The fourth-quarter and full-year results for Craft Brew Alliance (NASDAQ:BREW) disappointed investors on a number of fronts, and the stock fell by about 5% after the company reported on March 7. It tumbled even further on Monday.
Last summer, the company declared that it had moved on from its developmental phase and was in its growth phase. But revenue growth for the year rang in at just 8%. Craft Brew cited a super-competitive craft market, one in which the U.S. brewer count rose from 2,751 to 3,699 -- an astounding leap. But key competitor Boston Beer (NYSE:SAM), which already has a larger U.S. footprint, delivered sales growth to the tune of 34% while targeting many of the same drinkers as Craft Brew. Boston Beer now plans to ride that wave of momentum, making larger investments in marketing and selling its beers while it has the wind at its back.
What's more, Goose Island, owned by Anheuser-Busch InBev, recorded 70% growth. The megabrewer now has plans to ramp up production of the well-regarded, Chicago-based craft brand it acquired in 2011.
Craft Brew Alliance also made margins a priority in its previous calls in 2013. Those continued to contract, not grow as hoped, and it might be a case where the brewer was putting the cart before the horse.
Last year showed promise for Craft Brew, but it didn't quite deliver what investors were hoping for. Management remains optimistic, however. Last Friday's conference call gave us perhaps our best look yet at what Craft Brew is eyeing as its path toward sustainable growth and what the obstacles are. Here's a snapshot.
Different brands, different missions
Despite the sour end to 2013, Craft Brew Alliance CEO Andy Thomas says the company remains "staunchly bullish" about its prospects moving forward. The company has plans for its four major labels, each of which will have a different focus moving forward.
Kona is Craft Brew's fastest-growing brand, posting annual sales growth of 23% on 2013. In 2014, the Kona line will be the first of Craft Brew's products to get a full, traditional marketing campaign. That's going to cost money -- more than Craft Brew is used to spending on marketing. But the company sees an opportunity. Beer drinkers are buying into the "Liquid Aloha" message. Now may be the time to double down.
>Redhook is the company's phoenix. It had been a dying label despite its early roots in craft beer, but is now growing at a healthy clip -- 15% over 2013. Craft Brew Alliance has been successful in the nontraditional marketing of Redhook. It has a deal with the Dan Patrick Show to promote Audible Ale. It partners with Buffalo Wild Wings to sell Game Changer Ale, and it now has a deal with popular website TheChive.com to produce and promote KCCO Black Lager.
Gluten-free beer and old-school craft
Craft Brew Alliance's Omission brand is dedicated to gluten-free beer. Gluten-free is a fast-growing trend, and Omission has an advantage in the category: It brews with traditional malted barley -- not sorghum or other grains -- and uses a proprietary process to extract the gluten. This allows Omission to taste like real beer, while still meeting the standards for gluten-free set by the federal government and organizations involved with Celiac disease. With the gluten-free market expected to grow by 10% annually through 2018, Craft Brew has good prospects with the label.
Finally, Craft Brew's Widmer Brothers brand is the real laggard of the bunch, with sales down 3%. The company sees Widmer as "unapologetially ... a pure craft brewer," as management stated in its Q4 earnings call. Indeed, its beers rank well with drinkers on sites like RateBeer.com. The problem with sales may have been the mix. Widmer was long known for its German-style hefeweizen, a beer that more recently has not sold well in traditionally strong markets. The new plan for Widmer revolves around two ales: Alchemy Ale and Upheaval IPA.
With an expansion of the Widmer brewery in the works, the company needs to find a recipe for its return to growth.
The Foolish bottom line
The challenges for Craft Brew Alliance are twofold: First, it needs to find bigger growth in a hypercompetitive market, with rival Boston Beer firing on all cylinders and megabrewers A-B InBev and Molson Coors pushing deeper into the craft area. Second, it needs to deliver on promises to expand its margins significantly in coming years. Those two goals will be tough to meet, given the environment. If Craft Brew wants to grow sales, it will likely have to invest more heavily in marketing and distribution. Those investments are going to keep a cap on margin growth.
Things may look up for Craft Brew in 2014 if its plans for its four brands succeed. But the growth story here may be slower to develop than investors were hoping.
John-Erik Koslosky owns shares of Boston Beer. The Motley Fool recommends Boston Beer, Buffalo Wild Wings, and Molson Coors Brewing Company. The Motley Fool owns shares of Boston Beer and Buffalo Wild Wings. 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.