Brewers Face Hard Choices in Hard Cider

The hard cider market nearly doubled last year because Boston Beer (NYSE: SAM  ) so completely dominates the industry with its Angry Orchard brand that it largely alone moves the needle. According to C&C Group  (NASDAQOTH: CCGGY  ) , the owner of onetime leading brand Woodchuck, if you remove the brewer from the equation the market's expansion was a more subdued 20% to 30%. Not too shabby, but with large, mass brewers now entering the market to offset slow or declining beer sales, second-tier cider makers like C&C, along with the even smaller, independent cideries, risk getting squeezed out.

Planting the seeds of change
Last month Anheuser-Busch InBev (NYSE: BUD  ) introduced its Johnny Appleseed hard cider that seeks to tap into the huge demand for the beverage that its white wine substitutes Michelob Ultra Light Cider and Stella Cidre offerings couldn't match. It's joined by peers MillerCoors, which bought the Crispin brand in 2012 and launched Smith & Forge this year, and Heineken, with its Strongbow brand.

The Beer Institute said domestic cider production rose by 264% between 2005 and 2012, the last full year for which data was available, while Nielsen said volumes were up 102% in 2013 and have widened another 90% so far this year. 

Source: Wikimedia Commons.

Cider is still small, though not as small as the mead market, which may be the fastest-growing alcoholic beverage category, but at around 800 cases annually isn't making anyone nervous at this point. Cider is less than 1% of the overall beer market, meaning it's not going to change a brewer's fortunes just yet, not even industry leader Boston Beer, which doesn't break out cider sales numbers. C&C, however, said its own cider sales went in reverse, with shipments falling 2% and depletions suffering a 6% drop in fiscal year 2014. Depletions are sales made by distributors to retailers and are considered a proxy for consumer demand. 

One bad apple
Yet cider's meteoric growth could be sidetracked by one problem looming on the horizon: the lack of cider apples. Differing from so-called fruit apples that you find in the supermarket, cider apples have a bitter taste and thus carry a much smaller premium for farmers who tend to grow those that bring in more money. As a result, cider makers are sourcing apples from wherever they can, with Boston Beer saying it has U.S. and European suppliers of apples for its Angry Orchard cider. Anheuser-Busch similarly said it needs to source apples globally for its Johnny Appleseed.

More ciders coming to market will further reduce the available supply, which will drive up costs. Even if the higher prices induce farmers to start planting more cider apple trees, it's not a crop like corn that can be replenished each year: orchards take years to develop. In the meantime, prices for hard cider may soon start rising -- impacting the small-scale cider makers most.

While the biggest brewers have heft and distribution they can immediately deploy, the smaller cideries, like their craft beer brethren, have to differentiate themselves by highlighting their craft roots. C&C said it will "defend cider made in a real cidery," though it also hopes its distribution agreements with Anheuser-Busch and MillerCoors will reverse its decline in sales.

Cider house rules
Boston Beer began a national TV ad campaign late last year supporting Angry Orchard, undoubtedly explaining the stratospheric trajectory the brand has enjoyed. But with the mass brewers entering the field, investors shouldn't expect it to maintain the wide gap with its rivals. It may also, like others, experience pushback from consumers if prices begin rising.

It's clear, though, that consumers are looking for greater innovation and taste in adult beverages, whether it's craft beer, hard cider and tea, or even mead. Investors, then, should also look beyond just beer to find the best opportunities in the space, and it's hard to argue that Boston Beer isn't the apple of the market's eye.

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