Consider this recently overheard conversation among fellow investors:
"How much more can Boston Beer (NYSE:SAM) grow and still be considered a craft beer? A lot of people I know who are beer connoisseurs don't view it as craft beer anymore; as it continues to grow, it loses that craft beer appeal."
"Yeah, I think Boston Beer is overlooked by beer snobs. Shouldn't it be? In places like Seattle, Portland and Boise that have plenty of micro-brews, Boston Beer is not going to be "cool" with the craft beer crowd."
This is a common misconception that arises regarding Boston Beer, home of Samuel Adams Boston Lager. If Boston Beer is snubbed by the beer snobs, how can it continue to grow from here? How can it continue to prosper with the ever-growing number of micro-brews and continued competition from other craft brewers? I believe it can. I also believe many investors are missing the 800-pound gorilla in the room.
First, what is craft beer? The Brewer's Association, the trade group for craft beers lists the following three requirements to be considered a craft beer: first, they must be small, having annual production of 6 million barrels or less; second, they must be independent; and they must be traditional, having an all-malt flagship.
It is interesting to note that the Brewers Association voted in 2011 to increase the ceiling for craft beer production from 2 million barrels to 6 million barrels annually. This change occurred just as Boston Beer was set to surpass the previous 2 million barrel mark.
Indeed, even the legislature seems poised to embrace the growth of the craft beer industry and follow the lead of the Brewer's Association. The Small Brewer Reinvestment and Expanding Workforce Act of 2013, or Small BREW Act, would reduce the excise tax on beer for craft brewers by increasing the qualifying maximum barrel production from 2 million barrels annually to 6 million. This threshold supports the Brewers Association's criteria.
Even with the trade association's blessing and the legislature following suit, the question remains: Has Boston Beer gotten too big? Won't it be shunned by the beer snobs and connoisseurs? Can it continue to grow from here?
I would submit that Boston Beer's principal avenue for growth is not at the expense of other craft beers and micro-brews: it is by taking market share away from big beer.
Consider these statistics: Overall beer sales in the U.S. were up .9% by volume in 2012. At the same time, growth in the craft brewing industry was 15% by volume. With overall sales and craft beer sales up, who saw sales declines?
Anheuser-Busch InBev, brewer of the ubiquitous Budweiser brand, saw sales decline 6% in 2012, after a decline of 4.4% in 2011. This trend continued into the first quarter of 2013, with sales declining 5%.
Things were not much better in the most recent quarter for MillerCoors, which reported sales to retailers down 4.4%, sales to wholesalers down 5.3%, and total net sales down 2.9%.
These trends continued into the first six months of 2013. Overall beer sales fell 2%, even as craft beer sales grew 13% by volume.
Since the craft beer segment currently represents only 6% of the U.S. beer market, this presents plenty of opportunity for growth and continued disruption of the industry. As the largest craft brewer in the field, Boston Beer accounts for just over 1%, providing ample opportunity for growth.
Beer is the new wine
Jim Koch, CEO of Boston Beer has this to say about the shift:
Fifty years ago, a handful of California winemakers started making great wine and changed the way Americans think about U.S. wine and wine in general. Now it has a lot of respect and nobility. Beer is going through the same metamorphosis. Twenty-five years ago, a handful of small American brewers started making world-class beer and changing how Americans think about beer. The rest of the world is looking to the small American brewers like Sam Adams for creativity and quality. And 20-somethings are adopting beer in the same way their boomer parents adopted wine.
Foolish final thoughts
Boston Beer is on the cutting edge of a seismic shift in the U.S. beer market. Consumers in increasing numbers are abandoning the old guard of bland lagers and demanding more variety and flavor. As younger more discriminating consumers opt away from lager and lite and toward craft beer, Boston Beer is positioned to reap the rewards.
Danny Vena owns shares of Boston Beer. The Motley Fool recommends Boston Beer and Molson Coors Brewing Company. The Motley Fool owns shares of Boston Beer. 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.