Simply because of its size, every movement Anheuser-Busch InBev (NYSE:BUD) makes is going to cause tremors, but the recent lament by Boston Beer (NYSE:SAM) founder Jim Koch that government is killing the craft beer industry by not regulating the king of beers more is misguided.
It's true Anheuser-Busch is buying up brewers and distributors, but it's not so clear that is what's wrong with the craft beer industry. The mega-brewer's own mass-produced beer business is flagging, and stopping it from making acquisitions won't help Boston Beer sell more Samuel Adams.
Letting the big get bigger
Koch penned an op-ed in The New York Times recently bemoaning federal regulators' failure to halt industry consolidation. He pointed to SABMiller and Molson Coors (NYSE:TAP) forming the MillerCoors joint venture in 2008; the acquisition of Anheuser-Busch by InBev that same year; and most recently the merger of A-B and Miller that created the current duopoly when Molson bought out Miller's half of the joint venture.
It's a curious argument considering the craft beer industry itself was born out of deregulation. President Jimmy Carter broke the stranglehold mega-brewers had on beer-making by legalizing home brewing in 1979, which in turn gave birth to brewpubs following their legalization by various states a few years later -- and the explosion we've witnessed since in craft beer. Today, there are more than 1,900 brewpubs in existence and over 3,100 microbreweries.
Koch also lashed out at craft brewers for their willingness to sell out their brands to the mega-brewers or to accept financing from private equity to keep takeover bids at bay. The craft brewer said his industry peers should instead elect to stay small, focus on their craft, and continue brewing small-batch beers. The corporatization of craft brewing, he said, will kill the industry.
No doubt there is something to be said for that, but it's wrong to simply tell brewers to accept their lot in life and not aspire to more. It also goes against Koch's own trajectory in becoming the face of the craft beer industry.
A kitchen business
In his book "Quench Your Own Thirst," Koch explains that his original goal in starting Boston Beer was to build a brewery that could eventually make 5,000 barrels a year, but within five years, he was producing some 36,000 barrels annually. In its fourth-quarter earnings report issued in February, the craft brewer said it made 974,000 barrels in just three months, and 4 million barrels for the full year. It's clear Koch was never satisfied with just staying small himself.
Yet it can also be said he's always been interested in brewing better beer and helping those in the industry do so, too. He's widely regarded as a tireless cheerleader for craft beer, but that doesn't mean his prescriptions to cure what ails the industry are correct.
Depletions for Boston Beer fell 5% in 2016, and Anheuser-Busch InBev really had no role in that decline (depletions are sales to distributors or retailers and are considered an industry proxy for demand). In fact, it's a victim of the same industry changes occurring despite the acquisitions.
A tidal wave of choice
Consumers are simply overwhelmed by having too many beers to choose from. The craft beer trade group Brewers Association says there were more than 5,300 brewers in operation at the end of 2016, more than at any other time in the country's history, and as pointed out above, 99% of them are craft brewers. The industry has been inundated with craft beer such that there are too many brands and too many styles to choose from.
Anheuser-Busch CEO Carlos Brito acknowledged as much last year when he said during his call with analysts that "customers began to realize some time ago that there's a large assortment, there's only so much shelf space that you can share and cold box that you can split."
One can reasonably argue that rather than complaining about A-B and other big brewers buying up their craft brethren, more consolidation actually needs to occur. The industry -- and Boston Beer -- is a victim of its own success. The growth and proliferation has attracted even more brewers to the space, and that's diluting everyone's results, big or small. Instead of having a shakeout occur where large numbers of small brewers fail, allowing them to be purchased by bigger ones would be better. Boston Beer might do better for itself and the industry if it began acquiring small craft brewers instead of saying the government ought to make it harder for Anheuser-Busch to do so.
Back to basics
As much as beer snobs like to split hairs over what is a real craft beer, the average beer drinker doesn't much care who owns the brewery; it's all about whether the beer tastes good. It's why craft beer lovers will willingly down a pint or two of Shock Top and Blue Moon, blissfully ignorant (or purposefully uncaring) that they're owned by Anheuser-Busch and Molson Coors, respectively.
And while those two brewers now produce almost 75% of the beer in the U.S., beer drinkers continue to go their own way, looking for new local flavors to latch onto. By buying up the current favorite craft beers, Anheuser-Busch is simply a dog chasing its tail, and that's not going to help it maintain a loyal following. In that sense, Jim Koch is right: Brewers need to keep making great-tasting beer, but it applies equally to the mega-brewers as much as the small craft breweries.
Imposing more regulation or preventing the mega-brewers from turning craft brewers into mass craft producers won't change the direction the industry is heading, and it won't help Boston Beer sell more beer. But it may cause a number of small breweries to end up failing, and that's not good for anyone.