Industry giants face slowing U.S. sales as smaller brewers gain from Americans' growing taste for craft beers. A generational shift?
U.S. beer drinkers want to try new, tasty beers, and they're not dissuaded by the weak economy or higher prices. In the first half of 2010, sales volume at craft brewers rose 9 percent while overall sales volume for the U.S. beer industry dropped 2.7 percent. That's according to the Brewers Assn., the trade group for the country's 1,625 craft breweries, defined as small, independent outfits that use traditional brewing methods. "What we are seeing is [the] emergence of a real beer culture in the United States," says C. James Koch, founder and chairman of Boston Beer (SAM), in an interview. Boston Beer, which makes Sam Adams Lager, is the nation's biggest craft brewer. "People have developed a taste for very high-quality, independent brewers," Koch says. "People are moving out of mass, domestic brands and trading up to beers like Sam Adams." On Aug. 3, Boston Beer reported quarterly revenues that were up 10 percent from a year earlier. The brewer boosted its estimate for 2010 earnings from a range of $2.65 to $2.95, to a range of $2.85 to $3.15. According to the Brewers Assn., the number of craft breweries grew by 100 in the past year, to 1,625. Most of the breweries sell beer only locally. The larger craft brewers include Sierra Nevada Brewing and New Belgium. Molson Coors: "Cautious Optimism"
One of the world's largest brewers, Molson Coors (TAP), also reported earnings on Aug. 3, featuring a different tone. In February, Molson Coors President and Chief Executive Officer Peter Swinburn described "the toughest U.S. beer market in decades." On Aug. 3, Swinburn said "industry volumes remained soft and we expect 2010 to be a difficult year for the industry." He did say, however, that there were "grounds for cautious optimism, moving forward." The good news for investors is that Molson Coors' earnings per share of $1.25 in the last quarter beat the average estimate of analysts surveyed by Bloomberg by 5¢. In response, company shares rose 1.65 percent on Aug. 3. They have climbed 3 percent in 2010, while Boston Beer's stock has risen 39.5 percent year-to-date. Domestic beer sales for major brewers remain weak. In the U.S., Molson Coors distributes through a joint venture with another global giant, SABMiller. In the last quarter, the volume of beer sold by the MillerCoors venture slipped 2.9 percent, compared with results from a year earlier. Craft Beer: About 7 Percent of Market
Following a series of mergers and acquisitions, the U.S. beer industry is dominated by two major players. The MillerCoors venture has market share of 29.1 percent, according to research firm IBISWorld. Anheuser-Busch InBev (BUD), the Belgian company that bought the original Anheuser-Busch in 2008, takes up another 50.1 percent of the beer market. Craft brewers, by contrast, make up about 7 percent of the total U.S. beer market, according to the Brewers Assn. "It's a very small part of the industry," says IBISWorld senior industry analyst George Van Horn. "It's going to take a while for the craft segment to have a big impact on total industry production, either way." To stop the slide in U.S. sales, Molson Coors is following the lead of its small rivals by bringing new, traditionally brewed products to market. Molson Coors already sells Blue Moon, a wheat beer that the company says is the best-selling craft brew in the U.S. In May it acquired Granville Island Brewery, a craft brewer based in Vancouver, B.C. On Aug. 3, Swinburn promised analysts "a sharpened focus on crafts and imports." A Turn to Higher Quality in the U.S.?
Boston Beer's Koch says the giant beermakers have been trying to compete with craft brewers for more than 20 years. "They have a different set of skills," Koch says of his large rivals. "McDonald's (MCD) could open a gourmet restaurant and probably have a pretty good menu, but that's not McDonald's core skill." Because the craft brewing market remains small, big brewers have other priorities, Koch says. "There is way more upside [for] MillerCoors in fixing Miller Lite than what they will ever get out of the craft segment," he says. Van Horn says the popularity of craft beers reflects an attitude change among U.S. consumers that has played out over several years. Americans are focusing on smaller quantities of food and beverage, but seeking out higher quality, he says, noting that organic food sales have also held up during the downturn. Brewers Assn. Director Paul Gatza additionally attributes the popularity of craft brews to demographic changes, especially the arrival of a new generation of "Millennials" that doesn't care as much about established brands. "The beer drinker has changed," he says. Koch agrees: "Twentysomethings are adopting craft beer in the same way that baby boomers adopted wine."