Investors should be cautious before committing a portion of their portfolios to breweries that heavily depend upon the American market.
For example, Anheuser-Busch InBev's (NYSE:BUD) third quarter report reveals that while the company outperformed analysts' predictions, it wasn't because of sales volume. AB In-Bev's summer purchase of Grupo Modelo and its brands accounted for much of the good news in the company's report, as the acquisition of the Mexican brewing giant helped cut operating expenses.
AB InBev isn't exactly bragging about the foreseeable future. CFO Felipe Dutra said in a company statement, "We are not satisfied with our top line performance in 2013, which continues to be affected by macroeconomic headwinds in a number of our markets."
Meanwhile, MillerCoors, joint American venture of SAB Miller PLC and Molson Coors (NYSE:TAP), announced in October that it was laying off 200 workers and eliminating another 160 empty positions.
Molson Coors' third quarter report showed a decline in sales volume of 0.96%. Its executives say that they expect to see continued weak consumer demand.
Down the hatch or down the drain?
In the first half of 2013 sales of beer brands in general declined in the U.S. by 2%. Since reaching a peak in 2008, sales also declined in 2009, 2010, and 2011. There was a slight uptick in 2012, but the industry considered it less a sign of recovery than an aberration.
Why are American sales flat? Experts at Bernstein Research point to a couple of financial developments that affected the young blue-collar American male consumer in particular. CNBC quoted Bernstein as saying, "We believe that there has been a deterioration in the economic well-being of the lower income consumer with the pay-roll tax hike having taken its toll and a marked up-tick in unemployment among young men."
What are the recovery strategies?
Of course, the primary hope is that as the economy continues to improve for blue-collar workers and as more money becomes available, sales of beer will also increase. However, there are other more proactive strategies as well. One is to get the Americans who still drink beer to drink a more expensive beer.
Reporting from the 76th annual National Beer Wholesaler's Convention held in early October in Las Vegas, Brewhound.com quoted Heineken USA CEO Dolf van den Brink as telling assembled U.S. beer distributors that,
Today, high-end beer represents about 23 percent of beer business in U.S. In France and Italy it is 35 percent. We are only half way on our journey to growing the high end. At the end of the day it provides good margins and excitement to consumers.
AB-InBev has had success using that strategy with its Budweiser Black Crown brand. Black Crown's TV commercial doesn't feature construction workers and firefighters popping open a cold one after a hard day's work, but shows the upper income hipster crowd mingling at trendy bars and art shows.
Is anyone's beer sales up?
The Boston Beer Company's (NYSE:SAM) third quarter report showed that the company shipped 29% more in volume than it had a year ago, with a net income increase of 24%. Boston Beer, maker of the Samuel Adams brand, is America's best known and largest craft beer maker.
Obviously, the loss in customers for big beer has been a gain in customers for boutique brewers like Boston Beer. It appears to be the only clear favorite to invest in among American market breweries.
However, all beer makers, whether big or small, must face a new reality: the changing drinking habits of Americans.
Do you have anything stronger?
According to a Gallup poll conducted this summer, the percentage of Americans who drink alcohol of any kind has remained steady since the mid-1990s, but there has been a steady move for many drinkers away from beer and toward wine and liquor.
For example, in 1992, 47% of Gallup respondents said that their alcoholic drink of choice was beer, compared to just 27% for wine—a whopping 20 percentage point difference. In 2013, beer had dropped to 37% while wine had climbed to 36%. For the first time that anyone is aware of, Americans are statistically as likely to prefer wine as to prefer beer.
Will the big beer wagon stop rolling backward anytime soon?
Reversing a social trend isn't easy. If the perception among young adults is that mass produced beers don't project the image they want, how will they be compelled to buy these beers? Compounding the problem is that people aren't simply dropping big beer for small craft beers. Some of them are dropping beer entirely.
So, if you love beer and you want to put your investment dollars where your taste buds are, make sure that you make your decision when you're stone cold sober. No beer goggles, please.
Fool contributor Joseph Wilborn has no position in any stocks mentioned. The Motley Fool recommends Boston Beer and Molson Coors Brewing Company. The Motley Fool owns shares of Boston Beer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.