Is Boston Beer Bringing Refreshment to Investors?

Beer sales are rising again after a period of recessionary doldrums, and craft brewers such as Boston Beer are reporting outstanding growth.

Mar 13, 2014 at 7:00AM

According to the Beverage Information Group's 2013 Beer Handbook, beer sales volumes rose in 2012 after a three-year downturn. The increase was small, nearly 1%, but some segments reported much frothier results. Craft-beer volume rose nearly 14% -- the largest jump in more than 10 years.

Today we look at full-year 2013 results for Boston Beer (NYSE:SAM), the dominant company in the rapidly growing craft-brewing segment, and two global giants in the beer industry: Anheuser-Busch InBev (NYSE:BUD) and Heineken (NASDAQOTH:HEINY).


(Photo courtesy of stock.XCHNG)

Cheers to Boston Beer
Craft beer has a more complex flavor and richer taste, often made through extra steps in the brewing process. This high quality comes with a higher retail price, which consumers are increasingly willing to pay -- as shown by Boston Beer's splendid 2013 results.

Full-year net revenue reached $739.1 million, up 27% from 2012, on a 24% increase in the number of barrels sold. This spectacular growth came about because of continued success with its established brands, such as Samuel Adams Boston Lager, and also from growth in newer brands, such as Twisted Tea malt beverages and Angry Orchard hard cider.

The gross profit margin fell 2.2% to 52.1%. Increases in advertising, promotional, and selling expenses as well as general and administrative expenses were both below the revenue increase in percentage terms, resulting in about an 18.3% increase in operating income. Expressed as a percent of sales, though, operating income declined to 15.3% from last year's 16.5%.

As a management consultant, I was pleased to hear that the company's $12.2 million jump in general and administrative expenses year over year was due to salary increases -- and consulting fees. The wisest management teams know the importance of utilizing consultants' expertise.

An enviable problem
The decline in the gross margin percentage stems from a problem all beverage and food producers would love to have: Boston Beer's supply chain struggled to keep up with the robust demand for the company's products, resulting in higher operational and freight costs.

The company took immediate steps to mitigate this problem, increasing tank capacity at its breweries and enhancing its packaging and shipping capabilities. By the fourth quarter, the supply shortage problems were relieved.


(Photo courtesy of stock.XCHNG)

The company's Freshest Beer Program enables it to get a fresher product in the hands of consumers more quickly; it also allows distributors to lower their inventories, saving costs for them.

Slower growth, solid profitability
If Boston Beer could be likened to a stallion in full gallop, the Anheuser-Busch Clydesdales moved along at a steady clip in 2013. Revenue was up 3.3% in 2013 compared to 2012, even though total global volume declined 2%; revenue per hectoliter rose 5.8%, as the company's premium brands performed well.

Continuing this trend is central to the company's strategy, what it calls the "premiumisation of our portfolio."

With total beer sales growing at a sluggish pace in the U.S., the large beer makers are looking to international markets to fuel future sales increases. Last June Anheuser-Busch InBev completed the integration of Mexican brewer Grupo Modelo, maker of the very popular Corona brand. The company reported that this combination has already resulted in nearly $500 million in cost synergies.

This also gives the company the opportunity to introduce Corona to other countries through its vast global distribution system -- and to capture greater market share for its own popular brands in Mexico. 

Even with the so-so sales growth, excellent cost management enabled the company to increase its normalized profits from operations by more than 9% year over year.

Another big brewer struggling to build volume
Heineken's beer brands include Heineken and Amstel, but the company also produces soft drinks and cider products. Chief executive Jean-Francois van Boxmeer described 2013 as "a challenging year..."  Revenue grew by just 1.3%. Although group revenue per hectoliter was up 2.7%, this was partially offset by a 1.8% volume decline in the Heineken premium brand.  

At first glance, it appears that net profit plunged by more than 50%; but actually that was the result of 2012's numbers including a large gain due to the acquisition of Asia Pacific Breweries. On what the company terms an organic basis, net profit was just 2% lower.

The company reported lower-than-expected sales results in developing markets, which are key to its long-term growth strategy. The company is also rolling out innovative products, including its 'Radler' beers and a draft-beer appliance to tap into the rapidly growing at-home draft-beer market.


(Photo courtesy of stock.XCHNG)

What we learned
The great thing about Boston Beer is that although it has been in business for 30 years, its strategic approach is like that of an entrepreneurial, high-growth company. For example, it accepts earnings that are slightly lower than it perhaps could have achieved in exchange for making investments in production capacity and brand building that will have longer-term payoffs.

Always innovating, the company recently released a Samuel Adams Cold Snap, a white ale brewed with exotic spices designed for spring seasonal consumption. It also makes annual investments in its craft-brew incubator Alchemy & Science with the intention of finding the next generation of exciting beer flavors. The company stays hungry, or thirsty, for continued improvements in operating efficiency as well.

Although Boston Beer is growing extremely well -- especially compared to the larger brewers -- it has a tiny share of the overall beer market: 1%, according to company estimates. This means there are many beer drinkers who have never even tried its 50 varieties of craft brews. With continued improvement in the economy, a greater number of consumers will be willing to spend more for hiqh-quality beer.

But, the large brewers, seeing the profit potential in the premium market, are countering with premium products of their own, made in a craft-style tradition. It is a rock-solid strategy for Boston Beer to make these substantial investments in marketing to prevent the larger brewers from slowing the company's momentum.

For anyone who likes wonderful beer and brilliantly run companies, Boston Beer makes an excellent choice.

Should you spend the rest of your life drinking Sam Adams
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Brian Hill has no position in any stocks mentioned. The Motley Fool recommends Boston Beer. 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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