Good Beer Leads to Good Profits

One of the great growth stories through the recession and today is the expansion of the craft beer industry in the United States. In 2009, craft beer sales increased by 12% while the industry as a whole fell by more than 2%. The trend continued through the first half of 2010 as craft beer sales were up again 12% by revenue and 9% by volume, while total beer sales were down nearly 3%.

American consumers are beginning to realize that real beer actually tastes good and that there are more tasteful and well-crafted options than the mass-marketed brews produced by Anheuser-Busch InBev (NYSE: BUD  ) and Molson Coors (NYSE: TAP  ) . It has also created a growth opportunity for small businesses, restaurants, and retailers that take advantage of this craft beer movement to create a niche in the market. However, some retailers such as Walgreen (NYSE: WAG  ) , SUPERVALU (NYSE: SVU  ) , and Kroger are doing just the opposite, choosing instead to fill shelf space with private-label knock-offs of mass-market suds.

A tough sell
I recommended Boston Beer Co. (NYSE: SAM  ) this past summer as one of just a few ways retail investors could play this growing market. The company, known for its Sam Adams brand, still makes really good beer, but it is no longer the fastest-growing or most cutting-edge craft brewery. In fact, Boston Beer is becoming so large that the Brewers Association had to change the bylaws this year so the company could still be considered a craft brewer. Breweries that produce less than 2 million barrels a year were considered craft brewers; the change lifts that number to 6 million.

Today, the craft beer movement is being led by smaller breweries such as Stone in California, Bell's in Michigan, and Dogfish Head in Delaware.  The latter has earned an even greater cult following thanks to a weekly television documentary on the Discovery Channel about the brewery and its off-center founder Sam Calagione. These brewers don't have the marketing dollars that the big boys have; in fact, most of their marketing is of the viral or social kind. Instead, customers are won over by product quality.

So then, why are Walgreen and SUPERVALU adding more cheap beer instead of craft beer options? Retailers began to boost private-label options as a result of the recession. Store-branded private label products offer retailers higher margins, and consumers cheaper product alternatives, and these beers are cheap. At one store in Chicago a six-pack of Walgreen's Big Flats 1901 were spotted for $2.99, and placed strategically next to a sixer of Bud Light selling for $6.99.

Aside from the fact that outside of craft beer, industry sales are declining, beer drinkers are also very loyal to their favorite brands because of the amount of marketing and an association with good times. Beer in this format is mainly a social drink, and it's just not that cool to walk into the party with a case of cheap Walgreen or SUPERVALU beer.

These retailers get it
Whole Foods Market
(Nasdaq: WFMI  ) caught on to the craft beer movement relatively early and shelves a wide array of microbrews, which has been the standard in its stores for years now. However, over the last year Whole Foods has taken it a step further, creating separate craft beer dominated spaces or "beer rooms." Additionally, Whole Foods has been adding draft beer lines at stores in states where it's legal. This allows customers to take home fresh draft beer in small jugs called growlers, just in case they don't have their own kegerators at home.

Costco (Nasdaq: COST  ) entered the craft beer fray later than Whole Foods, but instead of focusing on popular craft beers, it has introduced its own private-label line of Kirkland beers. Costco's private-label beers are outsourced to reputable craft brewers and brewed to specifications of the superstore. Costco rolled out the beers in 2008, which have become a mainstay in its stores. These private-label craft beers are not competing against the gigantic marketing force of the mainstream beer brands, so it is an easier sell to consumers interested in trying a new beer. 

Crafty moves
Opportunities abound in the beer industry for retailers that are able to capitalize on this growing trend, but so far it appears that there aren't many that are ready to embrace the consumer's desire for more craft beer. The massive marketing machines will help ensure that the big brands always stick around, but the growing importance of social media has allowed many small craft breweries to go viral. At the end of the day, consumers want a high-quality product, and as craft beer continues to catch on nationwide, they won't have to search hard to find it.

Andrew Bond owns no shares in the companies listed. Boston Beer, Costco, and Whole Foods are Motley Fool Stock Advisor picks. Costco and Molson Coors are Inside Value selections. Motley Fool Options has recommended buying calls on SUPERVALU. The Fool owns shares of Costco, Molson Coors, and SUPERVALU. You can follow Andrew on Twitter @Bond0 or on his RSS feed. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (11)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 11, 2011, at 3:04 AM, PeyDaFool wrote:

    Andrew,

    You make some excellent points, but let's not forget about the vast expansion of macro breweries, such as Budweiser and Molsoon Coors, overseas in markets like China and Japan.

    Market share may be declining here in the U.S., but during my recent trip to China in 2010, it was inherently obvious large scale breweries from the U.S. are expanding rapidly in other countries around the world. This fact may drive profits in the future, even if the Stone Breweries or Dogfish Head's in the U.S. are rapidly picking up market share.

  • Report this Comment On February 11, 2011, at 3:57 PM, Jbay76 wrote:

    To be sure, DFH has had a cult-like following waaaaayyy before the TV show. Sam's claim to fame is his marketing ability and people's lack of knowledge about beer. I used to be a big fan of DFH brews until I began brewing my own beer at home. After a year of brewing research, I realized that his brewery is a "gimmick" brewery, somewhat wasteful in how they dry-hop their 60, 90 and 120 minute IPA (whose costs then get transferred to the consumer. Example, the raison d'etre is nothing more than a Belgium dubbel without the appropriate grains. In his ignorance, he used raisins when the monks used special B and caramunich 60L to create those flavors.

    A true following is Russian River Brewery in NorCal. When they release their kegs and 22 oz. bottles of Pliny the Elder, Pliny the Younger, or The Blind Pig, they last less than 24 hrs. I have been to a place where the bar served 8 oz cups and the 5 gallon keg still ran out in less than 20 minutes! That's a following!

    Brewer J

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