Can This Brewer Get a Leg up on Craft Beer?

Craft Brew Alliance (NASDAQ: BREW  ) believes it has finally come of age. Three months back, executives were confident that sustainable growth had arrived and the brewer had moved past its "foundational development phase."

But Craft Brew operates in a very competitive market -- one that is seeing 400 new breweries opening up each year, megabrewers like AB InBev (NYSE: BUD  ) rolling out mass-produced crafty offerings like Shock Top, and Boston Beer (NYSE: SAM  ) growing its beer and cider sales to the tune of some 23% over last year.

There's competition coming from every angle. Craft Brew reports again Thursday. Will its strong second quarter carry over? What should investors look for as signs of success?

Here are a two key areas to watch for when executives discuss the quarter:

Can the brewer right the Widmer Brothers ship?
Now nearly 30 years old, craft-beer pioneer Widmer Brothers has fallen out of favor with beer drinkers. As sales of Craft Brew's Kona brand grew 23%, and Redhook grew 14%, Widmer sales dragged, notching a bump of just about 1% over the prior-year quarter. That's disappointing at a time when craft beer consumption has been growing at a clip of up to 15% annually. But it's still an improvement over the 12% drop in Widmer sales the company reported in the first quarter.

Craft Brew is betting big on the Widmer brand. Just last year, it expanded the Widmer Brewery in Portland, Ore., investing more than $3 million in the project -- no small amount for a company that made $2.5 million in net income last fiscal year.

It began employing a new approach with the label, rolling out a wider variety of Widmer beers and packaging them in 12-packs. It's offered a Rotator IPA series to keep the lineup of popular India pale ales fresh. It's also been retiring poor-performing Widmer beers. It turned off the taps on its Drifter Pale Ale and introduced Alchemy Ale, which was an early hit.

The brewer needs all that investment to pay off. The leveling off of Widmer sales was a positive development. But Craft Brew needs to see those sales ramp up.

Can Game Changer truly be a game changer?
Craft Brew does not have the marketing budget of the bigger brewers. AB InBev has sponsorship deals with Major League Baseball and the NFL that deliver Budwesier and Bud Light huge exposure. It also hosts an annual music festival -- the Budweiser Made in America Music Festival -- targeting younger drinkers. This summer, some 120,000 music fans attended, each one a potential King of Beers convert. 

Boston Beer, meanwhile, is continually boosting its advertising and marketing efforts, with a goal to steal back more of the shelf space and tap handles it's lost over the years with all the new competition in the craft beer segment. It expects to spend up to $32 million -- or 19% -- more on advertising in 2013 than it did in 2012. Then, in 2014, it's eyeing up to a $42 million bump in that spending, a roughly 21% increase.

Even with all the grain it can muster, Craft Brew just doesn't have that kind of dough. Instead, it has to be creative in its marketing efforts. And it's found a potential winner in its Game Changer program with Buffalo Wild Wings (NASDAQ: BWLD  ) .

Craft Brew created a special Redhook beer to be served on tap at Buffalo Wild Wings restaurants. The beer started flowing July 15. It was a coup for Craft Brew, since B-Wild serves more draft beer than any other restaurant chain in America. Redhook now gets ample exposure with sports-loving, wing-eating beer drinkers across Buffalo Wild Wings' 955 locations.

With the timing of the launch, there wasn't much for the company to report on the deal last quarter. But with a month-plus of college and pro football in the books -- as well as the World Series -- the upcoming quarterly report should offer plenty of insight as to Game Changer's success for Craft Brew.

Comments from B-Wild's management last week may have tipped the hand. CEO Sally Smith said that Game Changer exceeded the restaurant's estimates and was one of the five best-selling draft beers at its locations. Craft Brew executives should have more to add Thursday.

The Foolish bottom line
It's a competitive market for craft brewers, with pressure coming from AB InBev above, upstart microbreweries from below, and craft powerhouses like Boston Beer somewhere in between. Craft Brew believes it has sustainable growth ahead. But to pull that off, it needs success from its vital Widmer Brothers brand, as well as clever, creative marketing efforts like it has established with the Buffalo Wild Wings partnership.

Investors should keep an eye on those areas when the company reports Thursday. Good news on those fronts could show a company that's on the right track.

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  • Report this Comment On November 07, 2013, at 9:06 AM, RickRickert4MVP wrote:

    What are your thoughts on the earnings release?

  • Report this Comment On November 07, 2013, at 1:31 PM, jekoslosky wrote:

    RickRickert4MVP - Things look on track from a numbers standpoint. I'll be giving the earnings call a closer look tonight.

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