Although there are more than 5,000 breweries currently operating in the U.S. -- more than at any other time in the country's history -- the industry revolves around just a handful of names.
After years of consolidation, the U.S. beer market essentially boils down to Anheuser-Busch InBev (NYSE:BUD) and Molson Coors (NYSE:TAP) -- which together own about 70% of the total -- and then everyone else.
Bigger isn't necessarily better
After acquiring SABMiller and divesting various brands and operations to meet global antitrust regulator objections, Anheuser-Busch continues to have around a 45% share in the U.S. and a 28% share of the worldwide market.
Yet U.S. beer production continues to wane. According to data from IRI, U.S. beer volume sales are down 0.7% so far in 2017, with dollar sales 1% higher due to price increases. That's mostly the result of flagging interest in mass-produced beers from the likes of Anheuser-Busch, which in its third-quarter earnings report said sales to U.S. wholesalers (STWs) declined 3.4% and sales to retailers (STRs) dropped 6.4%, much worse than the respective declines of 1.7% and 3.4% expected for the industry as a whole.
Similarly, Molson Coors experienced a 5.5% drop in segment net sales to $1.9 billion in the quarter, with U.S. STRs and STWs declining 2.9% and 7.2%, respectively. And that's despite owning all the brands of the MillerCoors joint venture for a full year, which it gained as a result of the Bud-Miller merger.
While the results cast something of a pall over the beer industry, investors who look beyond the macro brewers can still find a reason to hope and opportunities for growth.
Craft is still relevant
According to the Brewers Association, the trade group that represents the craft beer industry, breweries of all sizes produced almost 197 million barrels of beer in 2016, with total sales volumes exceeding $107.6 billion. That represents a 6.2% increase in sales volumes and gives craft a 12.3% share of the total beer market.
While that seemingly shows a slowdown in craft brewing, which for years had enjoyed double-digit growth rates, in reality, it's more a reflection of the aforementioned consolidation that has been underway. Anheuser-Busch, in particular, has sought to shore up the flagging fortunes of its Budweiser and Bud Light brands by buying up numerous craft breweries over the past few years.
Others have done so as well, including Constellation Brands (NYSE:STZ), which bought Ballast Point Brewing and Funky Buddha; Heineken (NASDAQOTH:HEINY), which bought Lagunitas; and Japan's Sapporo, which recently acquired the original craft brewer, Anchor Brewing.
Once these breweries are acquired by a major brewer -- or, like Craft Brew Alliance (NASDAQ:BREW), have a mega-brewer take a large stake in them (A-B owns about a third of the brewer) -- they're no longer counted toward the craft beer totals.
So what we're witnessing is not so much a slowdown in craft as it is volumes being removed from the equation. More breweries continue to open each year and 99% of them are craft.
Still, the biggest craft brewer, Boston Beer (NYSE:SAM), is also seeing a decline in depletions, or sales to distributors and retailers, an industry proxy for consumer demand. The owner of Samuel Adams beer said depletions are down 7% year to date primarily due to weakness in the flagship brand.
So drinking craft beer is still popular, but investors may want to look elsewhere.
Imports are where it's at
It might be beneficial for investors to turn their attention to imported beer. Last year, the Brewers Association said import beers grew 6.8%, surpassing craft beer as a whole. IRI reports that trend has continued in 2017, with import sales volumes rising 6.5% so far this year and dollar sales increasing 8.3%.
Yet discerning investors will also see that not all imports are created alike. For example, Heineken reported third-quarter U.S. sales were down by mid-single-digit rates, and Diageo (NYSE:DEO), which owns labels such as Guinness and Red Stripe, said U.S. net sales were flat.
On the other hand, Constellation Brands, which acquired the U.S. rights to the Mexican Modelo brand and its Corona beer label during the A-B-Miller merger, is seeing sales surge. Last quarter, it said the Modelo brands were responsible for more than 60% of the growth it enjoyed across its high-end business that spans beer, wine, and spirits. The Modelo brand family saw better-than-20% growth in depletions in the period.
There's a good reason for that. Nielsen data shows Mexican imports outpaced growth in the segment last year, surging 10.9% in volume and 13.8% in dollar sales. It's something even the mega brewers have noticed. For example, this past summer, Molson Coors entered into a distribution agreement with Heineken to bring Mexico's Sol beer, a brand established in 1899, to the U.S.
However, because Constellation Brands has focused virtually all of its attention on the Modelo portfolio, it may be the best bet in a sea of brewers each angling for a stake in shifting beer drinker tastes.
Of course the beer market is larger than just the U.S., though up until 2014, it had been the world's largest market, but now that title belongs to China. Yet when looking at the fortunes of the best brewers, the domestic market remains a bellwether. There may be some irony then that when it comes to where to invest in beer, it's those brewers bringing beer from south of the border that may be best.