Are Beer Makers Barrelling Along?

According to the Beverage Information Group's 2013 Beer Handbook, the industry began to rebound in 2012 after a three-year downturn. Both sales and volume were up from 2011, although not tremendously, and volume rose just 0.8%.

The segments recording the largest gains were super-premium, craft, imported, and flavored malt beverages. Craft beer volumes rose an outstanding 13.7%, the largest increase for that segment in more than ten years. The research report predicted that higher priced categories such as super-premium and craft will do well in 2013 as well.

Roll out the (nearly 1 million) barrels!
Boston Beer  (NYSE: SAM  ) is the dominant player in the rapidly-emerging craft beer market. Its most well-known brand is Samuel Adams Boston Lager, though in total the company markets 50 styles of beer. Craft beer is known for more complex flavors and a richer taste than ordinary beer. Consumers are willing to pay a higher price for this level of quality, even as the economy struggles to shake off the recession.

Boston Beer recently released its third-quarter results -- and outstanding results they were, particularly in light of slow industry growth. Net revenue rose 30% to $216.4 million, compared to the same period last year. Core shipment growth was up 29% to 993,000 barrels.

Compared to last year's third quarter, advertising, promotional and selling expenses were 17.8% higher at $8.5 million, as the company added sales personnel, and increased local marketing and media expenditures. Even with these expenditure increases, operating income soared 26.8% to more than $42 million, or nearly 20% of net revenue.

Boston Beer had the pleasant problem of demand exceeding the company's production capacity during the quarter, resulting in product shortages. A new bottling line was put into operation, along with the can line the company recently introduced. This problem should be solved going forward, and the new improvements will allow for further growth next year.

And this company has plenty of room to grow: its sales represent only about 1% of the beer market in the United States.

Not quite rockin' it in the Rocky Mountains
Molson Coors  (NYSE: TAP  ) , with a large presence in Canada, the U.S., and Europe, is one of the largest brewing companies in the world, with popular brands such as Coors Light and Molson Canadian.

The company's freshly brewed third-quarter results revealed issues with its market share. Volume declined -- although less than 1% -- and sales for the quarter were down 2%. CEO Peter Swinburn commented that "...consumer demand was weak across our markets."

Using GAAP measures, the company's net income was dismal, declining nearly 40% to $121.8 million. But the decline was due to a $150.9 million non-cash writedown in the value of two of the company's European brands. Netting those out, non-GAAP after-tax income actually rose 7.7%, as cost saving initiatives helped mitigate sales weakness. A bright spot was the double-digit growth in the company's above-premium brand portfolio.

Bud-ding profits internationally
Now let's check in on the third-quarter results for the largest beer producer in the world, Anheuser-Busch InBev (NYSE: BUD  ) . Revenue was up 3% compared to the same quarter last year. This growth was due to a 4.2% increase in revenue per hectoliter, offset by a 1.3% decline in total volume, leading management to say, "We are not satisfied with our top-line performance in 2013..."

The revenue per hectoliter growth was driven by a price increase, and by the strong performance of the company's high-end brands such as Michelob Ultra. The company achieved dramatic cost savings as a result of its combination with Grupo Modelo, the Mexico-based brewer known for its Corona brand. Cost of sales decreased by 1.2% compared to last year. The company estimates that $250 million in cost savings have already been achieved since the transaction closed in early June.

Anheuser-Busch estimated that its total market share in the U.S. declined by about 80 basis points in the third quarter. One lingering concern was the "labor participation and unemployment rates among young males..." It makes sense that these young consumers facing cash flow shortages may elect to purchase less beer. After all, there's that other pressing need: food.

International segments turned in a better performance. The Budweiser brand grew 8.1% on a global basis. Beer only revenue per hectoliter rose a healthy 6.1% in Mexico, helping to offset a 2.3% decrease in volume. In China, volume grew 8.3% in the third quarter, with revenue per hectoliter up 7.8%.

The best news was the bottom line. EBITDA increased 10.5% for the quarter compared to 2012, with EBITDA as a percentage of sales up 274 basis points to nearly 40%. Revenue per hectoliter growth, cost synergies with Grupo Modelo, and generally effective expense management clearly overcame what the company termed "macroeconomic headwinds."

What we learned
Anheuser-Busch's ability to deliver a splendid profit despite sluggish demand was impressive and definitely exceeded Molson Coors' performance. Boston Beer has the ideal mix of small-company entrepreneurial spirit combined with a large company's focus on operational efficiency, as well as cost control. 

The company has been willing to invest in increasing production and building brand awareness through stepped-up media, local marketing, and point-of-sale marketing. While the big brewing companies slug it out and try to snatch small market share increases from one another, Boston Beer is growing at a fevered pace.

Boston Beer is positioned to take advantage of the predicted growth for its niche, so this is my favorite of the three. Let's lift our steins to a terrific beer maker!

Beer is growing!
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