craft beer industry. It's an oasis of growth in an otherwise dead beer market.
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For Background Reading
Craft Beer Industry--Reading the Hop Leaves (Part 1)
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Disclosure
Long SAM
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Disclaimer
This review/analysis is provided for informational and entertainment purposes only and is the opinion of the author. The information and content contained herein should not be construed as a recommendation to invest or trade in any type of security. Neither the information, nor any opinion expressed, constitutes a solicitation of the purchase or sale of any security or investment of any kind. Conduct your own research and due diligence.
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