With Demand for Craft Beer Growing, Should Big Brewers be Worried?

As an undergrad, I reached a conclusion that many collegians arrive at during their college careers: beer is the most important thing that has ever happened. Science agrees -- a large body of peer-reviewed work has been published arguing that beer could have been the catalyst of the agricultural revolution. Extrapolating, beer is the reason for civilization and pretty much everything that keeps you from sleeping in a cave and fighting a saber-tooth tiger for your dinner.

Lucky for us, while our saber-toothed friends are long gone, beer has lived on, and it is big business. The markets have been dominated by familiar names in recent decades, and those names will likely remain the largest companies. But their market is changing and their ironclad grasp is getting a bit rusty.

The domestic dynasties

Let's start with Anheuser-Busch InBev (NYSE: BUD  ) . According to its accounting, A-B InBev controlled 47.2% of the U.S. market share in December 2013. That is impressive, considering there are over 2,700 breweries in the United States. Bud's strength is derived primarily from two of the most recognizable brands in the country: the classic Budweiser, which, according to Beer Marketer's INSIGHTS, accounted for 8.4% of the U.S. beer market share in 2012, and his cash cow of a brother, Bud Light. In 2012, Bud Light commanded 18.5% of the domestic beer market; more than double that of the nearest competitor, Coors Light. Even college favorite Natural Light made the top five individual brands with 3.7%. In all, it's a market share fitting the King of Beers.

SABMiller  (NASDAQOTH: SBMRF  ) , parent to the Miller Brewing Company, claims a more modestly massive share of the U.S. beer market. MillerCoors, a joint venture with the Molson Coors Brewing Company  (NYSE: TAP  ) , controls 29% of the domestic market, with Miller accounting for 17% of that share. In 2012, MillerCoors' "premium lights," Coors Light and Miller Lite, held down 8.7% and 6.9% of the domestic beer market, respectively, to round out the top five brands.

Between A-B InBev and SABMiller, these two Goliaths represent about two-thirds of all domestic beer sales.

But they are losing ground. With the exception of Coors Light, all of the other brands in the top five have seen their market share consistently drop since 2010. In fact, seven of the top 10 brands have lost share in the beer market in that time. While it's easy to make the apples-to-oranges comparison -- that American drinkers are driving the resurgence of wine and spirit industries -- the apple- to-apples losses in the beer market suggest something else is amiss.

Changing times

As a college student, I spent a great deal of time in bars -- sometimes tending bar, other times just finding reasons to postpone my homework. When someone would buy a round, the preferences were Bud Light, Miller Lite or, depending on the bar, Pabst Blue Ribbon. The common thread: American Lagers.

Since then, my palette, alongside the mentality of many American bar owners, has changed.

Last year, my parents visited me in El Paso, Texas. Being St. Patrick's Day, we were obliged to visit a pub. We chose The Hoppy Monk, a local bar that specializes in craft and import beers. My mother, relatively new to beer, ordered a Corona.  When the puzzled bartender said they didn't carry that, she asked for Miller Lite.

He instead poured her a craft lager. My mother was surprisingly pleased.

This is an aggressive beer...

In recent years, the eyes of the American beer drinker have been opened to exciting new brews. After decades of absolute dominance by the American lager, new flavors have become available. Stone Brewing Company sums it up nicely on the back label for the first true craft beer I ever tasted, Arrogant Bastard Ale.

It is no longer a choice between the lesser of two lagers. Now it's an IPA, a hefeweizen, a Bavarian double bock. If I don't know the brand I want, no worries. The bartender will explain the differences, like a sommelier educating about the subtleties of a fine wine. The beer varieties now available would have made my simple, lager-loving, young mind implode.

The rise of the local brewpub

Today, the microbrewers are changing the landscape of the American barley pop.

According to projections from the Demeter Group, "craft beer is projected to represent nearly 15% of the beer industry by 2020 at current growth rates." While no individual brewer is likely to control a majority of that share -- unless you include Boston Beer  (NYSE: SAM  ) , which has already established itself on the national stage -- the collective efforts of the microbrewers may give the industry giants a run for their money.

SABMiller seems to agree. In its 2013 annual report, SABMiller said of the craft beer market, "far from inexorably becoming more global over time, the rise of the craft beer segment in the USA, Europe, and Australia would suggest that, if anything, beer is becoming more local than ever."

Many microbrewers share that sentiment.

Patrick Hindson is the general manager at Toxic Brew Company in Dayton, Ohio. The brewpub, opened last June, has very local ties. 

Hindson, a Dayton native, said that making a great local beer is about connecting with the people around you. Toxic brews beers like Gem City Ruby, named after the city of Dayton, or local favorite Porn or Pawn Pepper Pale Ale, so named because locals know that Toxic is located in a storefront that was once a pawn shop … which happened to be connected to an adult bookstore. When patrons entered the adjoining businesses, they had to answer: Porn or Pawn?

Asked about how it feels to be part of the craft beer movement, and challenging the industry giants, Hindson was hopeful.

"Craft beer is spreading all over the place. People are drinking more local beers and trying new things," he said.

While optimistic about his establishment, which has expanded twice since opening, he understands the reality of the market.

"We'll probably never be able to beat Bud or Miller, but we can chip away at them."

Parting thought

In the end, I doubt we will ever see the fall of the Anheuser or Miller empires. Their brands are powerful. And while the machinations of big business are often slow and resistant to change, the major brewers appear to recognize that their days of only brewing the same old lagers are ending.

Whether it's creating "craft-y"-sounding new lines like Anheuser's Shock Top or taking over actual craft brewers -- alas, poor Goose Island -- or SABMiller consolidating its craft and import holdings under the hipster-sounding Tenth and Blake moniker, major brewers are handicapped in that they must still have mass appeal to turn a profit. They will never be able to capture the essence of a city -- save for St. Louis or Milwaukee -- the way a local brewer can.

And while the big brewers try to mass-produce that single beer for a very specific market, the Toxic Brewing Companies of the country will be there, making 21 unique beers, crafted just for the city that they love.

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