Can This Craft Brewer Chart a Course to Success?

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Craft Brew Alliance (NASDAQ: BREW  ) President Andy Thomas likes to think of his company as having a big brewer's body and a craft brewer's soul. That balance is what will guide Craft Brew in charting its own course in today's oh-so-crowded beer market, he says.

After a second-straight solid quarter -- revenue was up 11% over the prior-year quarter, while net income doubled -- Thomas and his company have reason to be excited about what lies ahead.

But let's face it: Boston Beer (NYSE: SAM  ) has already been striking that balance, and doing it well for a long time now. Thomas and others at Craft Brew should certainly be striving to carve out their own niche. In today's beer market -- one with a new brewer opening every day -- brewers have to set themselves apart.

But following a course similar to the one Jim Koch and company started in eastern Massachusetts 28 years ago wouldn't exactly make for a bad trip.

Already America's largest craft brewer, Boston Beer is still growing strong. That applies both to its numbers -- third-quarter revenue grew 30% over the prior-year period, and earnings per share were up 24% -- and to its offerings. It has some 50 beers altogether, spanning its flagship Boston Lager to its ultra-high-end, cognac-like, 27%-alcohol brew, Utopias.

Boston Beer continues to experiment, and it continues to roll out great new beers, all while deftly straddling that fence between craft-brew pioneer and corporate mass producer. Its 2.7 million barrels shipped in 2012 were three times as many as the next-largest craft brewer, Sierra Nevada.

Go East, young man?
Craft Brew has the chance to become what's essentially the West-Coast version of Boston Beer. Like the Sam Adams makers, it has roots that run deep in craft brewing. In fact, both the Redhook and Widmer Brothers breweries pre-date Sam Adams.

And while well-known on the Left Coast, they have yet to make a name for themselves in a lot of markets that were long dominated by the Midwestern brewing heavyweights and are just now starting to embrace craft beer. But that's changing.

In fact, the Widmer label is struggling in California, and overall, sales of all of Craft Brew's offerings were up just 5% in the West this past quarter. In the East, they were up 45% over the prior year. You can tell why Thomas calls the eastern states "a growth engine" for Craft Brew.

What's more, Craft Brew has rolled out its Kona beers in five new Midwestern markets. Those markets alone contributed 5 percentage points of growth to the brand's impressive 25% year-over-year sales surge.

Where does it go from here?
To say Craft Brew executives have been excited about the past two quarters would be an understatement. In the earnings conference calls, they've downright gushed.

"Remarkable," Thomas commented while discussing sales growth in the Nov. 7 earnings call.

It's easy to see why. The numbers on Kona and Redhook are impressive. Kona sales are up more than 25% over the prior-year period. Redhook, a company around for 31 years, is posting better than 21% growth. That bodes well for the brands as they compete for shelf space and tap handles with the ever-growing number of local and regional brews, as well as cratfy offerings from the megabrewers.

Those megacrafts may be shunned by more experienced craft beer drinkers, but they present strong competition to brewers like Craft Brew and Boston Beer. Blue Moon from Molson Coors (NYSE: TAP  ) outsold every smaller brewer in 2012 except Boston Beer and Yuengling. AB InBev's (NYSE: BUD  ) Shock Top label has also done particularly well, company executives have said. In 2012, sales were up some 70% over the first nine months of 2012, the last time executives talked numbers. What's more, the Goose Island brand AB InBev acquired has become one of the fastest-growing beer brands in the U.S., CEO Carlos Alves de Brito said last month.

The Foolish bottom line
Craft Brew executives like their company's prospects. But they also believe it's time for a bit of retooling. That likely means trimming some beers from their product lines, then putting more marketing efforts in behind those that remain -- the bigger growth drivers. Thomas said the company plans to "prune" and "eliminate clutter," which could be up to 25% of what it currently has out on store shelves.

There's nothing wrong with getting rid of the beers that aren't selling and focusing on the ones that are. Every craft brewer can't try to be all things to all drinkers. And maybe that's where Craft Brew charts a course very different from Boston Beer and its 50-plus offerings.

Exactly which beers get the axe and which stay remain to be seen. But it's clear that a long-term strategy is starting to come together at Craft Brew, and it's clear that executives are excited about what they see ahead.  

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