Does the Explosive Growth in Craft Beers Threaten Anheuser-Busch and Molson Coors?

The U.S. beer market has been saturated for some time. The industry is dominated by a few major players, including the likes of Anheuser-Busch InBev (NYSE: BUD  ) and Molson Coors Brewing (NYSE: TAP  ) . But even though they generate strong profits, growth has been hard to come by. That's especially true now that craft beers have truly revolutionized the industry.

Consumers appear entirely willing to fork over higher prices in exchange for beers with robust, satisfying taste. With smaller brewers popping up all over the country and carving out a hefty slice of the market for themselves, it's becoming increasingly clear the biggest beer companies have reason to be concerned.

It's all about IPAs
Growth of the craft beer industry has been truly amazing over the past several years. The Brewers Association, an organization comprised of thousands of American brewers, states that retail sales of craft breweries rose 20% last year to $14.3 billion. Craft breweries have averaged 10% annual growth over the past decade, according to its industry research.

The trend has finally caught the attention of the largest brewing companies. In response to seeing their own growth level off, they're resorting to acquisitions to try to buy growth. The overall strategy is to acquire companies that have emerging market exposure to try to compensate for nearly nonexistent domestic growth. Two years ago, Anheuser-Busch InBev acquired the remaining portion of Groupo Modelo that it didn't already own, for $20.1 billion.

With Groupo Modelo's brands in tow, including Corona, the combined company is a true industry giant. Anheuser-Busch InBev now holds a huge portfolio of more than 200 brands. Not surprisingly, Anheuser-Busch sits atop the market. It holds 47.6% of U.S. market share, which provides significant cash flow.

For its part, Molson Coors began expanding in emerging markets in 2012 with its $3.4 billion acquisition of Central and East European brewer StarBev.

But that's not likely to do much to fight off craft beer sales, particularly in the United States. Despite its massive acquisitions, growth is still hard to come by. Anheuser-Busch InBev produced just 3% revenue growth last year, most of which came from the international markets of China, Brazil, and Russia.

Meanwhile, Molson Coors posted a slight drop in sales in the U.S. in the fourth quarter, followed by a more concerning 3% drop in domestic sales in the first quarter of 2014. The main culprit was that, on a companywide basis, worldwide beer sales were basically flat for the past two quarters. But like Anheuser-Busch InBev, Molson Coors is experiencing diverging results in U.S. and international sales. For example, sales in Europe rose 5% last quarter, thanks in large part to its acquisition. Sales in its international segment rose 13%, due to strong growth in China, Mexico, and Latin America.

Craft beer bucks overall economic trends
While overall economic growth remains unimpressive in the United States, and consumer spending remains restrained, one industry breaking through in a big way is craft beer. The relatively modest economic recovery since the recession has in no way held back the craft beer industry. In fact, growth has been so impressive that craft beer is now starting to take market share from the major players such as Anheuser-Busch InBev and Molson Coors.

The latter two industry heavyweights are still finding growth opportunities abroad, but their domestic growth is a totally different story. Before long, we're likely to see them begin to acquire craft brewers in the United States to protect their businesses. This would be a wise strategy considering that consumers appear entirely willing to pay higher prices for higher-quality beer. It's only a matter of time before the industry giants take notice.

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