Why Anheuser-Busch InBev Isn't Worried About Falling Beer Sales

The brewer crafts a response to declining beer sales.

Mar 3, 2014 at 10:06AM

No matter how you look at it, the U.S. beer market is no better than a case of skunked brew. After a meager 1% increase in sales in 2012, the first increase in years, the industry succumbed again in 2013 and saw sales turn south once more.

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According to both Technomic and the Beverage Information Group, total U.S. beer volume sold in the U.S. fell to 2.8 billion 2.25-gallon cases, a 1.4% drop from 2.84 billion cases sold the year before. Anheuser-Busch InBev (NYSE:BUD), which reported earnings the other day that only beat analyst expectations because of a one-time gain from Brazilian operations and lower tax rates, remains unconcerned about the situation and anticipates a heady future.

That's because although the U.S. beer market is in decline, the craft beer market remains quite frothy, and the huge brewer continues to amass a portfolio of craft brewers that ought to keep it afloat. Last month Bud bought Blue Point Brewing, a 15-year-old craft brewer mainly found on the East Coast, increasing the brewer's bet that its fortunes will rise and fall on the niche market.

Craft beer production grew 9.6% to capture 7% of total beer production said Technomic, and BIG says momentum in the space "continues to build with no signs of slowing." That's underscored by the earnings results of Boston Beer (NYSE:SAM), the brewer synonymous with the craft phenomenon, which actually missed Wall Street's forecasts because it was growing so fast it couldn't keep up with demand. Revenues surged 34% in the quarter, but it was challenged operationally as a result, so that its costs actually rose, leading to lower profits.

Like Bud, the maker of Samuel Adams has a plan to deal with this growth, significantly increasing its tank capacity at its breweries while also bolstering its packaging and shipping capabilities. Of the two brewers, though, I prefer the position the latter finds itself in. Investing in capacity because your customers want more of what you're producing is a better deal than having to go out and buy your growth.

Yet there's another underlying story here that's not being told, one that applies to adult beverages generally, though we've heard the story before. And that's the preference among drinkers for premium beverages. The Beverage Information Group said distilled spirits notched its 17th consecutive year of growth, increasing 2.4% as super-premium products commanded the most attention.

Beam recently reported its top-shelf Maker's Mark bourbon enjoyed a 17% jump in sales, while Diageo is making super-premium spirits a key component of its future ambitions, buying DeLeon tequila in partnership with rap impresario Sean Combs and Peligroso tequila to target the Southern California surfing culture, and launching an ultra-premium blended Canadian whiskey, Crown Royal XO, which is a blend of 50 different Crown Royal whiskies.

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Craft beer is the premium category for beer drinkers and is arguably the reason distillers are seeing growth in their products. The more flavorful brews have led drinkers to seek out more and better flavors from spirits, too. That's why Jack Daniel's maker Brown-Forman has been adding a full palette of flavors to its spirits, including the very popular Tennessee Honey, helping to push net sales 30% higher in the first half of its new fiscal year. Even Bud is releasing a new "value beer," Busch Signature Copper Lager, for those who seek out the flavor of a craft beer without its higher price. 

Yet Boston Beer is on a roll again. After several years of declining sales in its flagship brand, Samuel Adams is once again watching depletions march higher. Anheuser-Busch has caught wind of these trends and is trying to make the most of them by buying its way to growth. It shows craft beer still has legs and just may be why we see Boston Beer run away with the gold, even if Anheuser-Busch InBev isn't worried for the time being.

Raise a frosty mug
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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Beam, Boston Beer, and Diageo. 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.

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