Craft Brewers Join Forces to Fend off Bud and Coors

Belgian-based brewing company Duvel Moortgat announced plans on Oct. 17 to acquire Boulevard Brewing Company, an American craft brewery based out of Kansas City, MO. While these are both currently privately held companies, the deal will have broader implications for publicly traded US breweries. Huge US Brewing conglomerates Molson Coors (NYSE: TAP  ) and Anheuser-Busch InBev (NYSE: BUD  ) , as well as the smaller Craft Beer Alliance (NASDAQ: BREW  ) and Boston Beer (NYSE: SAM  ) are without question taking notice of the pending deal and what it means for the industry.

Duvel vs. the big kids
Duvel Moortgat and Anheuser-Busch InBev are about as far removed from one another as any two companies in any industry. AB-InBev has a market cap of $164 billion and focuses on high volume sales of a few key products while venturing into the pseudo-craft market with products like ShockTop, Blue Moon, and most recently Goose Island offerings. Duvel Moortgat, on the other hand, is no longer a publicly traded company. It market lowers volume/higher margin premium products like namesake Duvel as well as NY-based Ommegang products.

Boulevard Brewing Company seems like a more natural fit for a company like Duvel than larger brewing conglomerates on account of its size (it just barely breaks into the top 20 largest US breweries by production) and offerings (its Smokestack Series of beers are delicious, intensely flavored and relatively expensive). Although on the surface the company may not seem like a natural fit for larger brewing conglomerates, that doesn't mean the big breweries aren't interested.

Melding big beer and craft beer
MillerCoors, the joint venture of SABMiller and MolsonCoors, is looking for a more direct avenue into the American craft brewing sector. Its craft and import division, Tenth and Blake, is in continuous conversations with craft breweries around the country, including reports of previous discussions with Boulevard Brewing Company, as it explores the expansion of its craft brands beyond Leinenkugel's and Blue Moon.

AB-InBev's $38.8 million acquisition of Goose Island Brewing Company in 2011 is another example of the biggest brewing conglomerates expanding their reach into the faster-growing craft beer industry. In the grand scheme, however, Goose Island's comparatively minuscule sub-200,000 barrel production was hardly a drop in AB-InBev's 300 million plus barrel bucket. Even with higher margins and expanded distribution, Goose Island won't be making a notable mark on AB-InBev's financial reports over the short term.

So why bother?
It is well reported that the craft beer portion of the beer industry is growing at a much faster rate (15% by volume in 2012) than the whole of the beer industry (0.9% by volume in 2012).  Sales of non-craft beer from 2011 to 2012 were essentially stagnant.  Over the past several years, Boston Beer and Craft Beer Alliance have vastly outgrown (both from a production and a market value standpoint) their larger competitors Molson Coors and AB-InBev.  The trend is not an entirely new phenomenon either: from 2009-2011, Coors Light was the only one of the top five selling brands in America that actually saw an increase in market share.  The other biggest brands, including Bud Light, Budweiser, and Miller Lite, all were subject to continuous declines in market share over the same period.

In spite of consistent growth over the past two decades, the broadly defined craft brewing industry accounts for only about 6.5% of total domestic beer sales by volume. Nonetheless, unless the larger conglomerates actively seek to join the trend, they do stand to lose (or continue to lose) market share over the extra-long term.  The players in the beer industry likely to see the biggest impact from the Duvel acquisition of Boulevard Brewing Company are not the giants, but the smaller producers. The craft beer market in America, while relatively small in both sales and volume, is currently split between more breweries than ever before.

Duvel's recent acquisition broadens the distribution reach of yet another small brewery and generates more competition for Boston Beer and Craft Beer Alliance. Look for AB-InBev and Molson Coors to make their own acquisitions in the near future as they try for deeper ties to the craft beer industry.

The takeaway
AB-InBev and Molson Coors both have strong enough holds on the macro-beer market to grow with the rest of the market. As they expand their reach into the faster growing craft beer segment, which will be seen through new product offerings and even more so through acquisitions, expect them to outperform the market. Boston Beer and Craft Beer Alliance are similarly poised to perform well in a growing beer industry both in the short-term and the long-term, though they don't have the stability offered by a huge market cap.


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