It's not just craft beer eating away at sales from macro brewers such as Anheuser-Busch InBev (NYSE:BUD), but also wine, spirits, teas, and ciders. Drinkers are no longer satisfied with mass-produced weak beer, thirsting instead for a bolder, stronger buzz from their drinks.
Like the craft beer movement it helped popularize with its Samuel Adams lager, Boston Beer's (NYSE:SAM) launch of its Twisted Tea flavored malt-beverage line in 2001 helped the "malternative" market grow into a fairly crowded $1.7 billion industry. It wasn't the first malt-based alternative on the market -- MillerCoors' Zima earned that distinction in 1994 -- but Twisted Tea's early success and continued strength helps maintain Boston Beer's near-$900 million trailing-twelve month revenue stream.
Now one of the malternative's early leaders, Mike's Hard Lemonade, might be up for sale. Could Boston Beer be a buyer?
An early leader in a new niche
Reuters reported last week the alcoholic beverage maker, which is owned by privately held Canadian wine distributor Mark Anthony Group, is in the early stages of seeking a buyer willing to pay over $1 billion for the lemonade stand.
Although the price tag would seemingly dissuade all but the biggest adult beverage companies from making a bid, this brand could find a comfortable home in Boston Beer's beverage portfolio.
Mike's Hard Lemonade raced out of the gate in the malt beverage market following MillerCoors decision to pull the strangely marketed Zima (I remember never knowing exactly what that drink was). It hit sales of 2 million cases in its first year (1999) and last year celebrated its 15th anniversary, noting it had sold over 190 million cases in the U.S. since its inception.
Over the years a trickle of competitors including Twisted Tea and Diageo's (NYSE:DEO) Smirnoff Ice brand of malt-laced vodka turned into a flood as they were quickly joined by Bacardi Silver, Brown-Forman's (NYSE:BF-B) Jack Daniel's Original Hard Cola, Skyy Vodka's Skyy Blue, and others.
Today Anheuser-Busch's Lime-A-Rita brand is the leading malternative with a 28.8% share of the market through the year ended May 18, 2014, according to Information Resources. Mike's was second at 22.9%. Considering A-B's massive marketing budget and Budweiser's distribution network, it's not surprising Lime-A-Rita leads the pack. What may cause eyebrows to arch is just how far ahead Mike's Hard Lemonade was for that year to MillerCoors' third-place Redd's Apple Ale, which had just a 12.4% share.
A well-stocked refrigerator
That might be why Mark Anthony believes now is a good time to sell, but could also provide support for Boston Beer becoming a buyer: it would give Boston Beer another leading brand to join its industry-leading Angry Orchard hard cider.
Angry Orchard is estimated to own more than half of the cider market, even though both Anheuser-Busch (Michelob, Stella Artois) and MillerCoors (Crispin, Smith & Forge) have launched brands to compete. Yet flavored malt beverages were responsible for approximately 3% of U.S. beer consumption in 2013, according to Boston Beer, while hard ciders accounted for less than 1%.
As part of the flavored malt beverage segment, Mike's Hard Lemonade would also provide Boston Beer with a seasoned, winning complement to its Twisted Tea, which itself continues to "chug along" in producing consistent quarterly growth in volume and depletions.
An acquisition might not go down so easy
The one thing that could keep the brewer from making a bid is the penchant of company founder Jim Koch to nurture growth from within. In 2011, Boston Beer created the Alchemy & Science subsidiary to serve as a craft brew incubator. It has already developed or launched a handful of brands, and it's not clear Koch or Boston Beer has a taste for taking on a billion-dollar brand, regardless of the strategic fit.
The risk in forgoing a purchase is that Anheuser-Busch or MillerCoors could sweep in and pick up Mike's, further solidifying their hold on the malternative niche and putting greater distance between themselves and Twisted Tea.
Of course, the owner of Mike's Hard Lemonade could always reject any offer received if it found it inadequate. But as competition mounts to find alternatives to mass-produced beers, the pressure to sell will grow and Boston Beer might just be standing in line to buy.
Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Diageo (ADR). 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.