This Craft Brew-haha Provides a Look Into a Less-Friendly Beer Market

The dust-up on social media over Boston Beer around the start of the year drew a lot of attention. For investors in any brewer, it's important to see this from the wider context.

Mar 11, 2014 at 1:38PM

In case you missed it, around the turn of the year, there was a craft-brewing dust-up on social media interesting enough to attract national press and prompt a response from Boston Beer (NYSE:SAM) founder and Chairman Jim Koch. The brew-haha was entertaining, for sure. But it was really a diversion from the trends that could leave some craft brewers out in the cold in the coming years.

At the center of the controversy was Boston Beer's new Rebel IPA, a hoppy, West Coast-style India pale ale, and the owner of one of the West Coast breweries whose offerings the new beer will compete with.

. Rebelipa

Source: SamAdams.com

In short, Tony Magee, owner of Lagunitas Brewing Company, accused the country's biggest craft brewer of specifically "targeting" smaller brewers like his own, trying to get stores and bars to swap out their beers with Sam Adams brews.

Here's the text of a few of his tweets:

Learned that SamAdams' Rebel IPA marketing plans incl specifically targeting our biz as well as other craft IPA. Flattering & sad, it is

BB specifically told our distribs in common that they were going t TAKE r tap handles everywhere they could

That's a directed attack ... Imagine someone threatening your children...

A changing market
The craft beer world has long been congenial. Brewers support other brewers. They borrow ideas from each other, tweaking styles to serve as their own. It's been as non-cutthroat as possible, for the most part. The only "targets" were the megabrewers, Anheuser-Busch InBev (NYSE:BUD), Molson Coors (NYSE:TAP), and SABMiller.

But that's changing. Craft beer today is a hyper-competitive market. Boston Beer has grown so large that the Brewer's Association had to revise how much beer a brewer can produce to still be considered "craft." What's more, brewers like Craft Brew Alliance (NASDAQ:BREW) are looking to follow in Boston Beer's footsteps, while the megabrewers continue gobbling up smaller brewers and building their own lines of craft-style beers, like Shock Top and Blue Moon.

There's a history here
The recent dust-up certainly painted Boston Beer in an unflattering light -- the schoolyard bully in the craft beer market, flexing its distributing muscle to displace smaller operators so it can expand.

The attack drew enough attention to make Koch -- an important player in the craft-beer revolution -- wade into the fray to offer a response by posting on Beer Advocate, saying the company doesn't target craft brewers and that "ultimately, it's the retailer who makes the final decision on what beers to serve on draft."

This was not the first time Magee has come out firing at Koch and Boston Beer. In September 2011, Magee tweeted critical remarks about Boston Beer after hearing a rumor that it was going to sue over a sales manager who jumped to a competitor.

JimKoch is NOT a craftbrewer, nope.

A year later, Magee sounded off on Boston Beer again during an interview with BeerPulse.

There's craft and there's crafty. It's like pornography. You know it when you see it.

Still, this isn't just a guy with an ax to grind. Smaller brewers have reason to worry. The craft market grew store sales by an impressive 19.2% in 2013, the fastest rate it's seen in years. But Boston Beer grew sales at almost double the overall rate -- 34%. Molson Coors' crafty offerings made up nearly one of every three new craft beers sold. A-B's Goose Island craft beer brand went national, growing sales by 70% over the prior year. Craft Brew Alliance continued its expansion eastward, with plans for a new brewery and high hopes for faster growth in 2014. All that comes at a time when a new brewer is opening every day in the U.S.

Magee's Lagunitas has notched significant growth itself, with its IPA dollar sales up 71.3% in 2013. The brewer is the 16th largest in the U.S.

The big craft-brew squeeze?
Koch and Boston Beer executives did not address the "targeting" rumors in the recent earnings call. But investors who have paid attention to previous calls have a good idea how management sees the landscape evolving. Koch has previously said they see "variety fatigue" building among stores and bars. There are too many beers available for the amount of tap handles and shelf space out there, and new opportunities are not growing as they were in the years prior.

Boston Beer, as well as executives from A-B, have said they see this prompting some consolidation in the industry, with recognized names that prove they can sell well over time being the big beneficiaries. There is a movement, no doubt, for more local beers, and those breweries are sprouting up every day. That means there could be a real squeeze on from both the bottom and the top -- leaving those in between feeling the pressure.

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John-Erik Koslosky owns shares of Boston Beer. 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.

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