Over the past three decades, craft breweries have been slowly picking away at the market share domination of Big Beer. Growth over the past thirty years has expanded craft beer's share of the market, by volume, from a completely negligible portion of the market in 1980 to 7.8% in 2013. While a full takeover of Big Beer by craft brewers may never happen, the growth seen in what was once only a niche-part of a huge beer market gives hope (and maybe a bit of insight) to specialty biofuel producers like Solazyme (NASDAQ:TVIA) and Future Fuel Corp (NYSE:FF) squaring up against behemoth Big Oil.
Ethanol is to biofuels what imports are to beer
Ethanol has steadily increased its share of the U.S. gasoline supply over the past 15 years from just over 1% in 2000 to around 10% currently, led by a handful of major producers including Archer Daniels Midland Company (NYSE:ADM) and Green Plains Renewable Energy (NASDAQ:GPRE). As changes to the blending limit are debated and the Renewable Fuel Standard (RFS) is refined to keep ethanol production at a steady share of the overall transportation fuel market, growth in ethanol appears to be slowing. The U.S. Energy Information Administration projects ethanol production to remain relatively flat through 2040 as overall motor gasoline consumption declines and Flex-Fuel Vehicles are gradually phased out. Twenty years from now, ethanol may very well have a role in the liquid fuel market, but several indicators suggest that it will not see tremendous growth as a vehicle fuel.
Like ethanol, imported beer in the U.S. is dominated by a few, large volume producers. Grupo Modelo dominates the U.S. import market with brands like Corona. The U.S. rights to sell Corona were acquired as part of an antitrust settlement earlier this year by Constellation Brands when Modelo was acquired by Anheuser-Busch InBev. Through the settlement Anheuser-Busch InBev retained the rights to market Corona and other Modelo brands to all other countries. Following Corona Extra as America's second best-selling import brand is Heineken, owned by Heineken International which ranks as the third largest brewery in the world by volume.
While imported beers currently occupy a major portion of the overall U.S. beer market, their growth pales in comparison with that of American craft breweries. Similarly, ethanol has room for growth, but the growth will come much slower than that of non-traditional biofuel producers.
The overall beer market over the past 20 years
Per capita beer consumption in the U.S. has steadily declined over the past 20 years. A similar decline in liquid fuel consumption is projected over the next three decades as fuel efficiency continues to rise. The metrics of more interest to both craft beer and non-ethanol biofuels, however, are those tracking craft beer growth during the same twenty year stretch.
While overall beer consumption has been dropping, craft breweries' share of the market has been growing, maybe best exemplified by the growth of Boston Beer Company (NYSE:SAM). Last year followed a long trend in which the craft beer industry experienced double-digit growth in volume (18%) and slightly larger growth in terms of dollars (20%), while overall U.S. beer sales by volume dropped almost 2%.
The statistic from 2013 that was somewhat counter to prevailing trends was the slight decline in imported beer sales. Likening imported beer again with ethanol could give insight into where the ethanol industry may find itself in twenty years. Imported beer was once the best option for consumers seeking an alternative to Big Beer products, but their consumption is dropping while craft beer consumption grows. Ethanol will likewise be gradually phased out from its position as the best alternative to Big Oil. Just as more flavorful craft offerings are gaining market share from both domestic Big Beer and imported offerings, non-traditional biofuels will take on a more prominent role in a market dominated by ethanol producers and Big Oil.
The biofuel and beer markets even share active 'homebrewers' of the respective products. An increasing number of biodiesel hobbyists produce small amounts of fuel from waste vegetable oil (likened to the extract brewers in the beer world), while even more devoted biofuel fans produce biodiesel all the way from oil seeds (a more intensive process better compared with full mash homebrewers). In both industries, these self-sufficing hobbyists tend to be evangelists of their crafts, and are reminders that both craft beer and biofuels originate from small volume processes that are competing against big businesses.
A big move away from petroleum-based fuels to sustainably sourced fuels will only happen when consumers support the effort and are willing to pay slightly more for a product that they believe in. It's happening in the beer world, and it's only a matter of time before in happens in the fuel world.
Volume is what separates Big Oil from biofuel producers and Big Beer from craft breweries. As volume goes up, operating expenses per gallon or per bottle go down. Twenty years from now, biofuels will not out-produce petroleum fuels, but if they can build their share of the market at the same rate that craft beer has invaded the U.S. beer market, then there is still huge potential for growth.
The key and the challenge is to find the currently small producers that not only have the leadership and devotion to go big, but who also who have a valuable and immediately marketable product that can keep the company afloat as ramp-up processes bring expenses down and margins up. Like what has happened over the past twenty years and continues to happen today in the craft beer industry, many companies will not survive the journey, but when you find the company that can withstand the tests of time, you can rest assured that it will continue to grow and share its rewards with investors for decades to come.