Anheuser-Busch InBev Is Crafting Future Growth

Further blurring the distinction between craft beer and mass-produced suds, Anheuser-Busch InBev (NYSE: BUD  ) announced the other day it was acquiring for an undisclosed amount Blue Point Brewing Co., a 15-year-old craft brewer mainly found on the East Coast that will join a growing portfolio of craft breweries the beer giant is amassing.

Source: Blue Point Brewing.

Among the craft labels the King of Beers already owns are Shock Top, Goose Island, Green Valley Brewing, and the output from its Project 12, the new craft beer-style recipes featuring the yeast strain Adolphus Busch first used in 1876. The first one to debut was last year's Budweiser Black Crown, which was unveiled at the Super Bowl.

Founded in 1999, Blue Point brewed up only 60,000 barrels last year, half of which were its Toasted Lager, but other labels include Hoptical Illusion and Toxic Sludge. A-B understands that it's the craft beer segment that continues to grow while the broad, mass-produced beers continue to decline.

According to the Brewers Association, craft beer sales grew to $12 billion in 2012, a 15% increase by volume and 17% by dollars over the year before, accounting for a 6.5% market share by volume but 10.2% by dollars. At the same time, total U.S. beer sales were up less than 1%. So if you're a smart brewer you're going to go where the action is, and that's craft beer -- and that's just where Anheuser-Busch is directing a lot of its attention these days.

Yet the presence in the craft beer market of mass brewers like A-B and Molson Coors, which brews the "crafty" Blue Moon beer, has watered down the meaning the trade group has assigned. The Brewers Association says to be considered a craft beer the brewer not only must produce no more than 6 million barrels of it annually (a nod to Samuel Adams maker Boston Beer, which eclipsed the organization's prior 2 million barrel limit) and be made with traditional ingredients such as malted barley, but also be "independent," meaning no more than 25% of the company can be controlled by a company that's not a craft brewer.

It's that last requirement that's caused Craft Brew Alliance, the brewer of beers like Kona, Red Hook, and Widmer Brothers, to no longer be considered an official craft brewer since Anheuser-Busch owns a third of the company.

The dilution has caused the Brewers Association in the past to take up pen and rail against the mass brewers' intrusion into their space, but it's a smart move on their part. When a definition fails to adequately delineate in the consumer's mind what it really means, then anything goes, and by and large, the drinking public isn't carrying around in its breast pocket the three-part test of craft beers when ordering a tall frosty mug at the bar. The trade group might feel it's not just a marketing term, but in the minds of those who matter -- the beer drinkers themselves -- a "craft" beer is likely more about taste.

Indeed, look what happened when Consumer Reports tried to wade into the matter and judge the "best" craft beer: It chose Bud's Shock Top. CR acknowledged the Brewers Association criteria, but then discarded them in favor of what the beers themselves said they were. Beer snobs were aghast at the calumny, but it probably represents how most drinkers see so-called craft beers.

Last quarter, A-B reported North American volumes declined 2.6% over the first nine months of 2013, while Boston Beer saw depletions, or sales made by distributors to retailers, soar 23% in the same time frame. Shares of A-B are up 10% over the past year; Boston's are 45% higher. We see why Bud wants in on the market.

The big brewer knows it needs to shore up a flagging business. It bought the Mexican Grupo Modelo business last year and just reacquired South Korea's Oriental Brewery last month. On a global basis, Budweiser sales were up more than 8% last quarter, so with yet another craft brewer to its name, an investor might want to pour a bit of Anheuser-Busch stock into his portfolio.

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