Craft beer has emerged as a huge market and social disruptor unprecedented in American consumer history.
A handful of large big beer producers are under attack by a swarm of community-based competitors, projected to be 4,000 strong by the end of 2014. This is astounding when you consider by the late 1960s there was only one craft brewer (Anchor Steam) left in the entire country.
Based on my travels to breweries as a craft beer writer, the craft beer market has a long way to go before there are bubble troubles. There is a reason small rural towns can support a local brewery. Most craft beer is not sold in bars or restaurants, but in craft brewery tasting rooms and in growlers that customers take home.
Consider the beer market numbers in recent years. Since 1999, beer's percentage of the total alcohol beverage market share has dropped 7% and has declined in four of the past five years. From 2007 to 2012 big beer has lost .03% of barrel market shares.
Compare this to craft beer, which has seen a 10 % annual growth for craft beer in the same time period. According to The Brewer's Association, the trade group for craft beer, craft beer sales were up 6.5% by volume and 10.5% in dollars in 2012. The same stats through mid-2013 were up 15% and 17%, respectively. Not to put too fine a point on it, in a market that is contracting, all the growth is coming out of big beer's hide. And to add insult to injury, big beer is losing this business despite its huge ad expenditures. Craft breweries, on the other hand, spend almost nothing on advertising.
Where to turn for profits
History has taught such market reinvention is often very profitable. But investors remain perplexed trying to figure out how to make serious money from craft beer. Sure, there was certainly the play with Boston Beer (NYSE:SAM) , which printed its original public offering on its six packs of Sam Adams. Founder Jim Koch is deserving of the billion dollars he has made founding the company. According to Tom Acitelli in his recent book The Audacity of Hops, Koch went through the same struggles of any other craft beer start-up. In the early days he went from bar to bar in Boston selling kegs and suffered the indignity of Anheuser-Busch's (NYSE:BUD) attempt to kill little Sam Adams by choking off its distribution lines.
But even with his battle scars and the fact that Jim Koch remains a great friend to small craft brewers, the average craft beer drinker will tell you that Sam Adams is now part of the big beer side of the category. And this is the paradox of craft beer: the customers who are driving its well-documented growth in market share, sales, and new breweries are buying the hopes and dreams of the local, privately owned, small-batch, artisan. True craft beer drinkers love the story of the small brewery because -- in their heart of hearts -- they feel it's their story of the little guy making good. The craft beer drinker who is now driving all the growth in the category will never rise to the bait of big mock "crafty" beer.
To think that big brewers are going to regain market share by buying interests in or emulating craft breweries is a risky play for investors. Big beer might be able to convert some of their 20-pack customers to their premium beer category, but they are just cannibalizing existing product lines, which are already in decline. Sales of Budweiser, "The King of Beers," for example, declined 29% from 2007 to 2012. At that rate, the Clydesdales may soon be put out to pasture.
Meanwhile, small craft beer breweries are going to continue to grow and disrupt , which means big beer is destined to get smaller.
But business is neither created nor destroyed in disruptions, it reappears as new opportunity. For example, localities -- where all craft beer is made -- love this new business model because it offers new employment, generates sales taxes, promotes destination travel, and fosters urban renewal as other businesses often follow a new brewery into a blighted area. Asheville, N.C., for example is the lucky city selected as the site of New Belgium's East Coast brewery, which is an employee-owned craft brewery of more than 500 people. And unlike its first-in status in Ft. Collins, Colo., New Belgium joins more than another dozen breweries already operating in Asheville. As a collective, craft beer is big business that benefits local economies rather than stockholders.
Fool contributor John Mitchell has no position in any stocks mentioned. The Motley Fool recommends Boston Beer. 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.