The craft beer market has enjoyed incredible growth in the U.S. -- production has more than doubled to 24.5 million barrels over the past five years as the craft segment now lays claim to 12.2% share of total beer industry volume and an even more impressive 21% of sales volume.
In this clip from Industry Focus: Consumer Goods, Motley Fool analysts Vincent Shen and Asit Sharma talk about some of the drivers behind the success of craft beer. They also discuss how traditional beer incumbents like Anheuser-Busch InBev (NYSE:BUD) are quietly buying their way into this segment to access some of that torrid growth, ponying up as much as $1 billion for the most attractive breweries.
A transcript follows the video.
This podcast was recorded on Jun. 14, 2016.
Vincent Shen: You're talking about a lot of high growth in beer, so let's just move right into that topic and talk a little bit about what a lot of people have referred to as a craft-beer explosion. Just a number I pulled from the Brewers Association, which still amazes me every time is how in the past 30 years -- in 1986, there were just 124 craft breweries. Now, there's 4,200, more than that actually. Over three decades of time, that's incredible growth.
Asit Sharma: Yeah, I mean, this is amazing growth. If you live in an area of the country where craft breweries are coming up, you can see that. I happened to live in Raleigh, North Carolina, and we happen to have sort of a craft-beer explosion here and in Ashville, which is a major city in the Western part of the state. I know in Northern Virginia, you guys see that, also. For our listeners who are out in the West Coast, it's no surprise for you. It seems like you cannot walk within your city a few blocks without seeing a new craft brewery in some of these hot spots. Why is this exploding? Few reasons. One is that consumer tastes obviously have changed. Millennials have a taste for the artisan product, the craft product. Folks are stepping in both to fill that need, but there are just a lot of people who jumped in. It's not an expensive business to start. You can start in your kitchen, and maybe it catches on.
Although we know that many of those breweries won't last for the long term, there are a surprising number of craft breweries that are finding local, regional, and some of them national distribution. I'd like to also point to those growth statistics. What surprised me was the size of the craft-beer market. In just a few years, it's grown to a $22 billion business. That is now one-fifth the size of the entire beer market in the U.S. That is a mind-boggling statistic.
Shen: It seems to me, I think we've seen this trend quite a bit with some of the mega breweries. Think of the more-traditional companies that we used to know, or used to follow more closely. Anheuser-Busch InBev. I mentioned the Ballast Point deal of Constellation Brands (NYSE:STZ), that a lot of them are trying to buy into this, into this trend, into these growth rates that you mentioned, even though technically when they do, these craft breweries lose their official status as a craft brewer.
Sharma: That's true. When we first saw this happening, it almost seemed like something underhanded, because you would find that Anheuser-Busch owned the craft brewery that you really liked. They very quietly bought up some of these small breweries. In fact, Anheuser-Busch bought eight craft breweries since 2011. In the beginning, in the early days, five years ago, they would disclose, "We spent $20 million on a small craft brewery," or $30 million. But as the years have gone on, they don't disclose quite as often. In fact, I couldn't find a number for their latest acquisition, which was just a few months ago -- Devils Backbone Brewery, and that is in Virginia -- near you, Vince. I couldn't find terms on that deal. You mentioned the Ballast Point Brewery deal that Constellation Brands took on last year; that was a $1 billion deal. That really lifted the veil on what's been going on.
In the interim, these companies are now spending not just tens of millions, but hundreds of millions to buy small breweries. It shows you how willing the giants are to pay for growth. This category has a 13% compounded annual growth rate. If you look at the beer business, in general, it trends globally at just under 3%. It's just beating inflation. If you had the deep pockets of an SABMiller or an Anheuser-Busch InBev, you probably would do the same thing. If you have the cash on your balance sheet and you can buy the growth, you would also be hopping in a car, and traveling up and down the East Coast, the West Coast of the United States, and visiting some of these breweries.
Shen: Absolutely. Just a curious thought I had, too, was the idea you mentioned that, how a lot of these bigger companies aren't disclosing the terms of these deals anymore. It seems like there is this arms race, so to speak, of craft brewery acquisitions. They just essentially want to prevent, like, just the overall value or the price they have to pay for these breweries to keep going up. If every brewery sees each latest press release, the number keeps going higher and higher for their competitors.
Sharma: Yeah, and this is something they really shouldn't do. Someone should sit down with these management teams and tell them, "You are working against yourself." Because put yourself into a small craft brewery's shoes. Vince, if you and I started business, and we decided at some point, "Hey, let's leave The Fool and sell this beer -- it's just going bonkers." One of these companies walked in our door, and we knew that terms weren't being disclosed, we would not demand top dollar. We would find an exorbitant sum and name that sum. When you put a cloud over the valuations of deals, it works ... it cuts both ways. It makes your competitors also close up their dealings; but for the people who are in the driver seat, the people with the product, it gives them a lot of power because they can virtually name their price. I believe that's what Ballast Point did.
Anyone who thought that this business isn't for real just has to look at that $1 billion price tag for $50 million in revenue. They really should be disclosing this as quickly as they can. "We paid $300 million for XYZ brewery." They would end up paying less in the future on their acquisitions.
Asit Sharma has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool recommends Anheuser-Busch InBev NV. 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.