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Why More Competitors Could Be a Boon for This Brewer

There are more than 2,500 breweries making beer in the U.S., with more than 400 new breweries opening just last year. That's made for a mushrooming number of brands and styles competing for shelf space and tap handles all across the U.S.

The trend is putting the squeeze on Boston Beer (NYSE: SAM  ) and other well-established craft brewers that have been around for a while, but don't have the clout of the megabrewers like AB InBev (NYSE: AB  ) to muscle their way onto shelves and draft lines. Where it once owned some 10% of the shelf space devoted to smaller brands, Sam Adams now owns as little as 1%.

It all looks troublesome for Boston Beer at first blush. But management sees a silver lining to this cloud, and they think this explosion in competition may put Samuel Adams in an even stronger position years from now.

The great influx
To understand why, we need to head back in time. Imagine yourself in the late 1970's or early '80s. Blondie is on the radio, George and Weezie Jefferson are on primetime, and Americans have never before had so many imported beers to choose from. German standards like St. Pauli Girl and Lowenbrau rolled out across the US in the mid-1970's. Canadian brews like Moosehead lager followed. Corona first hit U.S. shelves in 1981. And they kept coming.

Beer imports to the U.S. grew fast through the late 1970's and through most of the 1980's, a time when the domestic brewers were consolidating. But then something happened--the trend reversed. After import shipments grew tenfold over 16 years -- a barreling freight train of pilsner, ale, and lager -- they abruptly shrank, and continued to do so for several years.


That reversal marked the end of a growth cycle and the start of consolidation. As stores and taverns tried to accommodate the wider variety of available suds, many started to notice a trend: the stronger brands were selling out, leaving shelves empty and taps dry. The weaker brands, meanwhile, were collecting dust and getting stale.

The strongest imports survived, and indeed continued to grow -- think Heineken, Guinness, Corona. But many were carried back out to sea -- think Tuborg -- or sent back to the Great White North, like Moosehead.

'Tsunami of variety'
Boston Beer Chairman Jim Koch and CEO Martin Roper see parallels to that trend today. And they're not alone. Executives at AB InBev and Craft Brew Alliance (NASDAQ: BREW  ) also see the trend eventually playing out in their favor.

The number of breweries operating in the U.S. has nearly doubled since 2005. Just about every one of those 1,200 new breweries is going to offer four or five styles, and often more. The fast-growing Craft Brew Alliance offers four separate brands, encompassing more than 40 styles of suds altogether. Sales of its Kona and Red Hook labels grew year over year by 23% and 14%, respectively, in the quarter ended in June.

Add to that the ever-expanding selection of beers being produced by AB InBev, which continues to expand its Budweiser and Bud Light labels, acquire popular imports, and branch out into what we can call megacraft beers like the Shock Top brand, which has seen periods of explosive growth -- sales were up some 70% over the first nine months of 2012.

Put it all together, and you have what Koch calls a "tsunami of variety."

The strong survive
But that big wave will eventually recede, and it will leave behind a different landscape when it does. Boston Beer believes it will not only survive, but thrive in that post-tsunami marketplace. Its brand is strong across the U.S. Even in this uber-competitive market, Boston Beer's revenue from the six months ended in June was up 22% over the prior year. 

And while they may not have have the distributing clout of the brewing giants, bigger craft operations like Boston Beer and Craft Brew have an advantage over smaller breweries when it comes to putting boots on the ground. Both have national sales forces and the ability to move new products into markets, large and small, from coast to coast.

The brewers already see the tide turning. Craft Brew executives see smaller operators who once dreamed of expansion now focusing on local markets. AB InBev is using its clout to sell retailers on a plan to offer some variety, but give ample real estate to those brands with an already loyal following.

"At the end of the day," AB InBev CEO Carlos Brito said, "the national brands are the ones that will still command 90-plus percent of the business."

The Foolish bottom line
If these brewers are right, and the tide has begun to turn, they could benefit from the reversal. But no company may see a bigger boom than Boston Beer, already growing at a healthy clip in an intensely competitive market. With a strong, nationally recognized craft brand and a top-notch sales force, Boston Beer could capitalize on an overcrowded market. Investors should keep an eye on what executives have to say about the trend in upcoming quarters.

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John-Erik Koslosky

Fool contributor John-Erik Koslosky has been picking his own stocks since the market crashed in 2008. He aims for a mix of value and growth, but mostly, just looks to buy great businesses.

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