Craft beer has experienced growth recently as drinkers seek higher quality, better tasting beer. Profiting from this shift is the Boston Beer Company (SAM -2.06%), but the continuing government shutdown is standing in the way of the success of the beer company and other craft brewers.
Brewing at capacity
In 2012, the craft beer industry grew approximately 11% to 13%, outpacing the overall beer industry growth of 1%. Boston Beer Company has utilized this growth, shipping 837,000 barrels in its most recent quarter, a 21% increase year over year. This increase is mainly due to increased demand for the Sam Adams, Angry Orchard, and Twisted Tea brands.
The company had such a high demand that it was forced to increase the use of third party brewers and operate at full capacity in an attempt to keep up. Ultimately the company was not able to meet demand, but has invested in improved beer and labeling production capabilities. The company also has a new bottling line that should help it deal with high demand.
Despite this positive growth, craft beer has run into a speed bump with the government shutdown.
Uncle Sam vs Sam Adams
The federal government shutdown has closed all non-essential branches of the government, including the Alcohol and Tobacco Tax and Trade Bureau (TTB). The TTB is a part of the treasury department that approves new breweries, recipes, and labels for the beer industry. This puts a halt on all entrepreneurs trying to start craft beer companies, and will delay new seasonal beers.
This is bad news for Boston Beer Company, which has relied on the strength of seasonal Sam Adams beers to offset softness in other product sales. Any new seasonal beers will remain off the shelves until they can be approved, which won't happen until the government shutdown ends. Until then, stores will not be able to sell all of the Sam Adams beers they expected. This is the downstream effect that the shutdown has on retailers and wholesalers that stock craft beer. The company will be able to sell seasonal beers that have been previously approved like Sam Adams Winter Lager, but will not be allowed to make any changes to the label.
The shutdown will affect Boston Beer's competitor Craft Brew Alliance (BREW) in a similar way, slowing the company's new seasonal releases and updated labels. This comes after a relatively positive quarter where the Alliance saw revenue and gross margin increase 10.7% and 40 basis points, respectively. The company's growth will most likely slow if it is not able to release its seasonal beers.
The beer companies least affected are the large international brewers like Anheuser Busch (BUD -0.53%). Busch has four seasonal ales (one per season) that are not the company's top earners. Busch will have to hold on to any new beverage innovations, but can rely on staples like Bud Light and Budweiser. Busch could also benefit from the slowed craft brewery expansions. The craft beer industry has been growing in the double digits annually, with over 2,500 microbreweries currently in operation and 1,500 in planning stages. Craft beers have taken 7% of the total beer market share, and that's rising. With the government shutdown, the growth of craft brewers could slow, giving Busch more time with higher market share.
What's next?
While the government shutdown is a speed bump for the Boston Beer Company, it is a speed bump that the company and the craft brewing industry can get over. The company's depletion growth expectation of 17%-22% for the year might now be high, but the demand for quality craft beer remains the same. And according to founder James Koch, if seasonal releases are approved in time for the holidays, "Plan B is to drink what we can and dump the rest." For investors' sake, I hope it doesn't come to that.
